August 20, 2013
Dear Pershing Square Investor:
The Pershing Square funds were flat for the second quarter of 2013 with performance of 5.3% to
6.3%, net of all fees, for the first six months of the year. The funds‟ long-term track records and
performance versus the market since inception are set forth below1:
For the Quarter Year to Date
April 1 - June 30 January 1 - June 30 Since Inception
Pershing Square, L.P. 01/01/04 - 06/30/13
Gross Return 0.6% 8.6% 839.2%
Net of All Fees 0.2% 6.3% 463.4%
Pershing Square II, L.P. 01/01/05 - 06/30/13
Gross Return 0.3% 7.5% 545.0%
Net of All Fees -0.1% 5.3% 318.1%
Pershing Square International, Ltd. 01/01/05 - 06/30/13
Gross Return 0.4% 8.3% 441.7%
Net of All Fees 0.0% 6.0% 260.8%
Pershing Square Holdings, Ltd. 12/31/12 - 06/30/13
Gross Return 0.4% 8.1% 8.1%
Net of All Fees 0.0% 6.2% 6.2%
Indexes (including dividend reinvestment) 01/01/04 - 06/30/13
S&P 500 Index 2.9% 13.8% 75.6%
NASDAQ Composite Index 4.5% 13.4% 85.9%
Russell 1000 Index 2.7% 13.9% 81.4%
Dow Jones Industrial Average 2.9% 15.2% 82.0%
We are going to make mistakes. Because we manage a large pool of capital and we make active
investments in large capitalization, high-profile companies, our mistakes are often going to be
much more visible than those of other investment professionals. The dollar losses are also
generally going to be larger. Our mistakes are therefore going to attract a disproportionate
amount of media attention. This media attention is a natural outcome of our high profile
strategy. Over time, the media has been helpful in our engagements with our portfolio
companies, and we expect the firm‟s visibility to continue to be a sustainable competitive
References to outperformance since inception do not include PSH which was launched on December 31, 2012. Past performance is not
necessarily indicative of future results. Please see the additional disclaimers and notes to performance results at the end of this letter.
advantage. Activist investing requires a thick and calloused skin, and recent press coverage
reinforces this point.
We are fortunate in having made only a few mistakes in our activist commitments over the last
nearly 10 years. The good news is that our successes vastly overwhelm our failures. Below is a
list of every public, active investment we have made since the inception of the funds in January
2004. We have made 19 active long investments and six active short investments.
The table below for our long investments shows the initial acquisition date of our investment, the
closing price of the stock on the prior day (the unaffected price), the average exit price on the last
day of sale (or on 8/16/13 if still held) including dividends and adjusted for spinoffs and stock
splits (if applicable), and the current stock price on August 16, 2013 including dividends and
adjusted for spinoffs and stock splits (if applicable). For our short investments, we indicate
whether the investment is through CDS, short sales or both, and provide similar data so you can
assess our activist track record.
PERIOD OF ACTIVE INVESTMENT AUGUST 16, 2013
Initial Closing Price at Exit Adjusted
Acquisition Price Day or at 8/16/13 Current
Company Date Before Entry if Still Held Stock Price
Plains Resources Inc. 01/20/04 $16.25 $17.25 Taken Private
Sears Roebuck, and Co. 06/07/04 $36.90 $66.78 $33.22
Wendy's International 12/20/04 $38.35 $70.99 $118.01
Sears Canada Inc. 02/03/05 CAD 17.35 CAD 49.00 CAD 39.20
McDonald's Corp. 06/10/05 $28.98 $58.66 $111.08
Borders Group Inc. 07/14/06 $18.28 $0.65 Liquidated
Ceridian Corp. 10/06/06 $23.37 $36.00 Taken Private
Target Corp. 04/17/07 $60.17 $56.75 $71.92
Longs Drug Stores Corp. 06/30/08 $43.05 $71.64 Acquired by CVS
General Growth Properties Inc. (Includes HHC & RSE) 11/13/08 $0.35 $32.42 $33.16
Landry's Inc. 11/03/09 $10.76 $24.50 Taken Private
Fortune Brands (Includes BEAM & FBHS) 07/12/10 $40.70 $86.15 $102.86
J. C. Penney Company Inc. 08/17/10 $19.56 $14.80 $14.80
Alexander & Baldwin Inc. (Includes MATX) 12/20/10 $38.88 $58.97 $68.65
Justice Holdings Ltd./Burger King 02/17/11 $16.01 $19.53 $19.53
Canadian Pacific Railway Ltd. 09/23/11 CAD 46.22 CAD 128.76 CAD 128.76
The Procter & Gamble Company 05/04/12 $64.51 $82.79 $82.79
Platform Acquisition Holdings Ltd. 05/17/13 $10.00 $10.55 $10.55
Air Products & Chemicals Inc. 05/22/13 $94.86 $101.60 $101.60
MBIA Inc. 10/07/04 $60.03 $7.98 $16.36
Ambac Financial Group Inc. 03/17/05 $77.87 $31.48 $1.97
Herbalife Ltd. 05/01/12 $70.32 $66.74 $66.74
MBIA Inc. 04/27/05 67 bps 1,477 bps
Ambac Financial Group Inc. 08/30/05 42 bps 1,594 bps
Fannie Mae 08/06/07 62 bps 10 bps
Freddie Mac 08/06/07 60 bps 200 bps
Financial Securities Assurance 12/13/07 95 bps 1,128 bps
Please see the additional disclosures and notes to the chart at the end of this letter.
We have had three failures on the long side: Borders Group, Target, and J.C. Penney. Clearly,
retail has not been our strong suit, and this is duly noted.
Borders was a smaller than typical commitment and represented a total loss of a few percentage
points of capital. Borders was initially a passive investment where we got involved on the board
at the request of the Company‟s management when the business got into trouble. We have
learned from this experience that, to paraphrase Warren Buffett, often when you find yourself in
a leaky vessel, switching boats can be more rewarding than spending time bailing.
With respect to Target, we exited at a slightly lower price than we entered and, in light of the
time commitment and the loss of a proxy contest, we consider this a failure despite the modest
stock price decline. Years later, Target ultimately took our advice and outsourced its credit card
business, and the stock has done fine since. Our biggest failure in our Target investment was the
large loss we incurred in PSIV, the leveraged co-investment vehicle which owned Target stock
While the story of our investment in J.C. Penney is not yet over, our initial CEO candidate was
unsuccessful, the Company‟s intrinsic value has been impaired, and as of August 16, 2013, the
stock trades at a more than 40% discount to our average cost.
Aside from these three failures, you will note that not only have our active investments done
extremely well during our holding period, but in nearly all cases, they have continued to
appreciate in value since our exit. This is a reflection of the fact that the changes we have been
able to effectuate are consistent with the generation of long-term stockholder value. Activist
investors are often accused of being short-term in nature. Our track record demonstrates that we
are both a long-term investor and a contributor to long-term value even after we exit.
