Follies from Bill Ackman’s early days with Pershing Square Capital
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Part I: Sears
Pershing Square started purchasing the common stock of Sears Roebuck & Company in June 2004. In addition to purchasing Sears common stock for its own account, Pershing Square approached Vornado Realty Trust real estate investment company, to induce it to consider a potential strategic transaction with Sears. In that connection, Pershing Square began working with Vornado and purchased an equity stake in Sears for Vornado’s account as well, together acquiring a 4.9% economic stake through total return swaps, shares and options in the company.
On November 5, 2004, Vornado announced that it had acquired an approximately 4.3% economic interest in Sears. Following this announcement, the price of Sears common stock rose approximately 21% over the prior trading day’s closing price.
On November 17, 2004, Sears and Kmart Holding Corp. (which we refer to as Kmart) entered into a merger agreement to combine the two companies. Shareholders of Sears were given the option to elect to receive either $50.00 in cash or 0.5 of a share of the common stock for the combined company for each share of Sears common stock, representing a 36.5% premium to the trading price of Sears common stock on the day prior to Vornado’s announcement.
As outlined in the Registration Statement of the Form S-4 filed by Sears and Kmart in connection with their merger, “as a result of Vornado’s announcement and other concerns including maintaining confidentiality of the discussions, Sears and Kmart decided to accelerate the timeframe for implementing the proposed business combination to minimize the period during which speculation or additional price volatility could impair the parties’ ability to reach an agreement on financial terms.” Pershing Square believes that its involvement enhanced both the speed and certainty of the merger between Sears and Kmart, hence contributed to the value creation for shareholders of Sears.
Part II: Wendy’s
Pershing Square started purchasing the stock of Wendy’s in December 2004 and by June 2005, had accumulated a 9.9% stake in Wendy’s, including shares of common stock and options. Pershing Square believed that Wendy’s stock was undervalued at the time and suggested certain strategic initiatives to increase shareholder value.
Specifically, Pershing Square proposed that the company (1) spin off Wendy’s Canadian-based Tim Hortons division, (2) re-franchise a significant portion of Wendy’s company-operated restaurants, and (3) repurchase shares using the proceeds from refranchising. Pershing Square also retained The Blackstone Group L.P. (which we refer to as Blackstone) as its financial advisor to evaluate these strategic initiatives, and Blackstone arrived at similar conclusions as Pershing Square regarding the substantial unrealized value in Wendy’s stock.
Wendy’s eventually spun off the Tim Hortons division through an initial public offering in March 2006, raising approximately $670 million, which was returned to Wendy’s shareholders through share repurchases and higher dividends. The value of Wendy’s stock (including the value of the spun-off Tim Hortons) nearly doubled during the course of Pershing Square’s involvement with the company.
Part III: McDonald’s
Pershing Square took a stake in McDonald’s Corporation in 2005 and made a number of proposals to management that were designed to increase shareholder value. Specifically, in November 2005, Pershing Square made a proposal to sell 65% of McOpCo, a unit of McDonald’s which operated roughly 8,000 of McDonald’s 32,000 system-wide restaurants, to the public and accelerate an ongoing share repurchase program. Pershing Square later revised its proposal, urging McDonald’s to sell 20% of McOpCo to the public, commence a McOpCo refranchising program by selling company-operated restaurants directly to its franchisees, and increase share repurchases. As part of the plan, Pershing Square also proposed a three-fold increase in McDonald’s dividend.
McDonald’s eventually undertook a number of initiatives upon the urging of Pershing Square, including the sale of 1,600 McOpCo restaurants in Latin America and the Caribbean, a commitment to sell approximately 30% of its company-operated restaurants to franchisees over time, the repurchase of more than $5 billion of its stock, and an approximate three-fold increase in its dividend resulting in a sustained rise in its stock price. We believe our proposals helped McDonald’s highlight the value of its brand loyalty business, improve overall capital allocation, increase same store sales and accelerate earnings growth. During the approximately two-year period of Pershing Square’s involvement with McDonald’s, McDonald’s stock price nearly doubled in price.
Part IV: Sears Canada
Sears Canada Inc. was a majority-owned subsidiary of Sears Holdings Corporation . The remainder of its common stock was listed on the Toronto Stock Exchange and held by public stockholders. Pershing Square began investing in Sears Canada in February 2005.
In December 2005, Sears Holdings announced its intention to take Sears Canada private through a two-step process consisting of an offer of CAD$16.86 per share for the 46% that it did not already own, followed by a second-step transaction to cash out non-tendering holders. Sears Holdings also entered into a lock-up agreement with a shareholder with a 9.1% ownership stake in Sears Canada, providing for such shareholder to tender its shares into the offer. In response, the board of directors of Sears Canada formed a special committee, which retained an independent financial advisor. The independent financial advisor determined that the offer price was inadequate and valued the stock of Sears Canada at between $19.00 and $20.25 per share.
