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Shareholder Proposes Target Spin Off Property Company


New York City Pershing Square Capital Management LP, which owns just under 10% of Target’s common stock, on Wednesday proposed a plan to spin off the chain’s real estate holdings. Pershing says the plan could increase the value of the company, send shares higher and create long-lasting value for the company, according to the Associated Press.

Pershing Square  is proposing that the company spin off a type of real estate investment trust which will own the land under its buildings. Target would lease the land back under a 75-year lease.

Target owns most of its buildings as well as the land under its buildings, according to the Pershing Square hedge fund, led by investor William Ackman.

"There is a very large real estate company, one of the largest in the country, inside the business," Ackman said during a public presentation on the proposal.

Under the proposal, the REIT would be the exclusive land developer for Target for two years, and after that be the preferred vendor. The chain  would be able to make any capital improvements to its buildings—such as increasing fresh-food sections and expanding square footage—because it would maintain control of the buildings.

The spun-off REIT would be the 62nd largest company in S&P 500 if it existed, Ackman said. It would be the largest REIT in the country.

Ackman said the move could send Target's shares up from $40 to $70 by increasing the company's value.

Pershing, which also has a stake in bookseller Borders Group Inc., earlier this year pressured Target to make a financial move with its assets. Target ended up selling 47% of its credit-card receivables to JPMorgan Chase for $3.6 billion in May.

The move assumes Target will sell the rest of its credit-card portfolio by 2009.

Target released a statement Wednesday saying it has not yet reached a conclusion regarding the merits of the proposal. But it said its analysis had raised serious concerns on a number of issues, including:

  • The validity of assumptions supporting Pershing Square’s market valuation of Target and the separate REIT entity;


  • The reduction in Target’s financial flexibility due to the conveyance of valuable assets to the REIT and the large expense obligation created by the proposed lease payments, which are subject to annual increase;

  • The adverse impact that the company believes the proposed structure would have on Target’s debt ratings, borrowing costs and liquidity, exacerbated by current market conditions; and

  • The risk of diverting management’s focus away from core business operations over an extended time period to execute such a complex transaction, particularly in the current environment.

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