Bill Ackman acquires bigger stake in developer Howard Hughes

Billionaire hedge fund manager Bill Ackman’s Pershing Square Capital Management has increased its stake in the small U.S. developer Howard Hughes Holdings. Ackman plans to turn the company into a large investment vehicle, following the model of Warren Buffett, who transformed the struggling textile manufacturer Berkshire Hathaway into one of the most valuable investment holdings in the world.

Pershing Square is investing $900 million in Howard Hughes, purchasing 9 million newly issued shares at $100 each. This will give it a 46.9% ownership stake in the developer. The companies announced the deal in a joint statement yesterday, May 5.

Pershing is paying a 48% premium to Howard Hughes’ share price as of Friday, May 2.

As part of the deal, Howard Hughes will pay Pershing Square a quarterly base fee of $3.75 million and a quarterly management fee equal to 0.375% of the increase in Howard Hughes’ market capitalization above a reference, which is to be adjusted annually for inflation.

Ackman’s plan is to transform Howard Hughes into a diversified holding company that acquires promising businesses as long-term investments — similar to how Warren Buffett’s Berkshire Hathaway operates.

Now 94 years old, Buffett began as an activist investor and hedge fund manager, but in the 1960s, he shut down his private partnerships to focus on Berkshire Hathaway, then a troubled textile manufacturer. Today, Berkshire is worth over $1 trillion and owns businesses in insurance, energy, railroads, and retail, along with a massive investment portfolio and over $300 billion in cash.

Buffett is known for “elephant hunting,” a reference to his search for large acquisition targets. Meanwhile, Ackman, while explaining his vision for Howard Hughes, says: “We’re going to start not with elephants, not rabbits, but small animals.”

The agreement comes after months of negotiations between the two companies. Ackman first announced his intention to acquire Howard Hughes in August. At that time, his hedge fund already held a 37.6% stake in the developer.

In January, Ackman offered to acquire a majority stake at $85 per share, an 18% premium to the market price at the time. By February, Pershing Square had raised the offer to $90 per share for 10 million shares.

In March, the two parties signed a standstill agreement after Howard Hughes’ board said the February proposal was “not acceptable in its current form.”

Howard Hughes rose 2.9% to $69.40 per share following the deal announcement. According to MarketWatch, all three analysts covering the stock rate it “buy.” Their average target price is $90.67 per share, suggesting upside of nearly 30% versus the last closing price.