William Ackman's multiyear bet that he could overhaul ailing retailer J.C. Penney looks like it may end up being one of his $12 billion hedge fund's worst investment blunders.

On Monday, J.C. Penney's board dismissed Ron Johnson, a former Apple executive handpicked by Ackman to remake the retailer, and brought back Mike Ullman, whom Ackman has previously criticized.

Now the hedge fund manager, who sits on J.C. Penney's board, is faced with the prospect of being the largest shareholder in a company where his influence may be greatly diminished, say industry analysts and a Pershing Square investor, who did not want to be identified.

The usually voluble Ackman has yet to publicly comment on the management shakeup at J.C. Penney, and he did not respond to a request for comment for this story.

One way for Ackman to salvage something from his 18 percent stake in the company would be to find a buyer who wanted to take J.C. Penney private, said people familiar with the hedge fund and the retail industry. Such a move might help Pershing Square recoup some of the $500 million in paper losses it is currently sitting on, these people said.

"The faster Ackman and group sell JCP's valuable assets to someone else, the more value they will capture," said George Bradt, managing director of PrimeGenesis, an executive consulting firm.

Even before Pershing Square and Vornado Realty Trust accumulated big stakes in J.C. Penney in 2010, private equity investors were circling the struggling retailer.

Today a purchase would be cheaper with the stock price near $14 a share, down about $6 a share from where Ackman started buying. And a deal could still be attractive for players like Blackstone Group, KKR & Co or Apollo Global Management LLC because J.C. Penney still has valuable real estate holdings, owning nearly half of its space and leasing the rest at $4 a square foot. For comparison, retail space in lower Manhattan rents for an average of $184 a square foot.

Ackman, who has been a J.C. Penney board member since 2011, has long championed the retailer's vast real estate holdings as one reason it should be trading at a higher stock price. He also said less than a year a ago that Pershing Square could make 15 times its money if Johnson's ambitious plan to renovate the stores and sell more upscale merchandise had worked.

But that strategy, which has yet to bear fruit, resulted in Johnson's dismissal. It's unclear if new chief executive, Mike Ullman, will continue with Johnson's plan.

Ullman, the CEO Ackman forced out has been brought back from retirement to run the company, so there is little reason for an activist investor to stick around. Ullman told Reuters on Monday that he had not spoken with board members besides J.C. Penney Chairman Thomas Engibous.

But Ullman noted while he was at the helm, Penney's market value, sales and profits had reached all time highs.

This is not the first time that Ackman has come up short with a big bet on transforming a national retailer. Investments his firm made in Target - he put in $2 billion in 2007 - and bookseller Borders also ended badly. He apologized to clients in a fund where he invested only in Target and lost 90 percent of the fund's value. He lost roughly $200 million on Borders.

Johnson's failure to turn around J.C. Penney may mean the company's board will be less receptive to Ackman's recommendations, said a frequent hedge fund investor, who does not have money with Pershing Square.

The investor, who did not want to be named due to his continuing work in the hedge fund industry, said Ackman, as an activist, had been effectively "neutered" with regards to influencing J.C. Penney going forward.

Up until recently Ackman had been a cheerleader for Johnson, but that changed after the stock price fell 28 percent in the first-quarter.

"They capitulate at the bottom when everyone goes negative and even board members throw the company under the bus shouting ���We never really liked him anyway' as they show him the door," said Shawn Kravetz, whose hedge fund Esplanade Capital exited its J.C. Penney position last year.

AN UPHILL BATTLE

Now, getting private equity investors interested may be a hard sell.

"They have a pretty steep uphill battle. They have not announced any sort of restructuring plan yet. The straight-up numbers indicate that there is more trouble in sight," said one private equity executive, who follows the company and spoke on condition of anonymity.

With an enterprise value of around $5.5 billion, J.C. Penny is a feasible leveraged buyout target. But private equity has snubbed deals of late that it has deemed too risky in the sector, including Best Buy Co Inc founder's efforts to take the electronics retailer private.

Shares of J.C. Penney were down more than 12 percent in early afternoon trading following Johnson's departure.

Privately, Ackman has long said the investment could be risky because it relied so heavily on shoppers liking Johnson's plan.

Pershing Square returned 6.1 percent during the first quarter even as J.C. Penney's stock was tumbling, suggesting that investors have no reason to run for the exits right now.

But the pick does cast a shadow over Ackman's record where average annual returns of 20 percent have made him a favorite with pension funds and other big investors.

"To me, the whole point here is hubris," said Robert Sanborn, a Chicago-based hedge fund manager who invests in equities. "Every single investment idea is fraught with uncertainty, and one can sometimes delude themselves into forgetting this by relying on reams of all kinds of data."

"Sometimes these guys just miss the forest for the trees," he said.

(Reporting By Svea Herbst-Bayliss in Boston and Katya Wachtel in New York; additional reporting by Gregory Roumeliotis and Phil Wahba.; Editing by Matthew Goldstein and Leslie Gevirtz)