market folly

Continuing coverage, we're posting up notes from the Value Investing Congress.  Below are notes from the presentation of Bill Ackman of Pershing Square Capital Management.  His talk was about General Growth Properties (GGP) and the need to stop Brookfield Asset Management (BAM) from acquiring it.


General Growth Properties (GGP)

$19.48 stock, 5% cap rate.  Long-term contracts.  85% recurring revenue, 3% rent escalators per year.  Even during Great Recession, and GGP's bankruptcy, NOI only dropped 10%. Up from $15 to $20 out of bankruptcy, spun off HHC. Stock fell later in 2011, collapsed to $12.50 last summer.

Very interesting saga about how Simon Property Group (SPG) and Brookfield Asset Management (BAM) and Pershing all tried to do a deal with the company (we posted Ackman's letter to GGP).

This summer, Pershing filed a13D requesting a financial advisor to look a selling the company.  Board rejects the idea.   Ackman contends that director Patterson isn't independent, so 5 of 9 board members are conflicted.  He says if status quo continues, BAM will get control of the company without paying a premium. Says GGP will always have a "Brookfield Discount."

Says SPG may still be interested in buying GGP even though he says he won't do a deal.  Ackman says shareholders benefit from a merger with SPG, it's less risk, and has synergies.  He details the synergies of a deal with SPG:

Incremental NOI, etc.  Saves overhead costs of almost $110M per year.  Says $350-590M in incremental cash flow, with a multiple, several billion of value.  Says 86% stock/14% cash deal makes sense, pay 29% premium.  Accretion of 5.4% from day one.  Deal is $29 equivalent price by end of the year, up from about $20 today.  Dividend also goes up, 51% increase to shareholders.  Lower leverage, more liquid.  He assumes SPG stock will also go up.

Ackman claims BAM was filing prospectus in the meantime, to buy the company themselves.     His solution:  the board of GGP should form a independent committee, hire independent financial advisors, to salvage the control premium.

Q&A:  How do you expect the board to do this, since they've already dismissed it outright? He says they didn't understand what they were being presented.  "Properly informed" he says they will respond correctly.


J.C. Penney (JCP)

Updates on JCP?  Says very few people followed them in GGP, because is was unconventional.  Same with JCP, it there is enormous skepticism. Says JCP is building "a mall within a mall" and 85% of their stores are in malls with $300/sq ft and above, B+ malls.  SSS down 20% in 1H12 and will be in 2H12 as well.  The shops are working, but it takes time. Also, easier comps next year.  You have to think more than 3 months ahead, it's interesting.  Also, killed the dividend, which was unpopular.

What if the JCP strategy doesn't work?  Issue is how do you get them in the store?  A free haircut is better than a coupon of 50% off an inflated price. 


Procter & Gamble (PG)

He's long PG - why does he like it?  Says company has bloated cost structure, organization gotten more complex.  Company instead of cutting costs, raised prices to protect profits, and started to lose market shares.  He has attributed these issues to senior management failings.  If CEO doesn't turn things around soon, they will have to look outside to find a new CEO.  


Shorts?

Best short idea?  waiting to put on more, will share it publicly after they fill their position.  (As you'll see in our past profile of Pershing Square, shorting is less common for them to begin with).

For more on Ackman, we've posted an excerpt from his Q2 letter on why he sold Citigroup.


Embedded below is Ackman's slideshow presentation from the Value Investing Congress:





Be sure to check out the rest of the presentations from the Value Investing Congress.