On the short side, we have made six active commitments: three bond insurers about which we
made multiple public presentations, MBIA, Ambac, and FSA. On the bond insurers, we made
profits of many multiples of our capital on CDS as well as large gross profits on stock shorts.
Two mortgage insurers, Fannie Mae and Freddie Mac, where we were correct in our
determination that both were insolvent, but where we did not expect that the U.S. government
would protect their subordinate debt which we shorted through the purchase of CDS. Despite the
government‟s effective assumption of their debt obligations, we made multiples of our CDS
investment on Freddie Mac and incurred only a modest loss on Fannie Mae CDS.
Our sixth active short investment is Herbalife. To date, we have a substantial mark-to-market
loss on this position. We do not, however, consider Herbalife to be a failed investment despite
these losses. In the short term, the market is an indicator of what the majority of participants
who are invested in Herbalife believe. The facts and fundamentals will ultimately determine
whether or not we are correct. Our job is to find situations where the market assessment of value
materially differs from reality. We believe that Herbalife was a good short sale at our cost, and
an even better one at current values and in light of recent developments. We discuss Herbalife in
detail later in this letter.
While the recent press reports on Pershing Square have focused on two recent, loss-making
investments, we believe our long-term record speaks for itself. Our batting average on our active
long investments is 16 out of 19, or 84%, and 4 out of 5, or 80%, on the short side, with
Herbalife in the undecided column. We believe our activist track record, both long and short, is
the best of any activist investor of which we are aware.
Investing is a probabilistic business. For every commitment of capital we make, we compare our
estimation of the likelihood of success with the probability of failure. We then assess how much
we can make in a successful outcome with our best estimate of what we can lose in an
unsuccessful outcome. We are willing to take more risk in a situation that offers more reward.
We have historically described J.C. Penney as a higher-risk, higher-potential-reward investment.
We bought stock in the Company at a price we deemed to be attractive, and we assisted the
board in recruiting someone whom we believed to be the best potential retail CEO in America,
Ron Johnson. Ron went to work attempting to transform the Company into a more productive
and more profitable retailer. We were publicly and privately supportive of Ron while he
attempted to transform J.C. Penney.
It is difficult for a CEO to succeed, particularly in a turnaround or business transformation,
without major shareholder and board support. Our public support of Ron caused the media to
conclude erroneously that we were controlling the decision making at the Company despite the
fact that we had only one seat on J.C. Penney‟s 11-person board. All of the board‟s decisions
with respect to replacing Mike Ullman and hiring Ron were unanimous.
Had Ron Johnson‟s plans been successful in driving traffic and sales, we would have likely made
many multiples of our investment. When Ron‟s strategy failed to generate profitable sales and
led to large revenue declines and losses, we and the rest of the board concluded that a change in
management was necessary.
The board brought back Mike Ullman as an interim CEO. We were unable to attract a long-term
CEO at the time we replaced Ron because the Company needed capital and the CEO candidates
we approached would not come on board without the Company having adequate financial
We worked to protect our investment by assisting the Company in raising $2.25 billion of low-
cost capital to shore up the balance sheet and give the Company running room to return to
profitability. I became Chairman of the Finance Committee in order to lead this effort, and with
two other members of our investment team who were on site in Plano for four weeks worked
closely with the J.C. Penney finance team and the Company‟s advisors in executing this
Mike Ullman has worked hard to reverse some of the changes that contributed to the Company‟s
sales decline. Our understanding when Mike was hired as an interim CEO was that the board
would immediately seek to recruit a long-term CEO for the business. When the search process
was not launched for several months, Mike settled in as a longer-term CEO and began to make a
series of material changes in personnel and operations that were not consistent with the actions
of a typical interim CEO. We also began to have concerns about capital investment plans, cost
control, inventory management, and the business planning process.
In recent weeks, when we felt that these concerns were not adequately being addressed and we
could not make progress addressing them privately with the board, we raised our concerns
publicly with two open letters to the board. We did so because of our fiduciary duty to the
shareholders of the Company, and to protect our investment.
In his 1993 letter to shareholders, Warren Buffett addressed the issue of what a director should
do if he believes that a Company is heading in a materially wrong direction and he cannot
convince the rest of the board of the merit of his concern:
[A] director who sees something he doesn't like should attempt to persuade the other directors of his views.
If he is successful, the board will have the muscle to make the appropriate change. Suppose, though, that
the unhappy director can't get other directors to agree with him. He should then feel free to make his views
known to the absentee owners. Directors seldom do that, of course. The temperament of many directors
would in fact be incompatible with critical behavior of that sort. But I see nothing improper in such
actions, assuming the issues are serious. Naturally, the complaining director can expect a vigorous rebuttal
from the unpersuaded directors, a prospect that should discourage the dissenter from pursuing trivial or
non-rational causes. [Source: Berkshire Hathaway 1993 Annual Report.]
Sharing our concerns publicly has the benefit of focusing all constituents inside and outside the
Company on these issues. This increases the probability these concerns will be addressed. The
downside of going public as a director is that it makes it more difficult to work with the board
going forward. It also risks creating a media circus that can be distracting to the Company.
Having achieved our objectives of publicly elevating these issues and in order to minimize
continued disruption, I tendered my resignation from the board as part of an agreement whereby
the Company would add Ron Tysoe, an experienced retail financial executive to the board, and
one additional director with relevant expertise whom we expect will be named shortly. We
retain the contractual right to appoint an additional director to the board.
The benefit of our influence over our portfolio companies is that when unexpected negative
events occur, we can take steps to mitigate our risk, and are not therefore beholden to the status
quo. While there is substantial upside if J.C. Penney‟s business turns, there continues to be risk
at J.C. Penney. That risk has been somewhat ameliorated by the additional liquidity the
Company has obtained through the financing and the renewed focus the Company will have on
managing cash and costs while it works to bring back traffic and sales.
If J.C. Penney is able to return sales to the levels of recent years, generate historical levels of
gross margins and maintain the SG&A reductions achieved by prior management, the stock
should rise substantially from current levels. We believe these objectives are achievable, but
how much time they will take is more difficult to determine. The Company‟s recently
announced second quarter earnings report has shown some early indications that the Company
may be recovering.
While many of you have asked what our plans are for this holding, as with our other investments,
we do not disclose in advance what we intend to do in the future for obvious reasons. After our
failed proxy contest at Target, we held our investment for more than 19 months until the price
rose to a level where we found better uses for capital. We may choose to exit J.C. Penney after
more or less time depending on developments at the Company, the stock price, and the
availability of other investment opportunities.
I thought it would be useful to provide a detailed overview and update about Herbalife in light of
the stock‟s substantial rise in recent weeks and recent developments.
We initiated our investment in Herbalife in May of last year and gradually built a short position
prior to our December 20th, 2012 presentation entitled: “Who wants to be a Millionaire?” We
presented our findings to the public to catalyze regulatory interest in the Company‟s business
activities and to educate the public and potential Herbalife distributors about the Company‟s
recruiting-driven business model. We expected our public advocacy would shine a light on the
Company‟s victimization of financially unsophisticated, typically low-income, Hispanic and
other minorities and its misleading portrayals of the probability of making a living, or even just
spare income from becoming a distributor.
