By Phil Wahba and Matthew Goldstein
(Reuters) - Hedge fund billionaire Bill Ackman's two-year campaign to transform department store J.C. Penney came to an abrupt end on Tuesday with his decision to step down from the board, after a weeklong public spat with fellow board members.
Ackman's decision to leave comes after a failed two-year attempt by his $11.2 billion hedge fund to remake Penney into an upscale retail chain and a week of public fighting with other board members, including interim CEO Officer Myron (Mike) Ullman.
People close to Ackman and the retailer said his decision to leave the board was necessary for Penney to focus on its operations and continue the search for a new chief executive.
Ackman agreed to step down on Monday night, and the move removes a major distraction as Penney prepares for the holiday season. Some retail analysts said the public feuding threatened to unnerve vendors and lenders.
Penney's shares closed down 3.7 percent at $12.68 on the New York Stock Exchange.
"Bill Ackman has the done the right thing by stepping down from the board, under duress no doubt, and now Mike Ullman has pressure to perform," said David Berman, whose Durban Capital hedge fund specializes in retail stocks.
Ackman's experience in pushing for change at Penney, a chronic underperformer in U.S. retailing, contrasts with the improved performance of Canadian Pacific Railway Ltd after he led a proxy fight that forced out the railroad's management.
Ackman's Pershing Square Management Capital Management started buying Penney shares nearly three years ago to the day, paying an average of $22 for 39 million shares. The hedge fund now holds nearly 18 percent of Penney's stock.
If Ackman were to sell them at current prices, he'd lose $356 million, or a 40 percent loss. The paper loss figure does not include share purchased through swaps.
While a loss of such magnitude would be relatively modest for Pershing Square, it would only exacerbate Ackman's personal setback in resigning from the retailer's board.
Ackman has grown frustrated with the board's pace in finding a permanent successor to Ullman, who took over in April after the board fired Ron Johnson, Ackman's hand-picked candidate to lead the Penney's makeover.
Last week, the hedge fund manager took the unusual step of leaking two letters he had written to the board to push for a new CEO and a new chairman.
Ackman went public with his criticisms to propel the process forward, said a person close to the hedge fund.
His departure was voluntary, sources familiar with the matter said. He had decided as early as Sunday, one source said, because it would be difficult to remain on the board after airing his concerns publicly.
Ackman was reviewing "documents" spelling out the terms of his departure from the board on Monday night.
The news that Ackman was leaving the board was coupled with the announcement that Penney was naming a new board member with retailing experience, a move that Ackman had urged for a while.
He is expected to discuss the situation at JCPenney and other matters during an interview with PBS television host Charlie Rose that was scheduled to be aired on Tuesday evening.
Ackman was the driving force behind the decision to hire Johnson, a former Apple Inc executive, to replace Ullman as Penney's CEO in 2011. Ackman, impressed by the job Johnson had done in overseeing Apple's retail strategy, persuaded the board that Johnson could transform Penney into a trendier retailer.
The high-risk strategy, which included eliminating discounts, was a failure, leading to a 25 percent sales drop in 2012. By April the disappointing results and precipitous drop in the company's share price caused the board to oust Johnson and bring back Ullman to stabilize the retailer.
The question becomes what Ackman does with the large stake in Penney now that he is no longer taking such a highly visible role in the company and his fund has a paper loss of more than $356 million. He may be in no rush to sell because the shares are roughly $9 below the average price Pershing Square paid for them in 2011.
For his Pershing Square Capital Management, the Penney episode is a misstep reminiscent of his failed bid to push for change at Target several years ago. The twin failures have led some in the $2.25 trillion to grumble that Ackman, whose fund made more than $1 billion on an investment in mall operator General Growth Properties, does not have a good strategy when it comes to agitating for change at retail companies.
Pershing Square as of the end of July, was up 3.8 percent for the year, roughly equal to the performance of the average hedge fund.
The new board member, Ronald Tysoe, a retail industry veteran who spent 16 years as a vice chairman at Macy's Inc predecessor Federated Department Stores, is filling a vacancy created last year when Burl Osborne died. Penney is also looking for an 11th director.
Ackman said last week that he pushed for having someone replace Ullman within 30 to 45 days, because the company's internal second-quarter results projections were getting progressively worse.
Penney had been speaking with Tysoe for several weeks and been planning to announce the nomination later this week, a source said, noting Ackman had had little to do with it.
The search for Ullman's eventual successor will continue even with Ackman's departure, a J.C. Penney spokeswoman said. A person familiar with the situation said the goal is to have a new chief executive in place by January.
(Additional reporting by Nadia Damouni, Dhanya Skariachan and Jennifer Ablan in New York; Svea Herbst-Bayliss in Boston; Sakthi Prasad and Siddharth Cavale in Bangalore; Editing by Ted Kerr, Edward Tobin and Leslie Gevirtz)