Target free to focus on Q4 sales

It is strange for a retailer to be preoccupied with anything other than driving holiday sales this time of year, yet that is the situation in which Target found itself in recent weeks, as it was forced to evaluate real estate proposals from a high profile activist shareholder.

Pershing Square Capital Management, which owns about 10% of Target’s shares, proposed that the retailer create a real estate investment trust that would own the land beneath Target’s stores and lease the land back to Target.

“Target does not share Pershing Square’s perspective that execution of this proposed transaction will generate measurable shareholder value over time and believes the risks, particularly in light of the serious challenges facing our retail and credit card segments in 2008 and 2009, are significant,” said Target president and ceo Gregg Steinhafel. “Both our board and executive team remain firmly committed to generating value for our shareholders and expect to achieve this objective over the next three to five years through our continued, thoughtful focus on our current strategy and core business operations.”

Companies have a tendency to adopt a defensive posture when presented with proposals from activist shareholders, and oftentimes appear to dismiss them without serious consideration. That wasn’t the case with Target, which deserves credit for taking seriously an idea which had little merit from the standpoint that it would have done nothing to help Target increase retail sales at its 1,684 stores.

“Target has a strong record of engagement and open dialogue with shareholders over many years and we respect the spirit with which Pershing Square’s real estate ideas were presented,” Steinhafel said. “We gave these ideas a full and complete review, including numerous meetings between Pershing Square and Target senior executives and a meeting between Bill Ackman, the managing member of Pershing Square and several members of Target's Board.”

The company said its management, board of directors and outside advisors including Goldman Sachs determined that, “the potential value created, if any, is highly speculative and insufficient to merit pursuit of a transaction given the costs, strategic and operating risks, and loss of financial flexibility related to executing the proposed transaction.”

Target said it had concerns about the validity of Pershing Square’s assumptions regarding the market valuation of Target and a separate REIT entity and the reduction in Target’s financial flexibility that would result from the conveyance of valuable assets to the REIT.

Target owns about 85% of the land under its stores, which it considers a strategic advantage.

“Because of this, we can assert significant control over initial store design and construction as well as expansion and remodels over the life of the store without landlord or co-tenant interference,” John Griffith, Target’s evp of property development said in late October during a meeting with financial analysts. “This ensures that our stores continuously reflect our then current design features and appropriately represent the Target brand to remain competitive in the retail marketplace.”