Update: Target reviews investor proposal

MINNEAPOLIS Target confirmed that Pershing Square has asked the company to consider the spin-off of a separate publicly-traded real estate investment trust (REIT) that would own substantially all of the land currently owned by Target.

Pershing Square’s views of the consequences of executing this proposed transaction were publicly disclosed in a meeting hosted by Pershing Square on Oct. 29. As previously indicated, Target has been evaluating similar ideas proposed by Pershing Square, with the assistance of Target’s outside advisors, including Goldman Sachs since May 2008.

While the company has not yet reached a conclusion regarding the merits of these ideas, its analysis raises serious concerns on a number of important 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,
• The frictional costs and operational risks, including tax implications, of executing Pershing Square’s ideas, 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.