Put in $500, then purchased:
$500 for HHH
Bill Ackman's Pershing Square finally closed on a deal to acquire a $900 million stake in Howard Hughes Holdings Inc. at $100 a share (official release, cnbc news) in exchange for getting annual management fees from HHH based on some calculation of the equity appreciation. In the process, Pershing Square will transform the company into a diversified holding company, a "modern-day Berkshire Hathaway". That allows HHH to sell its real estate portfolio in a well-paced manner to realize the full potential of the net asset value of the portfolio by using the diversified portfolio of income streams to stabilize the cash flow of the company.
While the initial deal terms in February called for $90 a share for the same $900 million stake and Pershing Square would receive 1.5% of Howard Hughes’ equity market capitalization annually as the management fee (that's 60,393,938 * $66 * 0.015 ~ $60 million assuming a share price of $66 a share), the new deal today on 5th May, in addition to the increased share price to $100 a share, only charges $3.75 million quarterly base fee ($15 million annualized) and a quarterly management fee equal to 0.375% of the increase in HHH’s equity market capitalization above the Reference Market Cap of the Company (that market cap is adjusted for inflation).
0.375% * 4 = 1.5%, so the new percentage-based management fee is similar to the old terms except it only uses the equity increase from the Reference Market Cap of the Company (the Reference assumes the share price of $66 a share, adjusted for inflation annually) instead of the whole market capitalization of the company. That inflation adjustment is effectively a slight discount on the management fee for that portion of the market cap compared to the original terms in February.
For the post-transaction market cap before any potential increases, HHH only pays $15 million instead of the $60 million annual management fee in the February proposal. That is a huge discount in exchange for not having the opportunity to reduce the fee if the market cap of the company goes down. Well, it has to go down 75% to break even, so the new terms are definitely much better. I think the company management had done a terrific job to negotiate for such terms from Bill Ackman's Pershing Square.
I am always a fan of Bill Ackman. The book The Confidence Game shows that he is a very rational and smart investor who is fearless of the big guys while doing the right thing (e.g. by calling the company bluff and shorting MBIA). Over the years, I have also seen his work on General Growth, Chipotle, Herbalife, Alphabet, Canadian Pacific Railway, Universal Music Group, etc. I really admire his talent and his take on the value investing principles shared by Warren Buffett and Charlie Munger. I believe his recent bet on UBER would be a miss, but that doesn't change my overall portrait of him.
Pershing Square Holdings would be a good vehicle to invest in Bill Ackman's talent; however, it is not available in my brokerage, Robinhood. Now Howard Hughes Holdings (HHH) is a good opportunity for me to ride on his investing talent. I will have a write-up about the company soon. In the meantime, I see a 20% discount of the $90 a share purchase price in his February proposal to by a good buy-below price of the stock, which is $90 * 0.8 = $72 a share.
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