In February 2006, Sears Holdings commenced its offer. The independent directors of Sears Canada unanimously recommended that stockholders reject the offer. They stated that the bid was opportunistically timed and exerted pressure on Sears Canada and its minority shareholders.
After commencing the offer, Sears Holdings entered into support agreements with major Canadian banks whereby the banks agreed to vote their shares in favor of the second-step transaction rather than tendering into the offer and, in exchange, Sears Holdings agreed to extend the second-step process until December 2006 in order for these banks to receive certain significant tax benefits.
In April 2006, Sears Holdings entered into a deposit agreement with a significant stockholder whereby the stockholder agreed to deposit its shares with Sears Holdings in exchange for an increase of the offer price to CAD$18 per share and a litigation release.
Through the support agreements with the banks and the deposit agreement, Sears Holdings essentially guaranteed that its offer would be successful.
On April 14, 2006, Pershing Square joined with two other minority investors (which we refer to collectively as the SCC Investors) to halt the efforts of Sears Holdings to take Sears Canada private. Collectively these investors owned approximately 7.7% of the common stock of Sears Canada.
The efforts the SCC Investors lead to a hearing before the Ontario Securities Commission. The OSC determined that the offer by Sears Holdings had been abusive and coercive. The OSC also found that Sears Holdings had provided prohibited collateral benefits to the banks and the major shareholder pursuant to the support agreements and the deposit agreement. Consequently, the OSC ruled that the shares that were subject to these agreements could not vote with the minority. The OSC ruling has been widely viewed as a vindication for the SCC Investors’ efforts to challenge the transaction.
Sears Holdings ultimately abandoned its attempt to take Sears Canada private after the offer failed to obtain the approval by a majority of Sears Canada’s minority shareholders. Despite substantial weakness in the retail market, Sears Canada stock continues to trade at a premium price to Sears Holdings’ offer for the company. Pershing Square remains the second largest shareholder of Sears Canada.
Part V: Ceridian
Pershing Square started purchasing the stock of Ceridian Corporation in late 2006. By January 2007, Pershing Square held an 11.3% stake in Ceridian. At the inception of Pershing Square’s involvement with Ceridian, its stock was traded at approximately $23 per share.
After meeting the then-newly appointed CEO of Ceridian and understanding her strategy to extend the company well beyond its core businesses and fire the president of its Comdata division, Pershing Square became “active” with respect to its investment.
Pershing Square believed that Ceridian stock was undervalued and, in light of the newly conceived (and, in Pershing Square’s view, deeply flawed) corporate strategy, urged Ceridian to spin off its Comdata division. On January 18, 2007, Pershing Square delivered a written notice to Ceridian proposing to nominate a slate of alternative directors for election at Ceridian’s 2007 annual meeting of stockholders. The very next day, Ceridian engaged Greenhill & Co., LLC to act as its financial advisor to explore strategic and business alternatives for Ceridian and subsequently commenced a process to seek a buyer for Ceridian. As a result of the sale process, Ceridian entered into a merger agreement with private equity firm Thomas H. Lee Partners, L.P. and title insurer Fidelity National Financial Inc, which provided for the acquisition of Ceridian by THL/FNF at $36 per share.
Pershing Square believed that the $36 per share purchase price was inadequate and continued to consider with its advisors a variety of alternatives for Ceridian, including a potential sale of Ceridian, a sponsored spin-off or a recapitalization.
Pershing Square eventually supported the THL/FNF deal in light of the significant deterioration in the credit and broader markets that had made other alternatives less viable and the $36 per share offer more attractive. Pershing Square believes that its proposals and proxy contest contributed to the sale of Ceridian at approximately 56.5% above its share price at the inception of Pershing Square’s involvement with the company.
Part VI: Longs Drugs
Pershing Square started purchasing common stock and options of Longs Drug Stores Corporation at the end of June 2008 and, by the end of July 2008, accumulated an 8.8% beneficial ownership position and eventually obtained an approximately 25.8% economic stake in the company. On August 12, 2008, Longs Drug announced that it had entered into an agreement with CVS Caremark Corporation at a price of $71.50 per share. Pershing Square believed that Longs Drug had engaged in a suboptimal sale process and sought to convince the board of directors of Longs Drug to open the process to additional bidders. Pershing Square also hired Blackstone as its own financial advisor and sought to attract competing bidders. In particular, Pershing Square and Blackstone approached Walgreen’s Corporation.
As a result of Pershing Square’s efforts, in September 2008, Walgreen’s offered a competing bid of $75 per share, which was rebuffed by Longs Drug. Walgreen’s later withdrew its bid in light of the repeated refusal of Longs Drug to engage in discussions with Walgreen’s and the deteriorating economic conditions. Longs Drug consummated the transaction with CVS Caremark in October 2008.
Pershing Square believes that its involvement enhanced both the speed and certainty of a sale of Longs Drug, hence contributed to the value creation for shareholders of Longs Drug.
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