Billionaire Investor Bill Ackman Just Went All In On One of His Favorite Stocks: He Plans to Hold It "Forever"
8 hours ago
Bill Ackman and his fund Pershing Square Capital Management are big fans of the real estate development company Howard Hughes Holdings(NYSE: HHH). In 2010, Pershing, along with several big private equity firms, capitalized the company in a rights offering that valued shares at $47.62.
While Ackman is pleased with management and the work they've done over the last decade-and-a-half, he has very little to show for it. The stock returned 35% between 2010 and August 2023 before Ackman and Pershing began to intervene, which equates to a 2.2% compound annual gain.
However, Ackman isn't giving up. On the contrary, the billionaire is doubling down. Now he's proposing to purchase a sizable amount of the remaining public float because he wants to hold the stock "forever."
Under the proposal sent in a letter to Howard Hughes' board of directors, Pershing Square's holding company would form a new subsidiary to acquire over 11.7 million shares from the outstanding float at $85 per share in a transaction valued at $1 billion. There were over 31.2 million outstanding shares on Jan. 13.
Additionally, Pershing would simultaneously conduct a $500 million share repurchase program at $85 per share for over 5.8 million shares from the public float, financed by new bonds issued by the company. The subsidiary created by Pershing would eventually merge back into Howard Hughes and keep the same management team in place.
The $85 offer represented an 18.4% premium to Howard Hughes' stock price on Jan. 10 and a 38.3% premium from Aug. 6 of last year, when Pershing filed a 13D form with the Securities and Exchange Commission, hinting it was evaluating such a transaction. Pershing already owned close to 38% of outstanding shares before the proposal.
If approved, the deal would increase Pershing's stake to somewhere in the range of 61.1% to 69.2% of outstanding shares. It all depends on how shareholders respond to the deal. Shareholders can take $85 per share in cash or roll their position into the post-merger company. The intent is to end up with a public float of about 31% of outstanding capital.
Ackman estimates that if all shareholders involved in the potential transaction elect to take cash, 56.4% of them would receive cash as a pro-rated outcome. The company will then repurchase over 5.8 million shares that it will effectively retire. If all shareholders elected to roll over their position, then shareholders controlling nearly 38% of the public float would be exchanged for $85 per share in cash, and Howard Hughes would add $500 million of capital to its balance sheet from the bond financing.
In the letter to Howard Hughes, Ackman writes: "Put simply, we are all in, and we intend for Pershing Square Holdco's investment in HHH to be a permanent holding. In other words, we intend to hold HHH stock forever."
Howard Hughes runs one of the largest portfolios of master planned communities (MPCs). It covers 101,000 acres across six states spread out across the U.S., from New York to Hawaii. MPCs are communities customized to meet the needs of their residents and include a mix of retail, residential, and commercial developments, designed to deliver a mini-town feel with extensive amenities.
Up until recently, Howard Hughes also owned other unique real estate assets, including the Las Vegas Aviators Triple-A minor league baseball team, the associated ballpark, and an 80% stake in the air rights above the Fashion Show Mall in Las Vegas. These assets were operated in the company's Seaport Segment.
Recently, Howard Hughes spun the Seaport assets off into the Seaport Entertainment Group. Pershing received and maintained shares of the spin-off and noted its approval of the transaction in its recent letter to shareholders. Ackman said he sees "significant embedded upside potential in its unique collection of assets." He also said the move better positions Howard Hughes as a pure-play MPC company with decades of growth ahead.
Management at Howard Hughes believes the company has been significantly undervalued and has previously laid out a sum-of-the-parts (SOTP) analysis. It values the company at $118 per share, with the MPC assets making up the bulk of the value. SOTP valuations, while compelling, can take a while for the market to fully appreciate, so the spin-off of the Seaport assets looks like a good move to create shareholder value. With Ackman going all in, it may be time for investors to give this one another look, if they are not invested already.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Howard Hughes and Seaport Entertainment Group. The Motley Fool has a disclosure policy.
