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Bill Ackman, CEO of Pershing Square Capital Management.
Christopher Goodney/Bloomberg
Bill Ackman’s
Pershing Square Tontine Holdings
introduced a complex, multipart transaction on Friday. Shareholders within the particular function acquisition firm shall be left with a 10% stake in Universal Music Group, rights to a brand new automobile Ackman calls a particular function acquisition rights firm, or SPARC, and the remaining chunk of Pershing Square Tontine.
There is quite a bit to unpack there, and on Friday, many traders seemed to be promoting first and asking questions later. Shares of Pershing Square Tontine Holdings (ticker: PSTH) have been down greater than 14% on Friday afternoon, to round $21.50.
SPACs raise money in an initial public offering, and go public as simply money shells with no working enterprise. Their administration groups, referred to as sponsors, are tasked with figuring out a non-public merger goal and negotiating a deal. In the meantime, the SPAC trades on an change like some other inventory, and the money raised sits in a trust earning interest. When the businesses mix, the working enterprise will get the SPAC’s money and takes over its inventory market itemizing, raising money and going public within the course of. The SPAC ceases to exist.
Ackman hasn’t adopted that script. Pershing Square Tontine Holdings was the biggest SPAC ever raised final July, with $Four billion in preliminary public providing proceeds—or $20 a share—and launched a novel structure for its warrants and sponsor compensation. It additionally included a dedication to buy as a lot as a further $three billion in shares by the Pershing Square hedge fund on the time of a merger.
The transaction introduced on Friday is much more convoluted. Rather than merging with a non-public firm to take it public, Pershing Square Tontine is utilizing a portion of its belief money and ahead buy settlement to purchase a 10% stake in Universal Music Group, a significant music label 80% owned by the French media conglomerate
Vivendi
(VIVHY) and 20% by Chinese tech large
Tencent Holdings
(TCEHY). The twist is that UMG is already within the technique of going public on the Euronext inventory change in Amsterdam this summer time.
That means it doesn’t want Pershing Square Tontine’s stock-market itemizing, and the SPAC will live on after the transaction, with $1.5 billion in its belief and a $1.6 billion ahead buy settlement from the hedge fund. Ackman shall be trying to find a merger companion for that pool of money, which is able to not technically be a SPAC and gained’t have a redemption choice or expiration deadline. That belief money is value $5.25 a share of Pershing Square Tontine.
The $4.1 billion Ackman is spending on the UMG stake and associated bills—$2.5 billion from the SPAC’s belief and $1.6 billion from Pershing Square—values the music label at €35 billion, or about $42.5 billion, together with debt. That money equates to about $14.75 per Pershing Square Tontine share. Add that to the $5.25 remaining within the belief and also you get the $20 in IPO proceeds that the SPAC raised.
Several Vivendi analysts embody a valuation of UMG as a part of their goal on the mixed firm. J.P. Morgan and Goldman Sachs analysts have just lately valued UMG at round €45 billion, whereas their friends at Bernstein and UBS have estimated its value at or round €35 billion. Splitting the distinction yields a €40 billion worth for UMG, or about 14% above the worth that Pershing Square Tontine is paying for its 10% stake. That would make the stake value about $16.86 a SPAC share.
Then there may be the SPARC. For every share they personal, Pershing Square Tontine shareholders may even obtain one particular function acquisition proper, or SPAR, within the newly created entity. Each proper entitles its holder to buy a share of the SPARC at $20, however solely after it has agreed and introduced a merger, with the proceeds going to fund that deal. The construction successfully delays the SPAC fund elevating from the IPO to the closing stage. In the meantime, the SPARs will commerce on the New York Stock Exchange.
The worth of the rights as soon as they start buying and selling will depend upon how a lot credit score traders give Ackman for his skill to safe a horny deal for the SPARC. It might have greater than $10 billion in money obtainable if all shareholders train their rights and together with one other ahead buy settlement from the Pershing Square hedge fund for as much as $5 billion. That’s ammunition for an additional mammoth deal.
Before Friday’s drop, Pershing Square Tontine had traded in a variety from $21.50 to about $33 since its July 2020 IPO, and largely between about $23 and $26. Those are premiums to its belief money of between $three and $6, or 15% to 30%. It’s an honest proxy for the worth that the market has been assigning to Ackman’s deal-making skill.
If the SPARC is rather like a SPAC with out a belief, then the rights might commerce for round that vary as properly. The post-transaction Pershing Square Tontine might additionally command a premium to its $5.25 money worth—name it 22.5%, the midpoint of the 15% to 30% vary.
Put all of it collectively, and the sum of the elements yields a price of round $27.79 for Pershing Square Tontine inventory in the present day ($16.86 for UMG, $4.50 for the SPARs, and $6.43 for the remaining PSTH). That’s practically 30% above its ranges on Friday afternoon.
Long-term traders not afraid of a little bit of complexity ought to be taking benefit.
Write to nicholas.jasinski@barrons.com
