I have to say that the transaction does not make much sense to me. It is a lot of financial engineering that, most likely, will not create any value to shareholders.
The core of the transaction is to spin-off of the land that TGT's stores are build on, TGT keeps owning the buildings, into a REIT that will charge TGT rent and perform building maintenance and development of new stores. The REIT pays dividends to shareholder and because it is a REIT it does not pay any taxes. According to Ackman TGT will be $70 after the transaction and $83 in a year, somehow. What the transaction boils down to is : tax. That is it. The new structure eliminate some taxes, actually, redistribute it to you , the shareholder.
My problem with this is creating value by tax redistribution only is tax policies are outside management control. Tax policies can change therefore relying on a tax policy to create value can disappear very quickly. Management can create better sustainable value by using some of the levers it can actually control: revenue, expenses and cost of capital. The transaction is a lot of ado about nothing in my opinion.
A company value is the perpetual discounted present value of its free cash flow. Then, there are two way to create value for shareholders.
- increase free cash flows, and that can come from two things:
- increase revenues
- increase operational efficiencies or decrease operating expenses and capex.
- decrease the discount rate or the cost of capital, a company can accomplish this by:
- decreasing borrowing costs,
- optimize the company's capital structure.