Bill Ackman’s SPAC Tanks on Proposed Deal With Universal Music Group
Following a Wall Street Journal report yesterday, Pershing Square Tontine Holdings (NYSE: PSTH) confirmed that it is indeed in talks to acquire a piece of Universal Music Group (UMG).
The special purpose acquisition company (SPAC) is looking to buy a 10% stake in UMG for $4 billion, valuing the largest record label in the world at $40 billion, and distribute those shares to its shareholders. UMG represents many of the biggest artists in the world, including Taylor Swift, Alicia Keys, Elton John, and Pearl Jam, among many others.
Investors appear to be disappointed, sending Pershing Square Tontine shares down by 11% as of 12:30 p.m. EDT on Friday.
This isn’t your typical SPAC merger
The transaction is as unique as it is complex. Unlike most SPAC transactions in which the SPAC merges with a target company, Pershing Square Tontine is not really combining with UMG.
The SPAC sponsor (Pershing Square Capital Management) is creating a new Pershing Square SPARC Holdings. Once the deal is completed, current Pershing Square Tontine shareholders will own three different securities:
- A pro-rata share of UMG valued at approximately $14.75.
- A pro-rata share of Pershing Square Tontine valued at $5.25 per share in cash.
- A transferable right to buy a share of SPARC that’s good for five years, known as a SPAR.
While most SPACs go public with a net asset value (NAV) of $10 per share, Pershing Square Tontine was unique in that it went public with a $20 NAV last summer, raising roughly $4 billion and making it one of the largest SPACs on the market.
Since the proposed deal is not a merger, that means Pershing Square Tontine warrants will not become exercisable, as is usually the case with a merger. Instead, the SPAC will allow warrant holders to exchange their warrants for more Pershing Square Tontine shares through an exchange offer. Warrants are derivatives that allow investors to buy the underlying stock at a strike price and are included for free with SPAC units as a sweetener for institutional investors.
There is also no PIPE (private investment in public equity) component of the deal. Rather, Pershing Square Capital Management has inked various forward purchase agreements with various affiliates to bring an additional $1.6 billion to the table. After using its $4 billion in trust in conjunction with the additional capital and paying transaction fees, the SPAC expects to have roughly $1.5 billion in cash remaining.
Rewarding early SPAC investors
The SPAR that the SPAC shareholders will receive represents the right to buy shares of the SPARC for $20 per share, which can only be exercised once the SPARC identifies a target company to merge with. The SPARC will not raise money through a traditional offering, but will instead receive cash from the exercise of SPARs.
Assuming that all SPAR investors choose to exercise that right, the SPARC will have between $6.6 billion and $10.6 billion that it can use to fund another merger deal. The convoluted terms reflect Bill Ackman’s commitment to reward early Pershing Square Tontine investors. The famed activist value investor previously said on social media that he would find a way to allow those investors to buy into Ackman’s next SPAC. The SPARC isn’t quite a SPAC, but will function in a similar fashion.
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