Target has said it would seriously consider investor William Ackman's recommendation to spin off its real estate assets to a newly created and separate company that would then lease those properties back to the retailer.
Mr. Ackman, whose Pershing Square Capital Management hedge fund holds just under 10 percent of Target, said that the new entity called Target Inflation Protected REIT (TIP REIT) would unlock the value of the chain's holdings, which he estimates to be $39.1 billion.
"We've asked the company to do something that's transformational," Mr. Ackman is quoted by Reuters. He estimates that TIP REIT would increase Target's value by roughly $30 a share.
Target has not dismissed Mr. Ackman's recommendation but has expressed some reservations. The retailer's management has questioned whether a spin off would lead to higher expenses for the company and reduce its financial flexibility.
There is also concern that the spin off could damage Target's debt ratings, make it more costly to borrow money and reduce its liquidity. Further, there is the danger that it could divert the company from focusing on its core business.
Mr. Ackman acknowledged that TIP REIT could pose problems for Target but there's a quick fix if it doesn't work. "The beauty is you just put the genie back in the bottle and just merge the two companies," he said.
Discussion Question: Would the creation of TIP REIT be the right move to make Target a stronger retailing business?