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Bill Ackman Plans To Build The Next Berkshire Hathaway -- Here's How You Can Invest In It
Billionaire hedge fund manager Bill Ackman announced plans to build a modern-day Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). Although Ackman and his investors would own most of it, it would be available to invest in as a publicly traded company.
Ackman has a unique investment style through his Pershing Square hedge fund. Instead of owning dozens of stocks like many other famous investors do, he tends to prefer spreading Pershing's billions among just a few stocks in which he has the highest level of conviction.
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One of Ackman's largest investments, in which he has been very closely involved, is Howard Hughes Holdings (NYSE: HHH), a unique real estate developer that develops master-planned communities that are the size of small cities. Ackman helped Howard Hughes go public in 2010 in the wake of the financial crisis and served as the company's Chairman until recently.
The billionaire owns 37.6% of Howard Hughes via Pershing Square, according to regulatory filings, but apparently this isn't enough. Here's a rundown of how Ackman wants to take a majority stake in Howard Hughes and use it to kick-start his plan to create the Berkshire Hathaway for the modern era.
Ackman wants to own even more of Howard Hughes Holdings
Apparently, a nearly 38% stake doesn't appear to be enough for Ackman. In a letter to Howard Hughes' board of directors, he proposed "merging" the company with a new subsidiary of Pershing Square. By doing this, Ackman wants to acquire a majority ownership stake in the business by purchasing about 11.8 million shares from existing investors for about $1 billion ($85 per share) and spending another $500 million repurchasing shares, further reducing the public float.
Ackman is giving existing investors the option to get $85 per share in cash or roll their shares into the newly formed company. If too many investors elect the cash option, they'll receive a prorated amount of both cash and stock.
Depending on how many current shareholders decide to take the cash, Pershing will own between 61.1% and 69.2% of the company. In any event, Ackman and his investors will have a majority, and at least 30.8% of the company would be owned by outside investors.
Post-transaction plans are where it gets interesting
Howard Hughes Holdings has one main subsidiary, Howard Hughes Corporation (HHC). This is the real estate business and is expected to be completely unchanged after the merger. Ackman believes that HHC's business has an intrinsic value far greater than the current share price and its management is doing a great job.
However, the holding company would become a diversified business. In a nutshell, any excess cash generated by the HHC, as well as other sources of company capital, would be invested by acquiring businesses and other assets. As Ackman said in his letter, "With apologies to Mr. Buffett, HHH would become a modern-day Berkshire Hathaway that would acquire controlling interests in operating companies."
While the HHC subsidiary will retain its current leadership team, the parent company will be led by Bill Ackman himself in the CEO and Chairman roles and other key Pershing Square leaders in other leadership roles. Here are a few other important points:
- Ackman wants Howard Hughes Holdings to become the platform for Pershing Square to acquire controlling interests in businesses.
- He expects this deal to dramatically improve the company's access to capital, both for HHH and the HHC real estate business.
- The emerging conglomerate will get the full support of Pershing's team and resources, but Pershing will get a 1.5% annual management fee (as a percentage of HHH's market cap) in return.
There's a lot that needs to happen before Ackman can get started. The deal still requires the approval of Howard Hughes' board, for example, and there are some details that will need to be finalized. But the short version is that if the transaction goes through, an investment in Howard Hughes Holdings today could allow you to invest in Ackman's vision.
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Matt Frankel has positions in Berkshire Hathaway and Howard Hughes. The Motley Fool has positions in and recommends Berkshire Hathaway and Howard Hughes. The Motley Fool has a disclosure policy.
