After a rejected deal, a lawsuit by shareholders and a sharp drop in the share price, Bill Ackman wants to get out of the acquisition company’s game for special purposes.
While waiting for regulators to catch up, the Pershing Square hedge fund manager hopes to move forward with a different vehicle that will allow him to continue the big game hunt for a company to make public.
It’s the latest chapter in a convoluted saga that Ackman has already seen pivot several times. The ultimate goal of merging with a “mature unicorn” remains hard to find.
Under his latest plans, called Ackman’s SPAC
Pershing Square Tontine Holdings
(ticker: PSTH), would liquidate its $ 4 billion trust to shareholders at $ 20 per share. They would also receive a guarantee tied to a new entity, called Pershing Square SPARC Holdings, short for the company’s special-purpose acquisition rights, a term coined by Ackman.
Pershing Tontine Holdings (PSTH.WT) guarantee holders would also obtain warrants (essentially call options) for the shares of the new company. SPARC would look for an operating company with which to merge and make itself public in the process, while SPAC would cease to exist and its “tontina” guarantee structure would also disappear.
This does not mean much comfort for investors who bought shares of Pershing Square Tontine after its initial public offering in July 2020, when SPAC sold $ 20 units consisting of a common stock and a ninth of a guarantee, which can be exercised at $ 23 after the merger of the SPAC. Shares peaked at around $ 33 in February and had been trading steadily between $ 20 and $ 20 until recently.
SPAC shares fell below their confidence value per share for the first time on Thursday, closing at $ 19.99. Investors who pay more than $ 20 per share will lose.
Shares of Pershing Square Tontine Holdings fell 0.9% Friday morning to $ 19.80. Pershing Square Tontine’s securities fell in value, trading at more than 65% in the morning trade near $ 1.
Ackman’s change in strategy responds to a recent lawsuit filed against Pershing Square Tontine, which claimed that a SPAC is in fact an investment company and should be subject to applicable law.
“Although the lawsuit is filed on behalf of an alleged PSTH shareholder, this individual is simply an involuntary access point to allow the academics and law firms with whom the lawsuit has been associated,” wrote Ackman in a letter to shareholders posted Thursday night. “The two law professors who invented the legal theory behind the complaint acknowledged to the press that their motivation when filing the lawsuit was to ‘reform’ the entire SPAC industry.”
Ackman wrote that the uncertainty surrounding the lawsuit would scare off potential merger candidates and that, as a result, he may not be able to close a deal before the July 2022 deadline.
Berkshire Hathaway‘s
(BRK.A and BRK.B) Warren Buffett a a thread of tweets on Thursday night: “If you’re on a leaking ship, it’s often better to change ships than to repair leaks to complete the mission.”
(“If you are on a ship with chronic leaks, the energy devoted to changing ships is likely to be more productive than the energy devoted to the occurrence of leaks,” Buffett wrote in his shareholder letter of 1985).
It is not the first leak that Pershing Square Tontine has emerged. In June, the largest SPAC fundraiser ever conducted by the IPO agreed to a complex deal that would have created three public vehicles, with two expecting more deals in the future. SPAC agreed to buy 10% of Universal Music Group’s Amsterdam-listed shares in the French media conglomerate
Vivendi
(VIVHY), and distribute them to shareholders along with a SPARC guarantee. However, this would not have exhausted all of Pershing Square Tontine’s trusted cash and the company would have continued to seek another deal.
Regulators disagreed with the latter part: SPACs tend to merge with one company and then disappear, not live to make one deal after another. Ackman canceled the proposed transaction in mid-July, while hedge fund Pershing Square bought Universal shares.
Now, the SPARC idea of the initial agreement is back. These plans have yet to be approved by Securities and Exchange Commission regulators and require a rule change on the New York Stock Exchange, a process that could still take months. If approved, the Pershing Square SPARC will have 200 million SPARC warrants — exercisable at $ 20 at the time of a merger — and an additional 22.22 million warrants, which may be exercised at $ 23 within five years of the merger of the SPARC. The capital structure of the SPARC will be roughly the same as that of Pershing Square Tontine, without the money needed for a deal that is already in a trust.
A SPARC is more of a blank IOU than a blank check. Each SPARC guarantee represents the right to invest $ 20 in an eventual agreement negotiated by the hedge fund manager without term. This differs from an SPAC, in that money is raised in advance in an initial public offering, with sponsors then coming out to ensure a merger normally over the next two years. SPAC shareholders may vote on an eventual settlement and have a redemption option that they may choose to receive a proportionate share of SPAC’s trust in cash, rather than participate in its merger.
In a SPARC, these two decisions are essentially the same. Holders of collateral that support or oppose a possible deal that Ackman brings to the table will vote with their dollars. And they don’t have to bear the opportunity cost of closing their $ 20 per share on a SPAC trust for years while Ackman seeks a deal, he said. SPARC offers a more optional option, instead of disabling a SPAC.
“The main advantage of SPARC is that it would not withhold investor money while we are looking for a target …,” Ackman wrote. “SPARC guarantees will also eliminate the‘ two-year clock ’so that a sponsor can complete a transaction. This reduces the time pressure faced by the sponsor, which provides an incentive for SPAC sponsors to complete transactions before the clock runs out. “
It is an innovative but unproven structure. In recent months, Ackman has shown investors that he is capable of thinking about serious feats of financial engineering, even if it is sometimes too creative for regulators. So far, however, finding a top-tier company to merge with its entities has been more than a challenge. This will be doubly true for your SPARC, which may need another major commitment from Pershing Square funds to ensure it is effective enough to seal a deal, even if SPARC holders are not involved.
“We have six,” Ackman signed his letter to shareholders Thursday night, speaking militarily for “We have our backs.” So far, investors in Pershing Square Tontine may not feel that way.
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