MorningWord 8/27/13: Last night Bill Ackman’s Pershing Square hedge fund sold its entire stake in JCP of 39.1 million to Citi, who is now in the business of placing it with investors. Given the fact that the stock is trading up a tad ( 20c as I write) from the offering price of $12.90 suggests that there was reasonable demand. Remember In early March when the then second largest shareholder in the stock, Vornado sold 10 million shares, the block was bought by Deutsche bank at $16.40 and immediately traded below the deal price and subsequently went much lower.
So why would you ask yourself would Bill Ackman, who has been such a staunch supporter of the JCP for the last couple years clear out with the stock trading at 10 year lows? Well first and foremost, he got into the position as he thought he could affect change. Problem is almost every decision that the management that he helped install, and that the board that he was a member of made, resulted in fairly disastrous circumstances. After his little kerfuffle with the Board a few weeks ago, it became apparent that not only did they not want him, but that he was basically out of options without a management that he could be instrumental in installing again, and working with. Obviously this is my own conjecture, but rather than subject his investment to the whims of a board he does not see eye to eye with, and an existing management he has no faith in, he is just ripping off the band aid. IN the business we call this a “HATE SALE” , you know it isn’t the right time to do so, but it needs to be done. There is another saying in the business though, when another investor, or group of investors make a “HATE SALE” there are often times the opportunity for new entrants to the situation to make the “CLEAN-UP BUY” of the century. Meaning that the overhang from those who can’t take the pain anymore is out of the way, and now the investment may be able to shine in a different sort of light.
JCP is still a distressed situation, with or without Ackman, but the credit market has stabilized in the past couple weeks, and there are other value investors like Perry Capital, Glenview, Soros and Tiger Consumer who still see the stock as worth owning. JCP’s stock is trading at 1.25x book value, and while that book value might not be worth book in a distressed situation, it’s not worth zero either. With 42% of the float short, and the Ackman overhang out of the way, we see the balance as skewed towards more incremental buyers than sellers over the next few months.
IN this situation, and given the deep dislike by some other large activist investors for Ackmam, this JCP trade may just work if the company can raise capital and shore up their balance sheet a bit. The point being, there are many like Carl Icahn that would love nothing more to see JCP double or triple in the years to come, not to prove Ackman right, but to rub his inability to stick with the investment in his face, just for the sport of it. If the company does in fact raise equity in the weeks/months to come, this could be the print of all prints to buy on.