Nov. 19 (Bloomberg) -- Hedge-fund manager William Ackman said selling part of a real-estate investment trust that he wants spun off of Target Corp. would raise $5.1 billion as the rest of the ``tarnished'' retail industry struggles to procure cash.

Ackman's Pershing Square Capital Management LP would buy $250 million of stock in an initial public offering of less than a fifth of the REIT, he said at a presentation in New York today. Target, the second-biggest U.S. discount chain, fell 10 percent in New York trading.

When Ackman proposed creating the REIT in October, the retailer questioned how much value the plan would produce for shareholders and said it had ``serious concerns,'' including that a spinoff would hurt its debt ratings. Target has dropped 18 percent since Ackman said he had a plan for the company's real estate. The Standard & Poor's Index fell 5 percent in the period.

``I don't think it's a tough sell,'' Ackman said in a telephone interview. ``The only thing that made it a tough sell was that it was going to cause a downgrade. We solved that problem.''

Under the proposal, Target would place the land on which its stores are built into an inflation-protected REIT that would lease the properties back to the retailer for 75 years. The sale of a stake would help raise money to acquire new locations and could be used to pay down $3 billion of debt, Ackman said.

The IPO would prevent the retailer's credit ratings from falling and convince investors that his valuation of the deal isn't overblown, Ackman said.

The retailer said earlier this week it would reduce capital spending next year by $1 billion.

Diverting Attention

With climbing unemployment and rising housing costs pummeling consumers, this may not be the time for the retailer's management to divert its attention from the battle for shoppers, according to Dave Keuler, managing director at Mason Street Advisors LLC in Milwaukee. The firm holds Target shares among its $70 billion of assets under management.

``Shouldn't management be focused on running its business in the worst retail environment in maybe the last 70 years?'' Keuler asked in a telephone interview. ``You still have to do the whole transaction, and you still have to monitor it.''

Executives said on a conference call this week that they were considering Ackman's initial proposal. Lena Michaud, a Target spokeswoman, said she couldn't comment further today.

The two parties have been in talks about creating a REIT since May, Ackman said, adding that he thinks the retailer is ``receptive'' to the idea.

IPO Schedule

The company would have to approve the proposal at the start of 2009 in order for the IPO to take place in the second half of next year, he said in the presentation.

Target fell $3.10 to $26.96 at 4:02 p.m. in New York Stock Exchange composite trading.

``If the company actually came out and said they were going to do this, the stock would explode upward,'' he said in the interview. Target's shares are ``extremely undervalued,'' he said earlier today.

Pershing Square said Aug. 14 it controls a 9.5 percent stake in the discount chain.

The combined value of the retailer and the REIT would be $65 a share at the time of the IPO and reach $79 within a year, Ackman said. In October, he projected $83 after one year.

Pension and endowment funds have shown ``strong interest'' in the proposed REIT, Ackman said. The REIT would have a tax advantage over the retailer, he said.

`Enormous' Value?

``It's worth a very serious look,'' said Todd Slater, an analyst at Lazard Capital Markets who recommends holding Target shares. ``It seems like the plan unlocks enormous value because it monetizes the real estate in a way that can't be done in the current structure.''

Target would be able to take advantage of the foundering real estate market and buy ``some once-in-a-lifetime locations,'' including property owned by Sears Holdings Corp., Ackman said.

``Sears owns some real estate that Target would love to have,'' he said. ``They're going to need money to do it. And they can't raise $10 billion, $5 billion, the way they're currently structured today, they can't. Not without giving away their credit rating.''

The discount chain has ``always been open'' to buying blocks of real estate, Michaud said, declining to comment on Sears's property. Sears spokesman Chris Brathwaite declined to comment.

Pershing Square sold 6.2 million Sears shares in the three months through Sept. 30, reducing its stake to 501,000, or 0.4 percent, according to a regulatory filing.

Since boosting his stake in Target last year, Ackman has pressed the Minneapolis-based retailer to sell its credit-card loans and repurchase shares. Target announced a $10 billion buyback plan a year ago. It suspended the program earlier this week to conserve cash after reporting third-quarter profit fell 24 percent on lower sales of clothing and home goods.

It sold almost half of its credit-card unit to JPMorgan Chase & Co. in May for $3.6 billion.

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: November 19, 2008 20:00 EST