Howard Hughes: Pershing Square's Offer

I'm a couple days late on this post and turned into a bit of a "reply guy" on Twitter/X (you can follow me @ClarkinM) spewing some incoherent thoughts on the proposed Pershing Square offer, humor me a bit as I try to more intelligently spell out the current situation and where it might go from here.

On Monday, Bill Ackman's Pershing Square issued a letter to the Howard Hughes board outlining a proposed transaction that would see Pershing Square use the $1B they raised from outside investors at the management company level to buy 11,764,706 shares of HHH for $85/share in a tender offer.  Then simultaneously, HHH would issue an additional $500MM in debt to repurchase 5,882,353 more shares at $85/share.  As part of this transaction, Pershing Square would formally take over management of Howard Hughes Holdings and turn the company into a diversified investment HoldCo with Howard Hughes Corporation (the real estate business) as one of HHH's investments.  Pershing Square would charge a 1.5% base management fee for their services with no incentive fee.

To get it out of the way, Bill Ackman will probably get his way, maybe there's a bump, but this transaction has been teed up for a while (even the 2023 HoldCo corporate restructure in hindsight points to this being the end game).  I don't expect a third-party white knight to come in save minority shareholders, the best HHH shareholders can probably expect is a small bump in the tender offer and/or a discount in the external management fee.  Bill Ackman's fiduciary duties are to his management company investors and no longer HHH since he resigned from the board, he wants to keep this company public (rather than raise a fund privately to buy it) for a permanent capital vehicle that would justify the $10.5B valuation he raised capital at last year.  It's clear now, there's no scenario where he takes HHH fully private.

But here are my list of problems with this transaction:

1. Bill Ackman states, "When we filed our 13D on August 6th of last year, HHH's closing share price the previous day was $61.46 per share.  Including the market value of the Seaport Entertainment spinoff, this $16.62 increase represents a 35% total return over the last 14 years, or a 2.2% compounded annual return, and the Company has paid no dividend since its inception.  The Company's stock price performance is obviously extremely disappointing.."  Make no mistake about this, Bill Ackman founded Howard Hughes, it was his design in the GGP reorganization, he was the Chairman of the Board from the 2010 spinoff until April 2024 when he stepped down (presumably to setup this deal), not to mention he sat down for his infamous Forbes Baby Buffett article in 2015 touting HHH (HHC at the time) as the next Berkshire.  It's very disingenuous to now throw stones at the company with the solution being he needs to be brought back and paid handsomely to turn this around.  Why didn't he implement this strategy before?  The answer comes back to his management company is really the "next Berkshire" for him and not HHH.
2. This proposed transaction goes against HHH's two major strategic shifts in the last 4-5 years.  After the failed strategic alternatives process in 2019, Ackman got on a conference call and pledged to cut costs and refocus the company (even highlighted how the cost cuts should be capitalized and improve NAV).  This transaction clearly goes against this strategy as it will saddle the company with a significant G&A (~$60MM/annual) burden due to the external management fee.  The second strategic shift was the simplification of the business, becoming more of a pure play master planned community developer.  They've jettisoned almost all of their assets outside of their MPCs, sold the more cyclical and management heavy hotels within the MPCs, spun off Seaport Entertainment Group (SEG), all in an effort to simplify the business (and all those decisions were made while Ackman was the Chairman).  Ackman then files his original 13D/A a week after the spinoff, not giving HHH a chance to re-rate following the hiving off of the cash sucking Seaport business.  Now his plan is to allocate the free cash flow from HHC and invest in private businesses (hasn't he always been a public market investor?), going back on the Seaport spin rationale, just doesn't make sense and can't have it both ways.
3. The tender price is simply too low, management put out a "conservative" NAV of $118/share, in order to compensate remaining shareholders (any tender would likely be pro-rated) for the additional burden, the price needs to be higher than $85/share.  We've seen in the past, REITs that went to an external management structure, the asset manager directly compensates shareholders for the switch.  Here its indirect and insufficient.  Post transaction, the new externally managed HHH will trade at a significant discount to NAV.  Yes, the levered buyback will bump up NAV a bit since it will be done at a discount, but I would still anticipate an externally managed HHH to trade $70 or below in the current environment.  Could he bring in PIPE investors to backstop the tender?  Or some special dividend with a PIPE similar to biotech reverse mergers?  Something to show that outside investors at the HHH level are willing to go along with this transaction and not just investors in his management company.  When has an externally managed HoldCo actually worked?

The only other option for HHH would be to turn him down but given his ownership interest, he could bring in more friendly directors (presumably the board is already friendly) at the next annual meeting to get something done here.  Seems like the dye is cast, but doesn't mean its a feel good deal, feels a bit like Michael Dell and DVMT to me.  I'm still a little bitter about that one, guessing I will be about HHH for a while too.

Disclosure: I own shares of HHH