Ackman looks for a magic trick

Bill AckmanSay what you will about “activist” investor Bill Ackman, but the man fighting what appears to be a losing battle for control of Stuyvesant Town-Peter Cooper Village does not give up easy.

It took the founder of Pershing Square Capital six years to win a bet against the fortunes of bond insurer MBIA, during the course of which he was vilified by Wall Street and almost ruined. Yet in 2008, Ackman, then just 42, walked away with $1.1 billion in profits for his clients.

He’s also waged high-profile, high-stakes battles against corporate management at McDonald’s, Target and Wendy’s International. And he has often won profitable concessions.

Most recently, in 2008, he invested upward of $50 million in the bankrupt mall company General Growth Properties when the stock was hovering around 35 cents. At its current value of $15, he’s up about $1 billion — his second 10-figure score in just three years.

He may have been hoping for another jaw-dropping return with Stuy Town-Peter Cooper Village, where Ackman and his partners at Winthrop Realty Trust made a $45 million bet on the subordinate debt this summer. However, as The Real Deal went to press, Ackman and his partners had been dealt a major blow in their effort to win control of the 11,250-apartment complex, which has been up for grabs since a Tishman Speyer-led group defaulted last January on billions of dollars in debt used to finance its $5.4 billion purchase in 2006.

On Sept. 16, a State Supreme Court judge issued a preliminary injunction barring Ackman from foreclosing on the Tishman limited partnership that owns Stuy Town. Foreclosing would have allowed Ackman to put the partnership under bankruptcy protection and keep the apartment complex out of reach of its senior lenders.

Instead, the decision, and another by an appeals court judge late last month, cleared the way for an Oct. 4 foreclosure sale of the property by CWCapital, the special servicer representing Stuy Town’s primary lenders on $3.67 billion in senior debt. That sale would effectively wipe out Ackman’s subordinate mezzanine equity — $300 million worth of debt, most of which he purchased with Winthrop in August, at 15 cents on the dollar.

Ackman “rolled the dice,” said Joshua Stein, principal of Joshua Stein PLLC, a commercial law firm, and an expert on commercial mortgage transactions. Now, he said, “it’s a gloomy picture.”

Ackman, added one prominent real estate investor with expertise in high finance, “bought what was essentially a $45 million option, and he just got toasted.

“[By early October], he may own a worthless piece of paper,” the source said.

Ackman and Winthrop declined to comment for this article. However, in a statement issued by Pershing Square and Winthrop, the firms vowed to fight.

“Neither the trial court nor the appellate court has issued final decisions on the merits of the underlying contract dispute … PSW intends to pursue all available claims and causes of action against the mortgage menders and their special servicer, CWCapital Asset Management.”

In an earlier statement, meanwhile, it conceded that “if unsuccessful on appeal, or if the mortgage lender is permitted to foreclose prior to a successful appeal, the value of PSW’s investment in the mezzanine loans may be lost.”

Still, it’s a testament to the hedge fund manager’s recent record that even with the odds looking slim, most New York real estate insiders are unwilling to count him out.

“I don’t think we’re done with it,” said Stein. “My guess is it will be a busy few weeks. There will be negotiations, and he may still get a deal.”

Ackman “is not somebody to be taken lightly,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm headquartered in Midtown.

“Somehow he sees gold,” Davidowitz said. “You can’t ask me where he sees it — it’s a sewer pipe down there. All I know is his record.”

Carcasses in the path

Ackman’s approach to finance has been variously described as “dogged,” “fearless,” “stubborn,” “brilliant” and “self-righteous.”

Over the course of a 17-year career, he’s engaged in a series of fights with corporate boards using the media, and also the threat of proxy battles and lawsuits, to browbeat his opponents.

“Nobody,” New York Times business columnist Joe Nocera wrote in 2009, “digs into a company’s numbers as maniacally as Bill Ackman. And few are as dogged about pushing ideas on companies that he thinks will get the stock price up.”

His former opponents in corporate America say he’s “ruthless.”

“He will do anything to get what he wants,” complained one, who did not want to be identified. “He leaves a lot of carcasses in his path, and he really doesn’t care.”

His admirers, on the other hand, say he’s brilliant.

“The guy is a fucking genius,” said Davidowitz. “He goes in where others fear to tread. … He sees value where other people don’t.”

Often real estate has played a key part in Ackman’s calculations. And though his entry into the Stuy Town battle surprised some — he’s not one of the usual suspects who’ve circled New York trophy assets in recent years — it comes as no surprise to those who know his pedigree.

