Ackman Quits J.C. Penney Board With $700 Million Loss

Has Bill Ackman Jumped the Shark in Retail?

Bill Ackman resigned from J.C. Penney Co. (JCP)’s board after a public fight with his fellow directors, capping more than two years of agitating to remake the retailer that left him with $700 million in potential losses on his stake in the department-store chain.

Ronald Tysoe, a former vice chairman of Federated Department Stores Inc., now Macy’s Inc. (M), was named to the board and another director will be added in the “near future,” the Plano, Texas-based company said in a statement today.

The departure lets Chief Executive Officer Mike Ullman pursue a turnaround without internal pressure from Ackman, who was urging the ouster of Chairman Tom Engibous and a speedier search for a new CEO. Ullman and Engibous, who are working to help the retailer rebound from its worst sales year in more than two decades, have the board’s “overwhelming support,” J.C. Penney said.

Ackman’s resignation “doesn’t change the situation on the ground for the company,” Michael Binetti, an analyst at UBS AG in New York, said in an interview. The move also signals that J.C. Penney’s fundamentals still may be deteriorating because Ackman wouldn’t be acting so urgently if the results were getting better, he said.

J.C. Penney fell 2.5 percent to $12.84 at 12:34 p.m. in New York. The shares slid 33 percent this year through yesterday, compared with an 18 percent gain for the Standard & Poor’s 500 Index.

Ackman Stake

Ackman joined J.C. Penney’s board in February 2011 after his New York-based hedge fund Pershing Square Capital Management amassed a stake in the department-store chain that made it one of the company’s largest investors. He soon pressed to replace Ullman, who had been CEO for more than six years, with Ron Johnson, the executive who helped build Apple Inc.’s chain of retail stores.

Johnson, with Ackman’s support, instituted sweeping changes at J.C. Penney, including ending discounting and remaking the stores into collections of boutiques. The strategy flopped with the chain’s customers, resulting in a $985 million loss for the year ended in February as sales plunged 25 percent to the lowest since at least 1987.

J.C. Penney ousted Johnson in April and reinstated Ullman, 66, to stabilize the company. He has revived price cutting and brought back merchandise to attract core customers while shoring up J.C. Penney’s cash balance with a $2.25 billion loan and an $850 million drawdown from a revolving credit facility.

CEO Search

The board began looking for a long-term CEO last month, Engibous said in a letter on Aug. 8. Ackman was pushing to find someone by mid-September since there were only a few candidates, a person familiar with the matter said then. Ackman’s resignation will probably help the search because there will be less interference from the board, Matthew Boss, an analyst for JPMorgan Chase & Co. in New York, who has a neutral rating on shares, wrote today in a note to clients.

Ackman drew the board’s anger last week by making public two letters asking to speed up the CEO search and later asking to oust Engibous, saying the board wasn’t functioning effectively. Ackman told the board members that he had persuaded former J.C. Penney CEO Allen Questrom to agree to return as chairman.

J.C. Penney fought back, saying that the board supported Ullman and Engibous that Ackman’s statements were “misleading, inaccurate and counterproductive.” Management also gained the support of investors Soros Fund Management LLC and Glenview Capital Management LLC, according to people familiar with the situation. Steve Bruce, a Glenview spokesman who works for ASC Communications, said today in a statement that the firm was a passive investor in J.C. Penney and had taken no sides in the dispute.

Ackman Loss

Based on Pershing Square’s filings with the U.S. Securities and Exchange Commission and J.C. Penney’s closing price of $13.17 a share yesterday, the firm has a current paper loss of about $701.7 million on its investment in the retailer.

Pershing Square, which is the chain’s largest investor with about an 18 percent stake as of July, has a paper loss of about $497.5 million on the roughly $1 billion that the fund spent to acquire 39 million J.C. Penney shares at an average price of $25.90 each. In addition, the fund has partially realized losses of about $204.2 million on total return swaps tied to the price of J.C. Penney shares.

Stock Restrictions

Ackman is restricted from selling Pershing’s shares for the time being because he has material non-public information as a former director, Daphne Avila, a J.C. Penney spokeswoman, said in an e-mail. That may change once the second-quarter blackout period has ended, she said, without providing a date.

“The addition of two new directors and my stepping down from the Board is the most constructive way forward for J.C. Penney and all other parties involved,” Ackman said in today’s statement.

J.C. Penney is scheduled to report second-quarter results, the first full quarter under Ullman, on Aug. 20. Sales may decline about 8 percent to $2.78 billion, according to the average of 18 analysts’ estimates compiled by Bloomberg. The adjusted loss may widen to $1.07 a share, analysts project.



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