There are two principal ways for our short thesis on Herbalife to work: (1) regulatory
intervention or (2) deterioration in the Company‟s ability to recruit new victims and the resulting
impact on business fundamentals. We believe the likelihood of both (1) and (2) has increased
since our December 20th presentation. There are several other avenues which could lead us to a
successful investment outcome which include: (1) members of the board of HLF taking their
responsibilities seriously by conducting a truly independent investigation of the Company,
focusing on its business practices, product safety and the pyramid scheme allegations; (2)
recognition by the marketplace that the fundamentally corrupt HLF business model cannot
flourish; and (3) more whistleblowers coming forward and assisting regulators and the market in
understanding the Company.
Shortly after our presentation, Herbalife attracted regulatory interest with the SEC‟s Enforcement
Division launching an investigation of the Company as disclosed in the Company‟s 2012 10-K.
The SEC prosecutes securities law violations as well as pyramid schemes, having successfully
prosecuted one of the seminal pyramid cases, Koscot Interplanetary.
We do not know whether or not the Federal Trade Commission, the nation‟s principal consumer
protection regulator, has initiated an investigation of the Company. There have been a number
of positive developments that should increase the probability of an FTC investigation including
members of Congress and other members of state and local government and consumer advocates
publicly urging the FTC to investigate Herbalife through the public release of letters to the FTC
Chairwoman as well as private meetings with the FTC‟s staff that have been reported in the
Recent Herbalife Rule Changes
Since our December 20th presentation and the ensuing scrutiny of the Company, Herbalife has
made modifications to its business methods. In addition to rule changes that were implemented
by the Company earlier this year (e.g., the new distributor earnings disclosure, the elimination of
Herbalife‟s 10% restocking fee on product returns in the U.S., and the introduction of a product
return policy in Mexico), the Company has recently introduced two additional rules that should
raise red flags for policymakers:
o Prohibition of Lead Generation (announced in April, effective July 1st)
“Prohibition on Lead Generation: Rule 1-O states...Distributors may not purchase
(whether from other Distributors or third party lead providers) business opportunity leads
or product leads, leads-related advertising, advertising slots, or decision packs for their
own use or the use of others."
o New Rules Discouraging the Use of Loans
"1-C Incurring Debt, Obtaining a Loan, or Borrowing Money: Herbalife strongly
discourages incurring debt to pursue the Herbalife business opportunity, or conduct the
Herbalife business. Distributors may not encourage Distributors (or prospective
Distributors) to obtain a loan or to borrow money for use in connection with their
Herbalife business…Further, Distributors may not use in connection with their Herbalife
activities money loaned or granted to them for educational or other specific purposes not
related to the establishment of a business."
These rules are designed to address or to create the appearance that Herbalife is addressing some
of the abusive practices surrounding its business, including consumer losses due to purchases of
leads and distributors being encouraged to use student loans, credit cards, scholarship grants, and
other forms of debt to pursue the Herbalife „business opportunity.‟ The decentralized nature of
Herbalife‟s distributorships calls into question the extent to which these rules will be enforced.
If the rules are not enforced, any continuation of lead generation or debt encouragement tactics
should draw the attention of consumer protection policymakers and advocates. On the other
hand, if the rules are enforced, senior distributors will have a tougher time recruiting new
We view the Company‟s rule changes as a tacit admission that past practices have been
improper. The Company itself has advised its distributors that lead generation can lead to
misrepresentations and other abuses, and we cannot see how using student loans or grants to fund
an Herbalife distributorship can ever have been proper.
The Company continues to suffer the departure of top distributors. In early January, a long-time
President‟s Team member, Anthony Powell, left for a competing multi-level marketer (MLM)
called Vemma that markets „science-based‟ energy drinks to college students and young adults.
On June 22nd, the New York Post reported that one of Herbalife‟s top distributors, Shawn Dahl, a
so-called Chairman‟s Club member, had left the Company to pursue an alternative MLM
opportunity called Nutrie, also selling weight-loss and „health related‟ drinks. Dahl‟s departure
is particularly notable given that, as recently as April 30th on the first quarter earnings call,
Herbalife management claimed that there was no merit to the rumors that certain Chairman‟s
Club members might be planning their departure, asserting that “our Chairman‟s Club members
are committed to the business, committed to working with their organizations [and committed to
a] stronger Herbalife.”
Last week, John Peterson, one of the top few distributors in the Herbalife system – a so-called
Founders Circle member who became a distributor in 1983 – reportedly committed suicide. The
stock declined 4.1% on the news potentially because of the impact on other distributors‟
confidence from his death and what it may suggest about top distributor business prospects going
forward. In 2000, Herbalife nearly collapsed when the Company‟s founder Mark Hughes died
from an overdose of anti-depressants and alcohol. The Company was then sold to private equity,
and new management was installed to save the business.
The Company‟s U.S. web page listing its Chairman‟s Club members has been down for several
months – for „maintenance,‟ according to Herbalife‟s President Des Walsh – raising questions as
to whether there may be further changes in the Company‟s top distributor ranks.
Despite Herbalife‟s above-expectations earnings per share growth this quarter, a careful analysis
of Herbalife‟s second quarter financials suggests that business fundamentals are beginning to
deteriorate, as operating earnings, an important measure of the Company‟s core economic
performance, showed only a 3% increase, a dramatic decline in growth from previous quarters.
We believe that Herbalife‟s business fundamentals have just begun to be negatively impacted by
top distributor departures and various distributor rule changes.
Problems at Herbalife’s U.S. Manufacturing Facility
Earlier this year, we were approached by a former senior Herbalife employee (“the
Whistleblower”) who had left the Company due to his concern about serious product
contamination issues at Herbalife‟s Lake Forest, California manufacturing facility.
The Whistleblower left Herbalife voluntarily because the Whistleblower was troubled by senior
management‟s failure to take proper corrective action including stopping production, destroying
all potentially tainted product, and alerting the FDA and the public of the potential danger. The
Whistleblower believes that management did not take appropriate actions because of the risk of a
loss of confidence in the Company‟s products by the distributor base if word got out.
After the Whistleblower left the Company, he remained concerned about the potential harm to
consumers from the potentially tainted products and notified Michael Johnson, CEO, and Brett
Chapman, General Counsel about his concerns. The Whistleblower was never informed that the
Company took any corrective action.
Pyramid schemes are inherently unstable, confidence-sensitive companies. Because of the high
dropout rate of Herbalife distributors – 90% or more of new distributors quit within one year,
according to the last published data – Herbalife must recruit about two million new distributors
annually. Furthermore, in order to obtain their royalty checks, Herbalife sales leaders must
purchase several thousand dollars of product or more each year to continue to qualify, without
regard to their ability to resell the product. This makes pyramid schemes like Herbalife
particularly vulnerable to product quality concerns.
Herbalife has consistently marketed the quality of its products in its public communications.
