Pershing Square Holdings (PSH ) billionaire fund manager Bill Ackman has made a bid to take control of Texas real estate developer Howard Hughes and create a ‘modern-day Berkshire Hathaway’.

Pershing Square Capital Management (PSCM), the asset manager headed by Ackman, wants to increase its stake from around 38% to up to 69%, in a deal which could see the hedge fund firm put down $1bn.

The offer of $85 per share was pitched at an 18% premium to Howard Hughes’ stock price the day before the announcement on 13 January.

The push to take control of Howard Hughes is a deviation from Ackman’s typical strategy of buying minority stakes in listed companies and, if successful, could grow Pershing Square into a large financial group.

In an investor letter published on X, Ackman said he was following in the footsteps of legendary investor Warren Buffett, who built Berkshire Hathaway into a diverse conglomerate including insurance, utility and transportation businesses, worth more than $1tn. 

‘With apologies to Mr Buffett, [Howard Hughes] would become a modern-day Berkshire Hathaway that would acquire controlling interests in operating companies,’ he said.

If the plan goes ahead, Pershing Square would be able to tap into Howard Hughes’ substantial cashflows and balance sheet to fund acquisitions, including in unlisted stocks. 

Ackman said the group, which has a current market value of $3.9bn, will ‘soon begin to generate substantial excess cash resources above and beyond investments in new property developments and amenities’. He plans to use that to invest in ‘new companies and assets with the long-term goal of growing Howard Hughes’ per share intrinsic value at a high compound rate of return’.

Under the proposal, Ackman would take over as chair and chief executive of Howard Hughes, with other Pershing Square personnel, including chief investment officer Ryan Israel, also installed in executive roles. However, the management and strategy of the main real estate business, Howard Hughes Corporation, would remain unchanged.

The capital to increase Pershing Square’s stake will come from PSCM itself and related parties rather than PSH and other funds, though these will continue to invest in Howard Hughes.

One analyst told Citywire that no stake in the Pershing Square asset management business would be transferred during the deal.

In fact, Pershing Square would levy what is, in effect, an annual management fee of 1.5% of Howard Hughes’ market cap. However, PSH and other funds run by Ackman ‘will waive any management fees associated with HHH shares’, to avoid double charging clients. 

Long history, ‘disappointing’ returns

Ackman knows Howard Hughes well, having first invested in what was then shopping centre operator General Growth Properties as it went bankrupt during the 2008 financial crisis.

With Ackman as chair, the non-retail assets were spun out in 2010 as Howard Hughes, with the company being named after the aviation and business mogul who had originally owned the residential communities in the 1920s.

Ackman spoke to the progress that had been made since Howard Hughes listed but said the share price returns had been ‘disappointing’, with just 2.2% compound annual growth and no dividends paid.

This resulted in PSCM drawing up plans to take Howard Hughes private – which were revealed last August – but shareholders in the company rallied against this, leading the asset manager to deliver its new proposal that will create a ‘highly attractive cash alternative for shareholders who choose to exit, and [accomodate] shareholders who wish to invest alongside us for the long term’. 

Ackman said Pershing Square ‘intends to hold Howard Hughes stock forever’ given its ‘effectively unlimited opportunity over the next untold number of decades to develop communities that will become important large-scale cities for future generations’.

Shares in the property company initially jumped nearly 10% on Ackman’s bid, but have drifted lower in recent days to $76.65.

According to Deutsche Numis data, Howard Hughes made up 10.1% of the £10.9bn London-listed investment company PSH at the end of June. 

If the transaction goes through, PSCM has confirmed it will elect to roll over its 38% stake across its funds. Depending on how many other shareholders opt to cash out or roll over their stakes in the deal, which also involves taking on $500m of debt, Pershing Square will control between 61% and 69% of the final entity. 

The plan has drawn opposition from some other shareholders, including Boyar Asset Management, which has written to the Howard Hughes board urging it to reject the offer. 

‘The chutzpah required to propose such a lowball offer, while positioning it as a benefit to shareholders, cannot be ignored,’ said the firm’s principal, Jonathan Boyar. 

He also said the proposed ‘unwieldy structure’ would create uncertainty, diminished influence and a lack of liquidity for minority shareholders that ‘will likely result in [the] shares continuing to trade at a significant discount to intrinsic value’.