Off target: that other Ackman bet

Pershing Square Capital may have made a lot of money shorting bond insurers, but not everything went well for Bill Ackman through the second half of 2008. Here’s one effect of the credit crunch he didn’t foresee:

A letter, picked up by CNBC, from Ackman to investors warned that a 10 per cent stake in American retail giant Target, taken in July, had badly misfired.

The $2bn special purpose company Ackman set up to invest in Target – Pershing Square IV – had lost 42.7 per cent of its value after a disastrous December in which Target’s share price plummeted.

Pershing Square IV also has exposure to Target through swaps and options. Its total economic exposure to Target is equal to around 12.6 per cent. The slide in Target’s share price was magnified for investors in Pershing Square IV since the fund was leveraged.

And why, specifically, did Target plummet in December?  Despite being a retailer, Target too, has been a casualty of the credit crunch.

In particular, it was a decision to shelve plans to sell $7bn of credit card receivables that seems to have sent stock down. Ackman is meanwhile convinced that Target shares are worth at least $120. The retailer’s real estate alone is worth that, he told Pershing IV investors in his letter.

Even so, it doesn’t reflect well on Ackman. Back in July Target was already regarded as sound company and applauded for its operating performance. Ackman’s investment was made principally on the basis of changes he intended to inflict on the firm’s capital structure, said analysts. Changes such as selling off credit-card receivables. Changes whose success depended on sound credit markets. A bet completely at odds, then, with Ackman’s celebrated monoline shorting.

For the time being, Target’s still plumbing the $50 mark. Shares closed at $49.57 on Thursday.