From its website:
Everything we do starts with great products; and all our products start with proven science. Herbalife is
dedicated to developing innovative, effective products that comply with the highest research, development
and manufacturing standards in the industry.
Herbalife also touts steps it has taken to enhance the perception of the quality of its product with
its distributors. The Company has a Nobel Laureate on retainer to whom it has paid more than
$15 million in fees for serving as a company spokesman and attending company rallies and so-
called Extravaganzas which are used to recruit and inspire distributors. The Company has a
nutritional advisory board comprised of PhDs from around the world who are similarly
compensated for their affiliation with the Company as well as a so-called nutrition lab at UCLA
named after Mark Hughes, the founder of Herbalife, which it named with gifts totaling
approximately $1.5 million over 10 or so years. The Company has marketed its supposed
affiliation with UCLA more than 440 times in its SEC filings from 2004 to the date of our
December presentation, after which time the Company no longer appears to be publicizing its
We believe that the Company has been well aware of the risk of collapse of Herbalife‟s pyramid
business in the event that serious product quality issues were to surface publicly. In June 2008,
Barry Minkow, a convicted felon, publicly claimed that the lead content of Herbalife products
was above safe levels. This disclosure, even though it was from a convicted felon, was sufficient
to cause a significant drop in distributor confidence until the Company was able to rebut the
Herbalife Acquires a Manufacturing Facility
About one year after the Minkow incident, in August of 2009, Herbalife acquired a
manufacturing facility from one of its former suppliers in Lake Forest, California for $10 million
which it renovated for approximately $15 million. This facility, according to the Company,
produces approximately 40% of Herbalife‟s Formula 1 protein and nutrition powders which are
shipped around the world.
When Herbalife originally acquired the facility, analysts and investors questioned the economic
logic behind Herbalife acquiring its own manufacturing facility when its commodity products
(sold at 80% gross margins) had historically been purchased from contract manufacturers that
make similar product for its competitors at low cost. Analysts were skeptical that the Company
could improve its margins sufficiently to justify the capital costs and other complexities
associated with self-manufacturing.
We believe that the Company‟s likely principal motivation for acquiring this facility was to build
distributor confidence. Since its acquisition, the Company has used its Lake Forest facility as a
show place for its distributors and members of the media in order to increase the perceived
legitimacy of the Company. Many analysts, investors, and members of the media presume the
Company is legitimate because it manufactures actual products, but this of course has nothing to
do with whether the Company uses pyramid selling techniques in its business model.
According to information we have received, Herbalife did not follow current good
manufacturing practices (cGMP) in operating this facility. Apparently, the Company continued
to produce product at this facility while renovations were underway despite, we have learned, the
presence of mold at the facility. The Company also apparently did not have sufficient
management expertise to oversee the production of product for human consumption while
renovating the plant. As a result, we are informed, potential product contamination questions
persisted for months as product continued to be shipped around the world.
The Company has recently responded to the Whistleblower‟s accusations calling him a
“disgruntled employee” (we note that he was not terminated, but resigned voluntarily due to his
conscientious objections to the Company‟s conduct) and has stated that no tainted product had
been shipped to consumers. The Company explained away the product issues as typical due to
the “start-up” nature of the facility. We note that this facility apparently had been producing
product on a contract basis for Herbalife for as long as a decade prior to its acquisition by the
Company, and was therefore not a “start-up” facility. We believe that the Whistleblower‟s
claims are credible and reflect the Company‟s historic lack of concern for product quality. We
find dubious the Company‟s claim that no adulterated product was shipped.
Other Product Issues
Beyond the factory contamination issues, the fact that Herbalife ships soy protein powder and
other supplements globally from a California-based facility in non-temperature-controlled
containers apparently creates the potential for additional product quality issues as the high
temperatures reached during their ocean-bound voyage impact the chemistry, composition, and
stability of the products. Apparently, the milk, soy, and fructose that are the principal
ingredients for the Formula 1 powder when it reaches elevated temperatures are an attractive
breeding ground for potential contaminants. At a minimum, storage of the product at elevated
temperatures may cause the product to no longer meet its label specifications, making it
unsuitable for export into and consumption in many foreign markets.
Also, apparently, up until recently, Herbalife product did not have expiration dates that could be
read by consumers. Some of the Herbalife products that we have purchased on the internet have
no expiration date, but rather a nine-digit, indecipherable, alphanumeric code. We understand
from many sources that Herbalife‟s products are extremely difficult to resell because of lack of
demand and their excessively high suggested retail prices. The lack of comprehensible
expiration dates are apparently designed to allow Herbalife distributors to keep inventory on
hand while attempting to sell the product after the expiration dates have passed. Please see the
photo below of a bottle of Herbal Aloe Concentrate (an Herbalife digestive product) which we
purchased on the internet and its nine-digit, indecipherable expiration code, compared with a
clearly marked competitors‟ product.
Indecipherable Herbalife code A competitor‟s
easy-to-read expiration date
In light of the high cost to ship the heavy powders that are produced in Herbalife‟s Lake Forest
facility and the quality and safety risk of shipping product in non-temperature-controlled
containers, it is surprising that Herbalife has concentrated its production in the United States.
We were therefore originally puzzled when Herbalife announced on December 19th of last year,
the day before our presentation, that it was acquiring the former Dell manufacturing facility in
Winston-Salem, North Carolina and renovating it at a total cost of $130 million, more than five
times the cost of the Lake Forest, California facility that reportedly produces 40% of Herbalife‟s
global product sales. In the statement announcing the facility, the Company said
The purchase of this facility further expands Herbalife's global manufacturing capacity and is in
line with the company's stated strategy to increase self-manufacturing for its top products. Over
the next two years, Herbalife expects to invest in excess of $100 million on machinery and
technology, as well as a complete retro-fitting of the existing facility to ensure it is in full
compliance with U.S. Good Manufacturing Practices (cGMPs) for dietary supplements and food
products. Herbalife expects to begin production in this facility as early as June 2014 and
estimates that approximately 500 new jobs will be created by the time it reaches full operations.
At the time of the press release, we found this announcement particularly puzzling in light of
Herbalife‟s previous public statements on its quarterly conference calls that the Company
intended to build manufacturing facilities in other locations closer to the end users for the
products. Because: (1) 80% of Herbalife‟s sales are outside the U.S., (2) shipping costs for
canisters of Formula 1 and the Company‟s other products are substantial, and (3) there are
substantial customs, tax, and other duties incurred in shipping product from the U.S. it did not
make sense to us that Herbalife would locate yet another plant in the United States further
compounding these issues.
Once, however, we learned of the Company‟s product quality issues in its Lake Forest facility,
the logic behind Herbalife‟s building a new facility at five times the cost of the Lake Forest
facility made sense to us. Once the new plant is completed, Herbalife could then shut down the
Lake Forest facility potentially concealing the factory‟s apparent production and contamination
FDA Product Complaints
Recently, we submitted a Freedom of Information Act Request (FOIA) to the FDA for Adverse
Event Reports on the products that Herbalife produces in its Lake Forest facility and compared
them to FDA reports for SlimFast and Ensure -- directly competitive, globally branded, but
substantially lower-priced products produced by Unilever and Abbott Labs. Below are links to
copies of the results of these FOIA requests which we encourage you to review.
