Warren Buffett Is Retiring, but Another Billionaire Wants to Create the Next Berkshire Hathaway todayheadline

Billionaire hedge fund manager Bill Ackman has been attempting to use real estate developer Howard Hughes Holdings (HHH 2.82%) to create a “modern-day Berkshire Hathaway” for some time. Now, it looks like a deal has finally been reached that could allow him to get started.

I’ve previously discussed Ackman’s two prior proposals (links in text), but here are the short versions:

• In January, Ackman proposed taking a majority stake in Howard Hughes by purchasing shares for $85. Depending on how many shareholders took Ackman’s offer, he would own 61.1%-69.2% of the company.
• In February, Ackman revised the offer to increase Pershing Square’s ownership from the current level of 37.6% to 48%. He proposed acquiring 10 million new shares for $90 per share.

Ultimately, the board wasn’t thrilled with either proposal but wasn’t necessarily opposed to Ackman’s idea of creating a diversified holding company, so the two parties decided to negotiate.

The final deal has been agreed upon

Pershing Square and Howard Hughes announced that the former has agreed to invest $900 million in newly created shares, just as in Ackman’s February proposal. However, Pershing will now buy 9 million shares at a higher $100 per-share price.

This will give Pershing a 46.9% stake in the business and provide the capital to start building a portfolio of “controlling stakes in high-quality, durable growth public and private operating companies while continuing to invest in and grow the Company’s core real estate development and Master Planned Communities business.”

Just to run down some of the important details:

• Ackman will become executive chairman of Howard Hughes Holdings, a role he previously held but stepped down from a couple of years ago.
• The current Howard Hughes leadership team, including CEO David O’Reilly, will remain in place. The position of chief investment officer is being created and will be filled by Pershing Square’s CIO, Ryan Israel.
• Pershing’s voting power will be limited to 40%, and it can’t increase its ownership stake to more than 47%.
• In a CNBC interview, Ackman said that it was “highly likely” that buying or building an insurance company would be a part of the business (similar to what Berkshire Hathaway does).
• It’s worth noting that this transaction doesn’t need any further shareholder approvals. In fact, the transaction closed on Monday, May 5, upon approval of the Howard Hughes’ board.

One big difference from the previous proposals is the fee structure, which, as a Howard Hughes shareholder myself, had been my least favorite part of Ackman’s previous offer. In the prior version, Pershing Square would get an annual fee of 1.5% of Howard Hughes’ entire market cap, no matter what.

Now, the base management fee — in exchange for Howard Hughes having access to all of Pershing’s resources — will be $3.75 million paid quarterly, which works out to about 0.4% of the current market cap annually. Pershing will also get a 0.375% quarterly management fee, but only on any increase in the company’s market cap above a certain threshold, which initially will be set at about $3.9 billion and be adjusted for inflation.

This does a better job of aligning management incentives with shareholder success and represents a significant concession over the prior offer.

Will Howard Hughes Holdings replicate Berkshire’s success?

I don’t think Ackman will deliver returns of more than 5 million percent over a 60-year period like Buffett has during his time as CEO of Berkshire Hathaway. I don’t think anyone else will, either, on such a large scale — at least not in my lifetime.

However, the revised deal is a big show of confidence from Ackman and does a far better job of incentivizing Ackman and his team to create meaningful value for the company’s shareholders. It will be interesting to see how Howard Hughes evolves, and I’m planning to keep my shares and go along for the ride.