Ackman’s J.C. Penney Sale Ends Failed Saga to Agitate for Change

Activist investor Bill Ackman is selling his entire stake in J.C. Penney Co. (JCP) after a public spat with the company’s board, marking an end to more than two years of failed efforts to agitate for changes at the retailer.

Pershing Square Capital Management LP, Ackman’s hedge fund, said yesterday it hired Citigroup Inc. (C) to underwrite the sale of its 39.1 million shares in the retailer, after reaching an agreement earlier this month to unload its stake. The department-store chain filed a prospectus for the shares that account for about 18 percent of its stock and make Pershing its largest investor.

The stake sale coincides with Ackman’s resignation from the board of J.C. Penney on Aug. 12 after a public clash over its direction and management. It also brings to an end his role as activist investor at the company after his handpicked Chief Executive Officer Ron Johnson alienated customers with a plan to turn the chain into a collection of boutiques and presided over its worst annual sales in more than two decades.

“Ackman overplayed his hand with Johnson,” Paul Swinand, an analyst for Morningstar Inc. (MORN) in Chicago, said in an interview. The move to sell his stake will be the end of “a debacle” for J.C. Penney and its shareholders, Swinand said.

Citigroup will sell Ackman’s stake in J.C. Penney for $12.90 apiece, according to two people with direct knowledge of the matter, who asked not to be identified because the discussions are private. Ackman would take a loss of about $500 million, according to data compiled by Bloomberg. Jennifer Burner, a spokeswoman for Pershing, didn’t immediately respond to a request for comment.

Public Spat

J.C. Penney shares dropped 1.7 percent to $13.12 in extended trading yesterday, after falling 1.1 percent to $13.35 at the close in New York. The stock has declined 32 percent this year compared with a gain of 16 percent for the Standard & Poor’s 500 Index.

Ackman stepped down from J.C. Penney’s board after sparring with his fellow directors over his push to replace Mike Ullman, who succeeded Johnson in April as interim CEO. He drew the board’s anger in the previous week by making public a letter he sent to directors saying he had persuaded former J.C. Penney CEO Allen Questrom to agree to return as chairman if he approved of the next CEO.

Pershing became J.C. Penney’s largest shareholder in October 2010. Ackman then joined the board in February 2011 and began pushing for changes, assuming the activist role he also took at many companies, including Target Corp. (TGT) Four months later, the Plano, Texas-based department-store chose Johnson to replace Ullman as CEO, hiring him away from heading Apple Inc.’s successful stores.

Sweeping Changes

Johnson, with Ackman’s support, instituted sweeping changes at J.C. Penney, including the removal of sales promotions and private-label merchandise, popular among the retailer’s female shoppers, and introducing a more upscale home department with designer goods such as $60 toasters from architect Michael Graves.

The strategy flopped, leading to a $985 million loss for the year ended in February as sales plunged 25 percent to the lowest since at least 1987.

It’s been a tough year for Ackman. His $11.2 billion Pershing is trailing many of its biggest rivals this year with a 3.7 percent return through July in his largest fund.

Ackman is also nursing a paper loss on his short bet on Herbalife Ltd. (HLF), a weight-loss and nutritional supplement company, which he has accused of being a pyramid scheme. The company has repeatedly denied the accusation. Carl Icahn and George Soros’s family office have taken the other side of the bet, helping the shares double in value this year.

Paper Loss

Ackman’s career has been dotted with both high-profile wins and jaw-dropping losses. He raised a $2 billion fund to invest in retailer Target in 2007, and then lost 90 percent of the money in the next two years. At the time he called it “one of the greatest disappointments” of his career.

At least one large investor has pulled money over Pershing’s performance. Soros Fund Management LLC, the family office of billionaire Soros, asked to withdraw about $250 million from Pershing last year. Because Ackman’s firm only gives back a portion of investor cash each quarter, Soros won’t get all its money back until next year.

The turnaround that eluded Johnson at J.C. Penney may be gathering steam under Ullman. Since replacing Johnson in April, Ullman has revived discounting and brought back merchandise to attract core customers while shoring up J.C. Penney’s cash balance with a $2.25 billion loan and an $850 million drawdown from a revolving credit facility.

Sales Decline

In the second quarter, the retailer’s sales decline slowed. Revenue in the quarter ended Aug. 3 fell 12 percent to $2.66 billion, less than the 23 percent drop in the same period last year.

Ullman has also attracted other hedge fund investors besides Soros and Icahn who back his strategy. J. Kyle Bass, who focuses on corporate turnarounds, has accumulated a long position in J.C. Penney this month by buying the company’s secured loans, according to a person familiar with the matter, who asked not to be named because the information is private.

To keep the turnaround going, Ullman will have to preserve cash. J.C. Penney said on Aug. 20 when it announced its quarterly results that it expected to end the year with more than $1.5 billion in liquidity and that the forecast doesn’t assume outside financing.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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