AERS for Herbalife Formula 1 and Herbalife Personalized Protein Powder
AERS for Ensure Products
AERS for SlimFast Products
You will note from comparing the Herbalife report with the others that since August 2009 when
Herbalife acquired the factory, Herbalife had between 14 and 21 times as many Adverse Event
Reports made to the FDA that required hospitalization or emergency room treatment when
compared with the competitors‟ products. For Herbalife‟s Formula 1, 84 of the complaints
referenced hospitalization or emergency room treatment. Three of these were “life threatening”
and two were described as “abortion spontaneous.”
In the case of SlimFast, which is produced by Unilever, since August 2009, only four adverse
events referenced hospitalization or emergency room treatment.
In the case of Ensure which is produced by Abbott Laboratories, only six adverse health events
While the FDA makes clear that Adverse Event Reports have not been independently verified
and do not prove causation of harm by the reported product, we find this to be an area warranting
further regulatory review, especially given that many of Herbalife‟s U.S. distributors are from
vulnerable populations who may not be aware of governmental resources to which they may
The Impact on Herbalife
While it is difficult to predict the impact of the public disclosure of product quality issues on
Herbalife, pyramid schemes are inherently confidence games. Distributors are told constantly
that the Company offers the „best products‟ and the „best income opportunity.‟ The products are
promoted with a patina of dubious science. Michael Johnson, the Company‟s chief spokesperson
with distributors, has continually marketed to the distributors Herbalife‟s “science-based” high
quality products. His biography on the Company‟s website emphasizes Johnson‟s supposed
commitment to product quality:
Michael has strengthened Herbalife‟s product development and manufacturing through the development and
execution of a „seed to feed‟ strategy that ensures rigorous quality standards and control of product integrity.
He has overseen significant investment in scientific areas of R&D, quality assurance, product safety and
compliance; the creation of a more vertical supply chain, which will see 65 percent of all product demand
manufactured in-house by 2015; partnerships established with world-class ingredient suppliers and even
farmers of key ingredients; and the building of a team of industry leading scientists and experts who innovate
in the nutrition field, while maintaining a high standard of product quality.
We believe that if the product quality problems are proven to be true and Johnson was aware of
serious product contamination issues while he sold (or arranged to sell) tens of millions of
dollars of Herbalife stock, it will materially harm Johnson‟s and the Company‟s credibility with
its distributor base.
Recently, we have been contacted by another product-related whistleblower from Herbalife. We
would encourage others with information about product quality issues to contact the FDA, SEC,
and/or their state attorneys general or other regulators in their home jurisdictions if they have
evidence that would be helpful to regulators in understanding these issues. Pershing Square is
ready to help individuals with pertinent information get in touch with appropriate regulators.
When Will Regulatory Intervention Occur?
Herbalife has provided no disclosure of regulatory inquiries other than an initial disclosure in its
2012 10-K about the SEC‟s Enforcement Division investigation along with a statement that it
would not disclose any other regulatory inquiries unless it deemed them “material.” The absence
of these types of disclosures since the 10-K has given the Herbalife bulls the comfort to believe
that no FTC investigation is underway or forthcoming, and the coast is therefore clear for
Regulatory intervention takes time. Earlier this year, the FTC and various state attorneys general
brought charges against Fortune Hi-Tech Marketing, a 12-year-old pyramid scheme, shut down
the Company and seized its assets. According to press reports, the Fortune Hi-Tech Marketing
investigation and regulatory action took two years. We expect regulators to act more quickly in
Herbalife as a result of the spotlight that has been directed at the Company.
Why Have We Continued to Maintain a Large Short Position in Herbalife in the Face of
Other Well-known Investors Who Have Taken an Opposing View?
Over the past eight months, we have made material progress in attracting Federal, State and
international regulatory interest in Herbalife. We are not at liberty to disclose the nature of these
developments, but we believe that the probability of timely aggressive regulatory intervention
has increased materially.
Furthermore, we have learned of serious product quality issues from former Herbalife
employees, information that is in the process of being provided to regulators. Based on what we
have learned from these whistleblowers and other sources, we believe that serious product
quality and safety issues continue to exist at the Company.
We believe that as the potential for regulatory intervention increases, Herbalife‟s stock price will
decline. Product quality issues could cause Herbalife distributors to lose confidence in the
product and the Company which could lead to a rapid decline in sales and profitability.
We also find the Herbalife bull case uncompelling, even less so as the stock price has risen. The
bulls argue that the stock price is cheap with most target prices up only 15% to 20% from current
levels, that regulatory intervention is unlikely, and that as soon as the Company‟s financials are
re-audited, it can do a large share repurchase.
We do not find these arguments convincing for several reasons. First, the Company has a limited
amount of cash on hand that it could use to do a buyback because most of the Company‟s cash is
overseas, in jurisdictions where it cannot be repatriated, or is otherwise required to be used in the
business. As a result, a large buyback will require the Company to raise additional financing
beyond its current nearly fully utilized line of credit.
If Herbalife is deemed to be a pyramid scheme, there will be few, if any, assets to protect a
lender or bondholder in the event of the Company‟s failure. As a result, we believe that few
banks will be interested in providing credit to the Company, and similarly, we think that there are
few if any underwriters who would be willing to underwrite a bond financing for the Company in
light of the potential liability risk to the underwriter if Herbalife is later deemed to be a pyramid
scheme. Even if the Company were able to raise financing, we do not believe that a buyback at
current stock prices would be particularly accretive to earnings nor would it materially shrink the
outstanding share float. The bottom line is that we believe that there is a lot more downside to
Herbalife stock than upside at current levels, and it therefore remains an attractive short sale.
Canadian Pacific Railway Ltd. (CP)
Canadian Pacific continues to perform well. Despite the severe floods in Calgary in early July,
the Company has recently reaffirmed its 2013 guidance which called for greater than 40%
growth in earnings. Reported second quarter growth in carloads was 4%, with 11% growth in
Revenue Ton Miles, which accounts for increased lengths of haul for various commodity
CP‟s operational turnaround and improved efficiency continue to make CP a more attractive
shipping option compared to other railroads and trucking alternatives, which should contribute to
the Company‟s long-term prospects.
Oil by rail, which represents about 4% of CP‟s revenue, has been a moderate contributor to
recent growth. Several rail industry accidents, including the tragic Montreal, Maine and Atlantic
Railway (“MMA”) crude tank car accident in Quebec, have raised some concerns about the
safety and sustainability of rail transport for oil. Canadian Pacific has carefully studied the
operator errors likely responsible for that accident, and has further reinforced its safety
procedures. Safety remains the highest priority at Canadian Pacific. While all forms of
transportation – including rail, truck, pipeline and others – carry risk, we are pleased with
Canadian Pacific‟s industry-leading safety record.
