Why Target Is in the Crosshairs

11/12/2008 1:30 pm EST


Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, says an activist investor has big plans for the discount retailer.

Unlike most retailers, Target (NYSE: TGT) owns virtually all of the land underneath its 1,600 stores. And it's some of the best retail land around, because Target has been careful to buy in areas with the best demographics.

Now, as dismal retail-sales trends weigh heavily on Target's bottom line, many shareholders want the retailer to carry out a massive land sale to reap the value of those real-estate holdings.

All told, the real-estate spinout plan could double the value of Target shares within a year and triple it three or four years. That's the view of William Ackman of Pershing Square Capital Management, who's leading the charge for this change.

Ackman is an "activist" investor who likes to buy a big stake in a company then use the position to pressure management to drive up the stock to make him and his investors richer. Ackman's Pershing Square controls about 10% of Target stock. If Target stock doubles, he and his investors stand to gain $3 billion.

[Under his plan,] the value of Target's land might get more respect in the market, creating $10 billion to $15 billion in value out of thin air for Target shareholders. Ackman believes that the market puts a value of just $13 billion on Target's land.

Judging by similar transactions, Ackman calculates the replacement value of that land is much higher, around $19 billion. It could be worth much more to Target shareholders if it were transferred to a real estate investment trust (REIT) that would be spun off to Target shareholders.

The restructuring also could net huge tax savings, in essence creating an annual half-billion-dollar taxpayer bailout plan for Target. It would do this by converting taxes paid to the government into dividends paid to shareholders.

Target would have to pay about $1.4 billion a year in rent to the REIT for the land. But Target could deduct the cost of rent from taxes and save around 38%, or $538 million a year. 

With all the savings, Target could step up its share-buyback program enough to increase annual earnings [per share] growth over the next five years to 17.6% from 14.7%. That would make Target the fastest-growing retailer among its peers.

If history is any guide, the retailer may agree to some new tactics that draw from the plan and drive up the stock, but won't go along 100%. A year ago, [Ackman] pushed the retailer to launch a $10-billion share buyback program, which Target is now halfway through. Target also sold half of its credit card business to JPMorgan Chase (NYSE: JPM) last May, as a result of pressure from Ackman to unload that business.

[The likely] outcome, combined with the sheer cheapness of a well-run company with a solid brand whose business will snap back once the economy recovers, makes Target a Buy here. Target stock is down 40% from its 52-week high of $61 near the start of the year. (It closed below $36 Tuesday-Editor.)

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