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:
- 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.
- 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.
- 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?
Disclosure: I own shares of HHH
i just read the article. don't see him saying "hhh is the next berkshire". I see the author imbued his article with a lot of those kind of takes, and caught ackman at his most arrogant, before his massive denouement. Second it's disingenuous to call this "externally managed". the management team will own well over 60% of the shares outstanding. they will vote Less than 50% of the shares outstanding. and there is one class of stock. they are in alignment on outside shareholders with over $1b of their own money on the line put in at higher prices than you go out and buy if for tomorrow. they put a for sale sign on this in 2019 no takers. bill put another for sale sign on this in 24 no takers. and it's for sale now when there is an avalanche of private equity dollars out there looking for a home. it's been a crappy business and he has finally admitted it publicly. Frankly bill is buried in this, and his conclusion is that he is going to try and get out this mess himself with a little help from his investment team.
ReplyDeleteA few clips from the Forbes article:
Delete"Howard Hughes is the only company that I am, in effect, an executive of," says Ackman, who has agreements that render him unable to invest directly in real estate or any other private companies through his hedge fund, Pershing Square. "It is the one we have the most control and influence over, and the most amount of reputational equity invested."
Ackman has the holding company, courtesy of assets acquired in 2010; the legendary Howard Hughes name was a bonus that came when he sucked up the Summerlin project. To build an enduring business, though, he needs permanent capital.
Hedge funds like Ackman's are in no position to manage assets long term, since limited partners have the right to redeem interests every quarter. It's why, by their nature, they are trading vehicles. So last October Ackman issued shares in a new entity publicly traded in Amsterdam, Pershing Square Holdings Ltd., creating some $6.5 billion in new permanent capital from investors, mostly outside of the United States. Add to this his own and his employees' money in Pershing Square hedge funds and Ackman has boosted his permanent capital to more than $8 billion (his total assets under management are now $19.5 billion).
The financial crisis of 2008 presented the solution that led to Howard Hughes. As markets were descending into turmoil, Ackman bought up 25% of struggling mall REIT General Growth Properties at a fire sale, helped steer it into a managed bankruptcy and then cherry-picked certain undeveloped assets from the carcass, an unwanted hodgepodge that rivals dubbed "Sh-tco." General Growth turned out to be his greatest investing triumph, with a 130-fold gain on his stock, amounting to a $3.7 billion profit for his hedge fund. "Sh-tco" turned into the Howard Hughes Corp., a $6 billion vehicle that has seen its stock climb 300% since it was spun off--and allowed Ackman back into the real estate game unfettered.
One of Howard Hughes' most valuable assets is on Bill Ackman's home turf: Manhattan's South Street Seaport. Which explains why, on a stormy, bone-cold March evening, he is staring at blue jeans, which have been hand-painted with acrylic blue, purple, magenta, teal and white splatters that resemble the patterns of a Jackson Pollock painting. The offerings at the Rialto Jean Project, located at the Seaport, have Ackman puzzled.
One of Howard Hughes' most unusual and potentially valuable assets is the air rights above the 1.9 million square foot Fashion Show Mall on The Strip, across from the Wynn hotel and sandwiched between Trump International and Treasure Island. "I took everything where the market wouldn't assign a value," says Ackman.
Bill Ackman on the Las Vegas Strip? The Howard Hughes Hotel & Casino?
"Ultimately, the best real estate has a big entertainment component," says Ackman, as cocky as ever. "Never again am I going to miss anything like Rockefeller Center."
https://www.forbes.com/sites/antoinegara/2015/05/06/bill-ackman-baby-buffett-howard-hughes
The whole article is wild giving the stock price has halved since then.
It is 100% externally managed. $60MM in permeant capital management fees is worth what? 20x? He's paying $1B for the equity stake, getting that at discount, plus the management fees which is probably worth $1.2+B?
DeleteAckman does say HHH will become a "modern-day Berkshire" (source: https://assets.pershingsquareholdings.com/2025/01/13060332/HHH-Proposal-Letter.pdf). Am I missing something?
DeleteI think the argument is over whether he was directly quoted in the 2015 Forbes article comparing HHH to BRK, the journalist writes it that it is his BRK, but I guess up for debate if he actually said it. I don't think it really matters, he clearly sat down for the interview and ate up the attention at the time.
DeleteAgain he never said it was his Berkshire. You can interpret it that way if you choose. The incremental fee to ps will be based on about $2.5b of perm capital. Since they already get a MGMT fee on $1.46b. still a good payday 20x gross rev seems excessive but you're the valuation expert.
ReplyDeleteProbably excessive, that was the old multiple about a decade ago when there were a lot of spins/IPOs of permanent capital asset managers. Most of those didn't succeed.
DeleteThere is not one buyer out there that wants this at $90 a share? Or could construct a deal that creates more value than Bills? The nav calculation appears to be meaningless.
ReplyDeleteMaybe there is, but I'm not too optimistic, I think he's the only buyer so he'll take his pound of flesh.
DeleteWhat's proration % if everyone tenders, let's say worst case for those trying to tender all shares at $85?
ReplyDeleteThe last Q had 50,137,514 shares outstanding (they do have a buyback in place), Pershing Square owns 18,852,064, the tender is for 17,647,059 shares, so if everyone tendered you'd get ~56% of shares taken out at $85.
DeleteSaid another way, the current share price is reflecting $85 plus the externally managed HHH trading around $70.
DeleteHave any of the wannabe Berkshires ever worked? Didn’t Ackman go down this path already with PAH about a decade ago? Seems to me that the conglomerates don’t work when you’re buying companies and buying them with debt and adding a layer of home office expenses.
ReplyDeleteI can't think of any off the top of my head, plenty that didn't work.
DeleteI'm not involved with this one but just wanted to see if I was thinking about this correctly. At a high level just , if we assume gross mgmt fee is $60mm. Is the gross value of this mgmt stream worth approximately $1.6b (r = 10%?, g = 6%; (60 * (.1 - .06))/( .1 - .06)). Essentially he's created an uncallable bond that grows at market return (or higher if he can do it)?
ReplyDeleteOr lower than market return as HHH hasn't kept up with the market, but yes, its a very valuable revenue stream.
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