Billionaire investor Bill Ackman's Pershing Square is upping its investment in Howard Hughes Holdings Inc. in a $900 million deal that is expected to transform the developer of master-planned communities into a diversified holding company similar to Warren Buffett's Berkshire Hathaway.
After months of discussions, Pershing Square plans to acquire 9 million newly issued shares of Howard Hughes, bringing its ownership to 46.9% of the company. The investment will allow Howard Hughes Holdings to acquire controlling stakes in private and public companies while still focusing on its core real estate business. The deal makes good on a promise by Ackman, who told investors in January he wanted to transform Howard Hughes into a modern-day Berkshire Hathaway.
Pershing Square's purchase of Howard Hughes' common stock at $100 per share represents a premium of 48% to its closing share price on Friday, May 2, according to a Monday statement from the companies. The deal closed Monday.
Ackman, who is Pershing Square's chairman and CEO, has been named the executive chairman of Howard Hughes Holdings' board of directors. Pershing Square Chief Investment Officer Ryan Israel has been named CIO of Howard Hughes Holdings in a new senior leadership role at the firm.
Howard Hughes Holdings' leadership team, led by CEO David O'Reilly, will remain unchanged, and there will be no changes for other employees, the statement said.
"Pershing Square’s investment will create new avenues for growth, while our core business as the nation’s leading community builder will not change," O'Reilly said in the statement.
The developer owns high-end master-planned communities across the U.S., including in the greater Houston area, as well as Summerlin in Las Vegas and Ward Village in Honolulu. It also has built "substantial value for shareholders in recent years that has largely gone unrecognized due to the high cost of capital that the market assigns to the company in light of its pure-play exposure to real estate development and community creation," Ackman said in the statement.
"We believe that [Howard Hughes] is a superb platform to build a faster-growing, high-returning holding company that will acquire control of companies that meet Pershing Square’s criteria for business quality and durable growth," Ackman said in the statement.
Buffett's investment style
Ackman hinted on CNBC at ways Howard Hughes' new strategy under Pershing Square might mirror Buffett's investment style. Ackman told CNBC in an interview Monday that Howard Hughes could acquire or build an insurance company, saying the addition of a profitable insurance company bolstered Buffett's Berkshire Hathaway returns over time.
Buffett announced plans over the weekend to step down as CEO of Berkshire Hathaway after a 60-year career in which he delivered a more than 5,500,000% return on Berkshire's stock after turning a once-failing textile firm into the world's most valuable company that isn’t a tech giant or state oil producer, according to Bloomberg. In the announcement Saturday at the company's annual shareholder meeting, Buffett said he would recommend that the Berkshire Hathaway board appoint Greg Abel, who serves as chairman and CEO of Berkshire Hathaway Energy and is vice chairman of the company's non-insurance operations, to replace him as chairman at the end of the year.
The Pershing Square deal for Howard Hughes ends a monthslong "rigorous process" overseen by Howard Hughes Holdings' special committee with feedback from stockholders, the evaluation of each of Pershing Square's proposals and robust negotiations to reach a mutually favorable outcome, said Scot Sellers, chairman of the special committee.
“We believe this agreement not only reflects the value that [Howard Hughes] has created in recent years, but it also positions the company to transform its strategy, with enhanced value creation opportunities and upside potential, while improving its credit profile," Sellers said in a statement.
In the deal, Pershing Square has agreed to limit its voting power to 40% and its beneficial ownership to 47%. The firm has the right to nominate three directors as long as it continues to beneficially own at least 17.5% of the fully diluted Howard Hughes' shares.
Pershing Square Holdco, which made the $900 million investment in Howard Hughes, is 90% owned by Pershing Square principals with the remainder being owned by strategic investors. With this new investment stake in Howard Hughes, coupled with Pershing Square funds' existing ownership, Pershing Square's principals now own $1.2 billion of Howard Hughes.
The deal makes way for Pershing Square's organization to support Howard Hughes in its transformation by offering investment, advisory and other ancillary services, including capital markets assistance and corporate development. Howard Hughes is expected to pay Pershing Square a quarterly base fee of $3.75 million and a quarterly management fee, according to the statement. Howard Hughes will not pay other fees, the company said.
"We remain steadfast in our commitment to creating exceptional communities, pursuing innovative development opportunities and acting nimbly to meet market demand and deliver sustainable growth," O'Reilly said in the statement.
For the record
Morgan Stanley & Co. LLC was the financial adviser to the special committee, with Hogan Lovells US LLP and Richards, Layton & Finger, P.A., acting as the committee's legal counsel. Morgan, Lewis & Bockius LLP was the legal counsel for Howard Hughes Holdings. Pershing Square's financial adviser was Jefferies LLC, with Sullivan & Cromwell LLP and Morris, Nichols, Arsht & Tunnell LLP acting as legal counsel.