Bill Ackman and his fund, Pershing Square Capital Management, are big fans of the real estate development company Howard Hughes Holdings (NYSE: HHH). In 2010, Pershing joined several large private equity firms in capitalizing the company through a placement that valued the stock at $47.62.
While Ackman was pleased with management and the job they had done over the past fifteen years, he had little to show for it. Before Ackman and Pershing started intervening, the stock returned 35% between 2010 and August 2023, which equates to a compound annual growth rate of 2.2%.
However, Ackerman didn't give up. Instead, the billionaire is doubling down. Now, he's proposing to buy a lot of the remaining public float because he wants to hold the stock "forever."
Pershing Square's holding company will form a new subsidiary to acquire more than 11.7 million shares from the outstanding stock at $85 per share in a deal valued at $1 billion, according to a proposal in a letter to Howard Hughes' board of directors. On January 13, there were over 31.2 million shares outstanding.
In addition, Pershing will simultaneously implement a stock repurchase plan worth $500 million at a price of $85 per share, purchasing more than 5.8 million shares from public float, funded by new bonds issued by the company. The subsidiary created by Pershing would eventually be merged back into Howard Hughes, retaining the same management team.
The $85 offer represents an 18.4% premium to Howard Hughes' share price on Jan. 10 and a 38.3% premium to last Aug. 6, when Pershing filed a Form 13D with the U.S. Securities and Exchange Commission, suggesting it was evaluating such a deal. Prior to the proposal, Pershing already owned nearly 38% of the outstanding shares.
If approved, the deal would increase Pershing's stake to 61.1% to 69.2% of outstanding shares. It all depends on how shareholders react to the deal. Shareholders can receive $85 per share in cash or transfer their shares into the combined company. The aim is to eventually bring public float to around 31% of circulating capital.
Ackman estimates that if all shareholders involved in a potential transaction choose to receive cash, 56.4% of them would receive cash on a pro-rata basis. The company will then repurchase more than 5.8 million shares, which will effectively be cancelled. If all shareholders elect the rollover, shareholders who control nearly 38% of the public float will receive $85 per share in cash, and Howard Hughes will add $500 million in capital to its balance sheet through bond financing.
"In short, we are fully committed and we intend to hold Pershing Square Holdco's investment in HHH forever. In other words, we intend to hold HHH forever," Ackman wrote in a letter to Howard Hughes. stock."
Howard Hughes operates one of the largest portfolios of master-planned communities (MPCs). It covers 101,000 acres and spans six U.S. states from New York to Hawaii. MPCs are communities customized to meet the needs of residents and include retail, residential and commercial developments designed to provide a mini-town feel and a wide range of amenities.
Until recently, Howard Hughes owned other unique real estate holdings, including the Las Vegas Aviators Triple-A minor league baseball team, an associated baseball stadium, and 80% of the air rights above the Fashion Show Mall in Las Vegas. The assets are operated within the company's seaports segment.
Recently, Howard Hughes spun off the seaport assets into Harbor Entertainment Group. Pershing received and retained the shares in the spinoff and expressed its approval of the transaction in a recent letter to shareholders. Ackman said he sees "significant upside potential in its unique portfolio of assets." He also said the move better positions Howard Hughes as a pure MPC company that will continue to grow for decades to come.
Howard Hughes' management believes the company is significantly undervalued and has previously conducted a sum-of-the-parts (SOTP) analysis. The company is valued at $118 per share, with MPC assets accounting for the majority of the value. While the SOTP valuation is compelling, it may take some time for the market to fully appreciate, so the spin-off of the seaport assets looks like a good move to create shareholder value. With Ackman firing on all cylinders, it might be time for investors to take another look if they haven't already.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions and recommendations with Howard Hughes and Seaport Entertainment Group. The Motley Fool has a disclosure policy.
Billionaire investor Bill Ackman just went all-in on one of his favorite stocks: He plans to hold it 'forever'