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J.C. Penney Replaces Bill Ackman With a Hedge Fund Dream Team

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Name brand hedge fund investors bought discounted shares of J.C. Penney (JCP) Bill Ackman dumped on the market last week. Tuesday afternoon it was revealed that "suggestivist" investor Larry Robbins of Glenview Capital has amassed a 9.1% stake in J.C. Penney, up from less than 4% at the end of June. Also climbing on the J.C. Penney's train was Kyle Bass who bought a 5.2% stake for his Hayman Capital fund.

The announcements come on the heels of Richard Perry and his Perry Corp added 3 million shares to its position and now controls 8.9% of the company. Perry, who also owns Barney's New York, has pushed for Penney's to replace CEO Mike Ullman with current Foot Locker (FL) CEO Ken Hicks.

With George Soros having already disclosed a 7.9% stake in J.C. Penney, nearly 1/3 of the company is under the control of a handful of vocal fund managers. There's an argument to be made that J.C. Penney was better off with the devil it knew in Bill Ackman than it is with this confederacy of outspoken holders.

Related: Contempt for the Customer: Why Ackman Failed at JCP

Ackman set J.C. Penney on a near-fatal course by jamming former Apple (AAPL) retail head Ron Johnson into the corner office at J.C. Penney, but at least Wall Street knew where he stood. The other positive about having the Pershing Square head on the J.C. Penney board was that Ackman had been largely marginalized after the Johnson debacle.

The only thing worse than a non-merchant hedge fund manager telling Penney's what to do, would be four guys who all think they have the right strategy calling the shots. J.C. Penney no longer has the luxury of running the focus group studies Johnson should have done before he gutted the chain.

As Yahoo Finance Daily Ticker host Aaron Task notes in the attached clip, J.C. Penney has liquidity issues in the here and now. It's an immutable law of retail nature: if J.C. Penney can't get the financing it needs to buy inventory it needs, the company is dead.

Related: JCP: The Death Spiral Scenario

It's worth noting that the hedgies almost certainly got a deal on their positions from Citi (C), which was left holding the bag after buying Ackman's 18% stake for $12.60. Removing the hangover from Ackman's sale by replacing it with funds motivated by little more than taking a 50-cent scalp on J.C. Penney doesn't advance the ball much for the company.

Those concerns aside, J.C. Penney is worth more today than it was when Ackman was putting the company's very existence at risk. Regardless of how they got into their J.C. Penney positions, the groups that now own 30% of the company will maximize their profits by keeping Penney's alive.

Soros, Bass, and Larry Robbins have incredibly deep pockets and a strong aversion to public humilation. Their presence removes near-term credit risk. The worst case scenario for fellow shareholders has shifted from bankruptcy to the risk that J.C. Penney will need to sign horrible debt deals to survive. That's an upgrade.

As the owner of Barney's, Richard Perry understands retail. He levered his debt position in Barney's into an ownership stake, suggesting an ability to wheel and deal in a way that backstops J.C. Penney, if not for shareholders, then certainly for those running the debt.

Perry and Barney's have also reportedly been courted by Lord & Taylor's Richard Baker. Baker is a proven whiz at turning bad real estate into profits. The combination fits nicely at J.C. Penney where real estate may be one of the few tangible assets the company can leverage.

J.C. Penney is a high risk investment but the funds picking up Ackman's stake have given it a lifeline. The company will make it through Christmas; what happens from there is anyone's guess.

Disclosure: At the time of publication Jeff Macke was long shares of J.C. Penney

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