Ackman’s father, Larry, is the chairman of Ackman-Ziff Real Estate Group, a boutique advisory firm specializing in debt financing, mezzanine financing, preferred equity and sponsor equity.

Bill Ackman grew up in tony Chappaqua and attended Harvard twice, as an undergrad and for business school. After graduating in 1992, he started an investment firm called Gotham Partners with one of his classmates, David Berkowitz.

One of Ackman’s first big bets was, in fact, in a distressed real estate situation. During the slump of 1993, he bought up the stock of Rockefeller Center Properties Inc., the publicly traded real estate investment trust that held the $1.3 billion mortgage on the center, and was poised to take control. Battered by losses, the then-owner, Japanese company Mitsubishi Estate Co., turned the property over and took a $1 billion write-down.

In the months that followed, Ackman, then just 29, was at the center of a public battle amongst shareholders to determine the complex’s future.

Eventually a group that included David Rockefeller, Goldman Sachs and Jerry Speyer, among others, won control, beating out a plan advanced by Ackman and his allies.

But Gotham still retained its ownership stake in the Rockefeller REIT, and as the market rebounded, the Speyer-led effort increased profits. That stake helped give investors 40 percent returns on Gotham’s funds over the next three years, according to a 2009 profile in Portfolio Magazine.

Though he did not win the campaign to write the property’s future, it gave Ackman valuable experience working the media and interacting with fellow shareholders.

In the years that followed, first at Gotham and then at its successor company, Pershing Square, Ackman made a name for himself as an “activist investor” who bought up stock, then agitated for changes that would increase its value.

Ackman, said Tim Nantell, a finance professor at the University of Minnesota’s Carlson School of Management who watched him battle Target, “is one of these guys running around shooting their guns off.

“It keeps boards worried about their shareholders, focusing on creating value for shareholders — which is what they are supposed to be doing,” Nantell said. “I see it as a positive process in general.”

Some of Ackman’s biggest skirmishes have involved restaurant stocks, which captured his imagination, he said, after he read “Behind the Golden Arches,” a book about McDonald’s.

“One of the things that jumped out at me from the book was how Harry Sonneborn [the chain’s first chief executive] considered McDonald’s to be a real estate company,” he told one reporter in 2005. “That line made me think about the company in a different way.”

Ackman bought a 4.5 percent stake in McDonald’s starting in 2005 and threatened a proxy battle if the company refused to make changes that would “unlock shareholder value.” Press accounts at the time described a “40-minute audio-visual diatribe against the McDonald’s corporate structure,” which resulted in the company acceding to many of his demands. McDonald’s unveiled a plan to sell 1,500 restaurants, repurchase $1 billion worth of stock and release more financial information. Eventually, the company announced plans to spend $5.7 billion on dividends and stock buybacks to increase returns.

But it was Ackman’s long-running war against bond insurance giant MBIA that’s garnered him the most attention — even resulting in a book by Bloomberg News reporter Christine S. Richard, entitled “Confidence Game: How a Hedge Fund Manager Called Wall Street’s Bluff.”

Long before the credit crisis, Ackman examined MBIA’s balance sheet and found that the company had expanded from its original business of offering insurance on relatively safe municipal bonds into a wide array of riskier loans, including subprime credit card and home loans and distressed auto loans. Yet the company was highly leveraged — holding only about $1 for every $139 in debt it insured. Should only a small portion of MBIA’s portfolio go bad, it would not have enough cash to cover its obligations as an insurer and its business would enter a “downward spiral.”

So in 2002, Ackman purchased millions of dollars in credit default swaps, essentially buying insurance contracts that would pay off handsomely if the company’s fortunes dived. Then he released a scathing 66-page report, entitled “Is MBIA Triple A?” picking apart the firm’s finances.

Since MBIA was a highly regarded company, thriving on exactly the kind of deals that were feeding Wall Street’s credit-driven boom, Ackman’s attack drew widespread condemnation on Wall Street. It also prompted a counter-attack from the company, and an investigation by then-New York Attorney General Eliot Spitzer, who looked into whether Ackman was churning out distorted research to drive down the stock price so he could sell short.

However, Ackman didn’t back down. In fact, after almost a week of testimony, he convinced Spitzer to instead investigate MBIA.

Still, it would take almost four more years before Ackman’s predictions of a “downward spiral” came true. When subprime loans started going bad and the company’s fortunes finally collapsed — in 2007 and 2008 — MBIA took $4.6 billion in losses. Ackman walked away with $1.1 billion.

