Pershing Square Capital Management LP proposed a deal to merge a newly formed subsidiary with Howard Hughes Holdings Inc. in an effort to build the real estate developer into a “modern-day” version of Warren Buffett’s conglomerate.  

The investment firm run by Bill Ackman is offering Howard Hughes holders $85 a share, a majority of which would be paid in cash, the company said in the letter to investors posted on its website. That’s a 38.3% premium to Howard Hughes’s stock price in August, when Pershing Square expressed interest in a potential tie-up.

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For months, Ackman has been laying the groundwork for a deal to take over Howard Hughes, a company he used to help lead as chairman. He said in August that he was working with Jefferies Financial Group Inc. on a possible acquisition of all the shares in Howard Hughes that Pershing Square didn’t already own. The investment firm’s funds hold a 37.6% stake in the company.

A representative for Howard Hughes didn’t immediately respond to requests for comment.

A deal would give Ackman a chance to expand Howard Hughes, known for its investments in master-planned communities and retail properties. He said he’d push it to use its cash to invest in operating companies, following a model made famous by Buffett at his Berkshire Hathaway Inc. But while Berkshire’s now valued at $956 billion, Howard Hughes has a market capitalization of just about $4 billion.

“With apologies to Mr. Buffett, HHH would become a modern-day Berkshire Hathaway that would acquire controlling interests in operating companies,” Ackman said in the letter. Howard Hughes would invest “in new companies and assets with the long-term goal of growing HHH’s per-share intrinsic value at a high compound rate of return.”

Buffett’s strategy involved taking over a failing textile company and using it to buy a range of businesses, including insurers that helped generate enough cash to keep fueling the billionaire investor’s dealmaking. While a range of companies have been dubbed “baby Berkshire,” including Leucadia National Corp., which became Jefferies, it’s been hard to mimic Buffett’s exact style and generate the returns that made him famous.

Ackman has had a long history in the company. He was a major investor in General Growth Properties, which Ackman and Brookfield Asset Management Ltd. helped rescue from near-collapse. In 2010, General Growth Properties spun off Howard Hughes. Ackman was chairman of that company’s board from 2010 until last year, when he announced he was retiring from the position. 

Long-Term Owner

For the deal, Pershing Square’s holding company would buy about 11.8 million shares from stockholders not affiliated with Ackman’s company. Howard Hughes would also repurchase $500 million of stock, financed by newly issued bonds, according to the letter. 

Howard Hughes shares surged on the news, rising about 8.7% to $78.01 at 12:19 p.m. in New York Monday. 

Ackman said he expects all current Howard Hughes employees to retain their jobs. Howard Hughes’ senior leadership would be led by Pershing Square executives, with Ackman taking a role as chairman and chief executive officer. The real estate company’s current executives, including CEO David O’Reilly, would lead its main property unit, which would be called Howard Hughes Corp.

Ackman said that he may invite a “small consortium” of partners to join in on the deal. Those investors would go through an entity controlled by Pershing Square, requiring them to be subject to a multiyear lockup agreement, he said. 

“We strongly believe that we are the right long-term owner,” Ackman said. “With reference to Howard Hughes Holdings’ namesake – one of the world’s greatest aviators and entrepreneurs – let’s give this bird some wings.”