Did Bill Ackman Just Make a Big Mistake?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On most days investing is pretty boring. Unless it’s an earnings release there’s just not a lot of news worth following. I’m sure you could sit there and watch the numbers change on the computer screen and maybe that would be exciting for a little while but no real value is being delivered. For most of us though we check in and check out if a spare moment ever arrives, if nothing else at least trying to catch up on the latest headlines.
Then when you least expect it you come across something in the headlines that appeals to your baser instincts, some good old fashioned boardroom drama. In this case I came across a string of headlines relating to activist investor Bill Ackman pushing General Growth Properties (NYSE: GGP) into a full sale of the company. What was apparently pushed for behind closed doors the past few months is now in the open and a battle of the titans has begun.
In this latest boardroom brouhaha we have Ackman pushing for a sale of the company to Simon Properties (NYSE: SPG) for a hefty premium. In order to get this deal to go through he’s got to convince GGP’s major shareholder, Brookfield Asset Management (NYSE: BAM) to play along. The problem is that Brookfield doesn’t want to sell, in fact, they’d rather buy the whole thing than part with one share.
From Mr. Ackman’s letter to the GGP board we see that he’s expressed his frustration in Brookfield’s delay in trying to secure the necessary capital to make their deal happen. Further, he’s frustrated by the complex deal they’ve proposed in which they cherry picked 68 malls that they propose pawning off on Simon to close the equity gap. He’s also not too happy with how Brookfield’s slowly been increasing their ownership stake in the company through reinvesting their dividends back into the company’s shares while GGP has also been buying back shares. That’s allowed them to increase their stake in the company from 29% when they initially invested in the recapitalization to today’s 42.2% stake.
Here we see two different investing styles battling it out before our eyes. Ackman, who runs the activist hedge fund Pershing Square Capital, is looking to maximize the value for his investors. Holding a 10.2% interest in GGP, he’s got plenty of skin in the game and he’s looking to maximize that value and if maximum value can be realized sooner rather than later, so be it. He can recycle his capital into another investment sooner and earn even better returns for his investors.
Over at Brookfield, their CEO Bruce Flatt is building out an asset manager which holds significant ownership stakes in each operating asset. For years he’s been eyeing an opportunity to build out a US mall platform in their real estate division. He was already thwarted once when Simon outbid him for the Mills Corporation and nearly lost out again when they were bidding to recapitalize GGP. Their business model is one that buys control in an asset, sells part of it to the public or private investors and then earns income both from their stake in that asset as well as fees for managing that asset.
Brookfield, in building out a $150 billion asset management portfolio has been known to acquire a portfolio of assets and then pare it down into something they can grow. After recapitalizing GGP they worked to spin off both Howard Hughes and Rouse Properties in an effort to get GGP better positioned from both a financial and asset standpoint. Now Bill Ackman wants to force their hand and push for a sale of the company.
Brookfield responded by saying they have no intention of selling their stake in GGP and that they currently are not taking any steps to acquire GGP. They’re focused on their long term plan which has them transferring their GGP ownership interests along with the rest of their real estate assets into a publically traded partnership which will be called Brookfield Property Partners. That vehicle will enable them to earn the management fees and operations income they are seeking.
So, is Bill Ackman making a big mistake trying to force a sale of General Growth? No, it’s of course in the best interest of his investors for him to look to maximize the value of the capital they’ve entrusted to him. However, I find it highly unlikely that he’ll get his deal with Simon. Brookfield wants to build out their global retail platform and have spent the past half-decade on this pursuit. They feel that it’s in their shareholders best interest to pursue this platform and to have control over the destiny of their assets. It’ll be interesting to see who does come out ahead, though I’ve got my money on Brookfield in this boardroom battle.
latimerburned owns shares of Brookfield Asset Management. The Motley Fool owns shares of Howard Hughes. Motley Fool newsletter services recommend Brookfield Asset Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.