Of course, Ackman has not always been successful.

In 2007, he raised around $2 billion to invest in Target Corp. — vowing to find ways to increase the stock value. Among other ideas, he pressed Target to spin off its real estate into a separate company, and then lease it back to the stores. But when the board refused his changes, he ran a slate of his own candidates and was roundly defeated. At one point in 2009, his fund, which consisted of both stock and options, was down a staggering 93 percent. Though Ackman later recovered a portion of those losses, in the end he reportedly lost his investors millions of dollars.

After his unsuccessful proxy fight, Nocera called his efforts “deeply misguided,” noting that they were a “huge, expensive distraction for a company trying to struggle through a recession.”

In addition, earlier this year Ackman’s hedge fund trimmed its stake as the largest shareholder of the book seller Borders after reportedly taking tens of millions of dollars in losses.

General Growth redux?

Ackman has said it was Michael Ashner, the CEO of Winthrop Realty, who approached him about Stuy Town. Winthrop, which already owned some of the senior mezzanine debt, was looking for a partner to help it acquire the rest.

In general, the parties holding the most senior pieces of mezzanine debt have the right to step in once their debtors fail to make payments to them. Then they take over the property and assume loan payments to the principal lenders.

However, it’s been almost nine months since Tishman Speyer defaulted on the $3 billion senior loan as well as the $1.4 billion of mezzanine debt. And CWCapital, the special servicer on the senior loan, had already begun the process of moving toward foreclosure.

Ackman entered the fray and characteristically began making his case to CW and to tenants that he could serve their needs, hoping to change their minds.

“It’s a $3 billion real estate transaction,” Ackman told the New York Observer. “They need help. They need us, we need them. … There’s plenty of room to make a deal where everyone’s happy.”

But when negotiations with CWCapital failed, Ackman filed a lawsuit. He had reason for optimism — he recently made a similarly sized bet on General Growth Properties that also hinged on an unlikely legal outcome, and it had paid off to the tune of $1 billion.

At the time Ackman acquired 7.5 percent of that stock, the company was headed toward bankruptcy, and shares were valued at pennies. GGP owned 183 malls, theoretically valued at billions of dollars. However, most of them had been spun off into subsidiary companies, which was thought to protect them should the parent company declare bankruptcy, said Bill Kavaler, an analyst with Oscar Gruss & Son.

When a judge ruled that GGP could place the subsidiaries under bankruptcy protection, the owners of the debt on the individual malls agreed to restructure their debt, and the value of Ackman’s penny stock exploded.

A seat at the table

Even though Ackman’s chances of a similar reversal at Stuy Town now appear less likely, he may still find a way to make a deal.

Ackman bought himself a “seat at the table,” argued Ben Thypin, senior market analyst at Real Capital Analytics.

“They figured that this is a very good way of getting CW’s attention, and then move to the front of the line in terms of who would take the property off their hands,” Thypin said. “Obviously CW is claiming in court they want to foreclose, but it’s a negotiating tactic.”

A foreclosure sale will fetch far less than the $3.67 billion CW is owed, Thypin said. (The latest appraisal set the property’s value at a mere $1.9 billion.) In addition, the firm will have to pay tens of millions of dollars in transfer taxes if it sells. Extending the debt may prove a better option — if Ackman can convince CW that his plan could help them recover more value over time, said Thypin.

At least one of the lenders on the senior mortgage has publicly voiced his opposition to a foreclosure. David Tepper, the manager of the hedge fund Appaloosa, sued unsuccessfully to block CW’s efforts earlier this year, arguing that bankruptcy was a better option because it would allow the lenders to avoid nearly $200 million in transfer taxes. He has not commented publicly on Ackman’s plan.

Ackman has already begun wooing tenants, presenting the seeds of a plan that at first blush seems closer to what tenants are asking for than anything offered by Tishman Speyer. A conversion to a co-op, an option Ackman has put on the table, “is very much consistent with what the tenants association has supported in the past, provided that rent-stabilized tenants are protected and feel no additional pressure,” said city councilman Daniel Garodnick, a lifelong resident of Peter Cooper Village.

Still, he said, “We don’t have sufficient detail to be able to move forward at this point. … It’s sort of an outline of a plan.”

The outcome in the coming weeks will depend on a number of factors — the appeals court decision, the true amount of tenant enthusiasm for Ackman’s plan, CW’s willingness to play ball, and what other players are in the mix.

One thing is for sure, though: It’s likely to be an interesting show. With Bill Ackman, it usually is.