In June, we announced that we would sell up to ~30% of our existing position in Canadian
Pacific, for portfolio management reasons. Share appreciation of over 179% since we began
accumulating the shares, and 26% year-to-date, has increased the size of our CP position to more
than a quarter of our capital. Even after these sales, we expect to remain CP's largest shareholder
and for CP to remain one of our largest investments over the coming years as the turnaround
story continues to play out.
Procter & Gamble (PG)
P&G is a high quality business that has been under-earning for the last several years primarily
due to ineffective leadership. At the 2013 Ira Sohn Investment Conference on May 8th, we
publicly shared our views on the significant opportunities to increase shareholder value at P&G
and explained how we thought the board would not allow the underperformance and leadership
issues to persist. Two weeks later, P&G‟s CEO stepped down and the board appointed A.G.
Lafley as the new CEO, which we believe to be a meaningfully positive development.
Given A.G. Lafley‟s strong and decisive leadership style, his superb reputation both internally
and externally, and his in-depth knowledge of all of P&G‟s categories, we think he is the right
person to get P&G back on track. During Lafley‟s previous tenure as CEO from 2000 to 2009,
P&G generated organic revenue growth of 5% per year, achieved consistent profit margin
expansion and saw EPS grow 12% per year. We believe Lafley will enhance organic growth,
accelerate P&G‟s existing cost cutting program, increase innovation, implement a succession
plan, and improve employee morale significantly. With a meaningful portion of his net worth
invested in P&G stock and options, and a legacy as one of America‟s greatest chief executives
on the line, Lafley is incredibly motivated to turn around P&G in a timely fashion.
While Lafley has been back at P&G for less than 90 days, he has already taken several
encouraging steps. In his first two weeks on the job, he reorganized the Company‟s senior ranks
and publicly identified several potential internal candidates as his successor, effectively creating
a race amongst these executives for the next CEO position at the Company. In his first public
comments since returning as CEO, Lafley stated that two of his key objectives will be gaining
momentum in P&G‟s core – its largest businesses, markets, and customers – and making cost
productivity a key P&G strength, similar to P&G‟s competencies in innovation and consumer
We are impressed by Lafley‟s high-level strategy, his detailed command of each of P&G‟s
businesses, and his urgency to solve the problems that have plagued the Company over the last
several years. We are eager to hear further details of his plans over the coming months.
We believe that Lafley‟s appointment as CEO significantly increases the probability that P&G
achieves its underlying earning potential. The modest increase in P&G‟s share price since the
announcement of Lafley‟s return does not, in our view, adequately reflect the value of P&G
under his leadership.
For portfolio management reasons, we have sold a portion of our position and converted a
substantial portion of the balance of our investment into long-term, deep-in-the-money call
options on the Company. These options represent approximately 3.7% of the portfolio. In
addition, we own shares which represent 1.6% of the portfolio for a total cash position size of
5.3% of the funds. Because of the leveraged nature of the options, the position inclusive of stock
and options currently behaves as if we had 17% of the fund invested in the common stock of
Procter & Gamble.
General Growth Properties (GGP)
In the second quarter of 2013 GGP posted its best results in seven years. Not since the second
quarter of 2006 has the Company recorded same-store NOI growth in excess of 6.8%, which was
well in excess of its high-quality mall REIT peer group (Simon: +5.9%, Taubman: +3.9%,
Macerich: +4.6%). Strong top-line growth also translated to industry leading growth with funds
from operations per share increasing 18% on a year-over-year basis.
GGP also continues to make progress on its refinancing front. The Company replaced $602mm
of 1.5 year property-level debt bearing interest at 5.68% with 9.4 year debt bearing interest at
3.78%. Subsequent to the quarter, GGP refinanced an incremental $479mm of property-level
debt bearing interest at 4.64% with new loans at 3.99%. In addition, GGP obtained a $1.5bn loan
at LIBOR + 250 basis points in place of debt bearing interest at 3.98%. In sum, we believe these
transactions will be ~3% accretive to 2014 AFFO (a REIT measure for free cash flow) growth.
Although REIT share prices have underperformed recently due to the recent rise in 10-year
Treasury yields, we believe that General Growth is much less susceptible than other REITs to a
rising interest rate environment, as 90% of its debt is fixed-rate and does not mature for 7.2
years, on average. GGP continues to trade at a substantial AFFO multiple discount to its peer
group, despite our expectation that GGP will continue to post leading AFFO per share growth
amongst its high-quality mall REIT peers.
We continue to have confidence in the long-term future of GGP and are extremely impressed
with management‟s continued progress. We have trimmed the position somewhat to raise capital
for our new investment in Air Products.
Beam Inc. (BEAM)
We continue to be impressed by the strength and stability of Beam‟s business. Since Beam
became a standalone company in October 2011, its organic revenue growth has averaged
approximately 6.5%. Importantly, Beam‟s revenue growth has been driven by its higher margin,
more profitable “brown spirits” portfolio, which has allowed its profits to grow materially in
excess of revenues. The strong demand for brown spirits, particularly bourbon, combined with
the supply constraints for the aged liquid and strong innovation in the category, has allowed
industry participants to command attractive pricing power.
We expect the bourbon category to continue to experience attractive pricing and volume growth
over the next several years, which should enhance Beam‟s profit margins and fuel substantial
earnings per share growth. With its enviable position as a global leader in bourbon, one of the
most attractive categories in a consolidating spirits industry, we continue to be optimistic about
the future prospects of Beam.
Howard Hughes Corporation (HHC)
The Howard Hughes Corporation had an impressive second quarter in 2013. The Company‟s
master-planned-communities segment posted 60% top-line growth, driven by an increasing
velocity of lot sales at Summerlin (Las Vegas) and continued strength from the Woodlands
(Houston), where lot prices increased 76% year-over-year with a 63% increase in total residential
The Company also made considerable progress on numerous development initiatives in the
second quarter, beginning construction of over two million square feet of commercial property,
including the 1.6 million square foot Shops at Summerlin project, the 250,000 square foot
Riverwalk Marketplace redevelopment, and the 200,000 square foot Two Hughes Landing office
building in the Woodlands. Each of these developments was launched with substantial amounts
of pre-leasing, reducing risk. In addition, construction began on the sold-out 206-unit ONE Ala
Moana luxury condominium project in Honolulu, with an expected fourth quarter 2014
completion date. Upon completion, each of these projects has the opportunity to substantially
improve the Company‟s intrinsic value.
Despite HHC‟s spectacular business performance, more than $4 billion market capitalization,
and its strong stock price appreciation from $36 per share to $104 per share since its spinoff, the
Company has yet to attract analyst coverage from a bulge bracket investment bank. As such, it is
one of Wall Street‟s best kept secrets.
