Pershing Square Enters Landry's Restaurants (LNY), Opposes Proposed Buyout ~ market folly

Monday, November 23, 2009

Pershing Square Enters Landry's Restaurants (LNY), Opposes Proposed Buyout

Bill Ackman's hedge fund firm Pershing Square Capital Management, along with Richard McGuire, chairman of Borders Group, has filed a 13D filing with the SEC disclosing a 9.9% ownership stake in Landry's Restaurants (LNY). The filing was made originally due to activity on November 3rd, 2009. The 13D has since been amended on November 20th, 2009 and they now own 1,604,255 shares. In the fine print, we also see that they have economic exposure to 2,404,126 more shares through cash-settled total return swaps which then brings their aggregate economic exposure to 4,008,387 shares. This represents 24.8% of all shares outstanding. The swaps they entered have a price range of $14.57 to $19.37 and have expiration dates between June 30, 2011 and December 9, 2011. This is a brand new position for Pershing Square as they did not hold it when we covered their portfolio.

Keep in mind that a 13D signifies an activist investment and you'll see exactly why Ackman has gone activist below. Currently, Landry's is involved in a potential management takeover as chief executive Tilman Fertitta tries to acquire the remaining shares for $14.75 per share. Given that Pershing's swaps have a reference price higher than Fertitta's offer, it is clear they are up to something here and they have said they will oppose the proposed buyout by Fertitta, who currently owns 55.1% of the shares. So it seems Fertitta currently has two options in that he can either raise his bid or stop trying to acquire shares for the mean time. This potential buyout becomes a little more complex given that Fertitta has agreed to a 'majority of the minority' condition where it requires the minority shareholders to also approve of the transaction. So, with whatever shares he cannot acquire he still has to convince the shareholders of those shares to approve the transaction. Given that Ackman will not support this buyout, we'll have to wait and see whether or not Pershing is simply waiting for a higher bid or if they have other plans in mind.

Bill Ackman's Pershing Square Capital Management. Ackman is a well known value oriented and activist hedge fund manager who often takes large stakes in companies. For a more in-depth look at Bill Ackman, head to our profile of Pershing Square here. We've detailed a lot of Pershing's positions lately, including their boosted stake in McDonald's (MCD), their long of Corrections Corp of America (CXW), and their short of Realty Income (O).

Taken from Google Finance, Landry's Restaurants is "a diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full-service, specialty location restaurants, with 175 locations in 27 states and Canada, as of December 31, 2008. The Company is a full-service restaurant operator in the United States, operating primarily under the names of Rainforest Cafe, Saltgrass Steak House, Landry’s Seafood House, Charley’s Crab and The Chart House. Its concepts range from upscale steak and seafood restaurants to theme-based restaurants, and consist of an array of formats, menus and price points that appeal to a range of markets and consumer tastes."

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