Burger King Worldwide (BKW)
Burger King today trades in-line with its nearly 100%-franchised QSR peer group on a forward
P/E multiple basis (Dominos Pizza, Dunkin Donuts and Tim Hortons). We believe this valuation
understates Burger King‟s intrinsic value principally for two reasons. First, we believe that
Burger King deserves a higher valuation than its 100%-franchised peers because of its superior
global footprint and global brand awareness, which, when coupled with the Company‟s global
joint venture business model should allow for superior long-term growth and investment returns.
Furthermore, we believe the Company has a significant opportunity to improve earnings by
refinancing approximately $1.4bn of debt that currently bears interest at above-market rates
(~10.5%). Refinancing this debt at what we deem to be a market rate (approx. 6%) would be
12% accretive to the 2014 consensus forecast of $0.91 per share as it would save the Company
11 cents per share on an after-tax basis. It will become feasible for the Company to cost-
effectively call its debt beginning in the first half of next year.
Given that Burger King currently has less leverage than its peers (DNKN at 5.3x, Dominos at
4.8x, BK at 3.7x Net Debt to EBITDA), the Company could choose to increase its leverage and
return a large amount of capital to existing shareholders in the form of a dividend and/or share
repurchase of as much as 30% of the market value of the Company. We believe this refinancing
and capital-return opportunity presents a significant, underappreciated short-term catalyst for the
We continue to be impressed with the strength and execution of the BKW management team and
the capital-light structure of its high growth business model. There is a lot to be said for owning
a great business run by excellent operators who are also disciplined capital allocators.
Platform Acquisition Holdings (PAH)
In May, we invested in the Platform Acquisition Holdings IPO. PAH is $850 million market
capitalization company that intends to buy an operating business that can serve as an initial
platform for future growth and additional acquisitions. Acquisition targets are likely to be
businesses that are leaders in their industry, generate strong cash flow, and are run by a high-
quality management team.
PAH is led by Martin Franklin, who is currently the Chairman of Jarden, and who was one of our
partners in Justice Holdings, the cash shell that merged with Burger King in 2012. At Jarden,
Martin has demonstrated an extremely strong track record of capital allocation and operational
improvements. Shareholders have been richly rewarded as Jarden‟s recent stock price has
appreciated nearly 30 times since Martin became CEO in 2001. While PAH is a small position
for the fund, we believe it offers an attractive risk-reward opportunity.
If PAH achieves our expectations, we believe that we will make multiples of our capital
invested. If, however, PAH is unable to acquire a business on attractive terms, we own a near-
controlling interest in a pool of cash in a public shell which could be liquidated to return the cash
to the Company‟s owners. A member of our investment team is likely to join the PAH board in
the near future. In the meantime, we have observer rights on the board.
Air Products and Chemicals, Inc. (APD)
On July 31st we filed a 13D announcing our ownership of 9.8% of APD in our core funds and
Pershing Square V (PSV), our co-investment fund. As has been our practice, we intend to
engage with the Company‟s management and board regarding the Company‟s business,
management, governance, operations, assets, capitalization, financial condition, strategy and
future plans. Such a dialogue is always the first step in our active investments, and in the past
we have been able in many cases to persuade management to consider our ideas and proposals
without further action. We are in the initial phase of our engagement with APD, and therefore,
limited in what we can say at this time.
APD is a large capitalization, investment grade, U.S. corporation that principally operates in one
business segment and serves a diversified global customer base operating in a diversified set of
end markets. The business is simple, predictable, and free-cash-flow-generative, and enjoys high
barriers to entry, high customer switching costs, and pricing power. The Company benefits from
long-term secular demand growth for its products and services. In addition to growth from
existing in-place assets, the Company has a large opportunity to deploy growth capital in its core
business at attractive rates of return.
We believe the downside risk of this investment is modest in light of our cost basis, the stability
of the business, and the Company‟s strong balance sheet. In other words, we believe that we are
paying a fair price for the Company as-operated, and a bargain price if we can successfully
Pershing Square V (PSV)
Pershing Square V, our fifth special-purpose investment vehicle, was launched on July 19, 2013
with approximately $900 million of capital, including approximately $450 million of outside
capital and the balance from our core funds. PSV is invested alongside our core funds in APD,
our recently disclosed active investment, a position already established in our core funds prior to
the PSV launch. We were not able to deploy all of the PSV capital raised so we returned the
additional funds to the PSV investors.
We had two goals in launching PSV. First, we believed that the incremental capital raised will
complement the core funds‟ investment and potentially increase our influence over APD and the
probability of a successful outcome. Second, we were responding to numerous requests that we
have received from investors for co-investment opportunities. Given its scale and liquidity, APD
was an ideal situation in which to deploy additional capital. We look forward to keeping you
apprised of our progress with APD and PSV.
Pershing Square Holdings, Ltd. (PSH) Update
As of July 1, 2013 the Net Asset Value of PSH was approximately $2.5 billion, including $180
million of conversions and subscriptions at the beginning of the month. We expect to reach the
$3 billion threshold required to proceed with an IPO through capital appreciation, additional
investor conversions and new capital from investors. Our goal is to proceed with the IPO in
2014. We are accepting new capital on a monthly basis and are allowing quarterly conversions
to PSH by non-U.S. investors.
Anthony Massaro joined our investment team on July 29th. Anthony previously worked as an
Associate in the private equity group at Apollo Global Management, where he focused on
leveraged buyout and distressed debt investments across a wide range of industries. Prior to
Apollo, Anthony completed a two-year Analyst program in the Natural Resources Group in the
Investment Banking Division at Goldman Sachs. Anthony graduated summa cum laude from
The Wharton School at the University of Pennsylvania in May 2009, where he received a
Bachelor of Science in Economics with concentrations in Finance and Accounting and a
Certificate in Italian.
Rosie Platzer joined our Legal team as an Assistant Compliance Officer on June 3rd. Prior to
joining Pershing Square Rosie was an Associate at Paul, Weiss, Rifkind, Wharton and Garrison,
LLP. Rosie received her J.D. from New York University School of Law and her B.A. in English
and Psychology at Columbia College. She is also a certified Zumba instructor.
While we have received more than our share of media attention this year, little of it has been in
our own voice. Until this month, my only appearance this year on television was a telephonic
interview that Carl Icahn joined unexpectedly on January 25th of this year. To respond to some
of the issues raised in various recent media reports, I was interviewed on the Charlie Rose show
on August 14th. The link below will enable you to view the segment if you so choose:
Save the Dates
Please mark your calendar for the following events:
Third Quarter Conference Call, 11AM EDT, Monday, October 14, 2013. A save-the-date
notice will follow.
2013 Annual Investor Dinner. Please note that we have changed the date of our 2013 Annual
Investor Dinner. The new date is Thursday, February 13, 2014.
Please feel free to contact the Investor Relations team or me if you have questions about any of
William A. Ackman
Additional Disclaimers and Notes to Performance Results on p. 1
The performance results shown on the first page of this letter are presented on a gross and net-of-fees basis. Gross
and net performance includes the reinvestment of all dividends, interest, and capital gains, and reflect the deduction
of, among other things, brokerage commissions and administrative expenses. Net performance reflects the
deduction of management fees and accrued performance fee/allocation, if any. Performance fee for Pershing
Square Holdings, Ltd. is 16%; performance fee/allocation for each of Pershing Square, L.P., Pershing Square II, L.P.
and Pershing Square International, Ltd. is 20%. All performance provided herein assumes an investor has been in
each of the funds since its respective inception date and participated in any “new issues”. Depending on the timing
of a specific investment and participation in “new issues”, net performance for an individual investor may vary from
the net performance stated herein. Performance data for 2013 is estimated and unaudited.
The inception date for Pershing Square, L.P. is January 1, 2004. The inception date for Pershing Square II, L.P. and
Pershing Square International, Ltd. is January 1, 2005. The inception date for Pershing Square Holdings, Ltd. is
December 31, 2012. The performance data presented on the first page of this letter for the market indices under
“since inception” is calculated from January 1, 2004. The market indices shown on the first page of this letter have
been selected for purposes of comparing the performance of an investment in the Pershing Square funds with certain
well-known, broad-based equity benchmarks. The statistical data regarding the indices has been obtained from
Bloomberg and the returns are calculated assuming all dividends are reinvested. The indices are not subject to any of
the fees or expenses to which the funds are subject. The funds are not restricted to investing in those securities
which comprise any of these indices, their performance may or may not correlate to any of these indices and it
should not be considered a proxy for any of these indices.
Additional Disclaimers and Notes to the Active Investment Chart on p. 2
The issuers included on this chart reflect all the companies, both long and short, with respect to which PSCM has
taken a public, active role in seeking to effectuate change to date.
With respect to all information provided in this chart, share prices and dividends (if any) related to companies that
have been spun off or otherwise separated from active positions are included, regardless of the nature of PSCM‟s
position (i.e., active or passive) in the spun off or separated company.
Information under the “PERIOD OF ACTIVE INVESTMENT” section relates to Pershing Square‟s active holding
period with respect to each position; however, in the event that a position was initiated as a passive position and
subsequently became active, information with respect to the initial passive holding period is also included.
The “Initial Acquisition Date” is the initial date of purchase or short sale of the position.
The “Closing Price Day Before Entry” reflects the closing price on the day prior to the day Pershing Square began
purchasing or shorting the position.
The “Adjusted Stock Price at Exit or at 8/16/13 if Still Held” (ASPE) is the average exit price on the last day of sale
(or the price at August 16, 2013 if still held), plus any dividends received or paid during the period of active
investment and as adjusted for spin-offs (if any). Pershing Square may divest itself of a position over numerous
days, weeks or months. The average exit price with respect to the total position may be higher or lower than the
exit price reflected herein.
The “Adjusted Current Stock Price” (ACSP) is the stock price as of August 16, 2013, plus any dividends received or
paid during the period beginning with the Initial Acquisition Date through August 16, 2013 and as adjusted for spin-
offs (if any).
Specific information with respect to certain companies is set forth below:
Plains Resources – Taken private by Vulcan Energy Corp in July 2004.
Sears Roebuck, and Co. – In March of 2005, each Sears Roebuck share received $18.53 in cash and 0.31475 shares
of SHLD. In October 2012, SHLD spun off its publicly traded Sears Canada (SCC) shares. Each SHLD share was
granted 0.428302715 shares of SCC. ASPE includes share price at exit of SHLD and cash received in the initial
conversion. ACSP includes current share prices of SHLD and SCC, and a dividend received in 2012 from SCC
(converted into USD). SHLD has not paid any dividends.
Wendy’s – In September of 2006, Wendy‟s spun off Tim Hortons. Each share of (old) Wendy‟s received one share
of (new) Wendy‟s and 1.3542759 shares of Tim Hortons. ASPE includes share prices at exit of Wendy‟s and Tim
Hortons and all dividends received. ACSP includes current share prices of Wendy‟s and Tim Hortons and all
dividends received and dividends paid subsequent to exit.
Borders Group – Filed for bankruptcy in February 2011.
Longs Drugs - Acquired by CVS in October 2008.
General Growth Properties (GGP) – In November of 2010, GGP spun-off assets into new company called
Howard Hughes Corporation (HHC). Each share of GGP received 0.098344 shares of Howard Hughes Corp. In
January of 2012, GGP spun-off additional assets into a new company called Rouse Properties (RSE). Each share of
GGP received 0.037509 shares of RSE. ASPE includes current share prices of GGP and HHC and share price of
RSE at exit and all dividends received. ACSP includes current share prices of GGP, HHC and RSE and all
dividends received and dividends paid subsequent to exit.
Landry’s – Taken private by CEO in October 2010.
Fortune Brands (FO) – In October 2011, FO spun off assets into a new company called Fortune Brands Home &
Security (FBHS). Fortune Brands was renamed BEAM, Inc. ASPE includes current share price of BEAM and
share price at exit of FBHS and all dividends received from FO and BEAM. ACSP includes current share prices of
BEAM and FBHS and all dividends received and dividends paid subsequent to exit.
Alexander & Baldwin – In July of 2012 the company split into two companies – (new) Alexander & Baldwin
(ALEX) and Matson, Inc. (MATX). Each (old) ALEX share received one share of (new) ALEX and one share of
MATX. ASPE includes share prices at exit of ALEX and MATX and all dividends received from ALEX (old and
new). ACSP includes current share prices of ALEX and MATX and all dividends received and dividends paid by
(new) ALEX subsequent to exit.
Justice Holdings (JUSH) – Company completed a reverse merger with (privately held) Burger King in June of
2012. The company was renamed Burger King Worldwide Inc. (BKW). Each JUSH share received one share of
BKW. ASPE and ACSP include the current share price of BKW all dividends received.
Platform Acquisition Holdings Ltd. – Purchase price includes warrants received at IPO.
Ambac – Filed for bankruptcy in November of 2010. Original shareholders received no value when Ambac exited
It should not be assumed that any of the increases in share prices of the holdings listed herein indicate that the
investment recommendations or decisions that Pershing Square makes in the future will be profitable or will
generate values equal to those of the companies discussed herein. Specific companies shown in this chart are meant
to demonstrate Pershing Square‟s active investment style and the types of industries in which the Pershing Square
funds invest and are not selected based on past performance.
General Disclaimers and Notes
Past performance is not necessarily indicative of future results. All investments involve risk including the loss of
principal. This letter is confidential and may not be distributed without the express written consent of Pershing
Square Capital Management, L.P. and does not constitute a recommendation, an offer to sell or a solicitation of an
offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of
delivery of an approved confidential private offering memorandum.
Any returns provided herein based on the change in a company‟s share price is provided for illustrative purposes
only and is not an indication of future returns of the Pershing Square funds.
This letter contains information and analyses relating to some of the Pershing Square funds‟ positions during the
period reflected on the first page. Pershing Square may currently or in the future buy, sell, cover or otherwise
change the form of its investment in the companies discussed in this letter for any reason. Pershing Square hereby
disclaims any duty to provide any updates or changes to the information contained here including, without
limitation, the manner or type of any Pershing Square investment.