Business: Pershing Square Tontine Holdings is a special purpose acquisition company ("SPAC"). The firm does not have significant operations. It intends to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. The company was incorporated in 2020 and is based in New York.
Stock Market Value: $4.57B ($22.86 per share)
Percentage Ownership: n/a
Average Cost: n/a
Activist Commentary: Pershing Square has an extensive and successful track record as an activist investor and has previously been involved in a very successful SPAC investment. Pershing Square served as cosponsor of Justice Holdings, with Nicolas Berggruen and Martin Franklin. Justice Holdings raised approximately $1.5 billion in its initial public offering in February of 2011 (including a $458 million investment by Pershing Square). In April of 2012, Justice Holdings purchased from 3G Capital a 29% stake in Burger King Worldwide Holdings Inc. for $1.4 billion in cash, and subsequently merged with Tim Hortons, to form Restaurant Brands International. Pershing Square remains the second-largest investor in Restaurant Brands International.
Pershing Square Tontine Holdings, Ltd. is in discussions with Vivendi S.E. to acquire 10% of the outstanding ordinary shares of Universal Music Group B.V. ("UMG") for approximately $4 billion, representing an enterprise value of $42 billion for UMG.
Pershing Square has had its best success when it has invested in high quality businesses with simple, predictable, cash flow and durable and growing business lines. That is what it was looking for with this SPAC, and that is exactly what it has found. UMG is the largest owner of musical intellectual property in the world and accordingly has a very reliable licensing revenue stream. Moreover, it is not capital intensive, has a high return on capital, a strong balance sheet, excellent management team and in an industry (music subscriptions) that has been growing by 25% annually. Moreover, a $42 billion enterprise value could be severely undervaluing the company. As the market leader in an oligopoly, with Warner Brothers as its only real competitor, there are not a lot of public comps for UMG. However, Spotify recently went public and has a $44 billion enterprise value despite having negative $205 million of EBITDA in 2020 and only projecting $500 million of EBITDA in 2023. On the other hand, UMG is estimated to have close to $2 billion of EBITDA. Moreover, as a middleman streaming company, Spotify could be viewed as a commodity with low pricing power. UMG on the other hand owns the intellectual property which is a much more valuable position in the industry. In the cable industry, companies like Spotify (i.e., Charter Communications) trade at much lower valuations than content providers (i.e., Disney). But the UMG investment is just part of the transaction. In an extremely innovative structure, PSTH shareholders will receive the following three securities:
- UMG Ordinary Shares, which represents approximately $14.75 per PSTH share, before accounting for any dilution from PSTH warrants. Following PSTH's acquisition of the UMG Shares, UMG will complete its previously announced listing on Euronext Amsterdam in the third quarter of 2021. Once the listing is complete, PSTH will distribute the UMG Shares directly to PSTH's shareholders in a transaction registered with the Securities and Exchange Commission. This is essentially a late-stage investment in UMG as a private company before it goes public.
- PSTH shares after the distribution of the acquired UMG shares ("PSTH Remainco"), which will have approximately $5.25 in cash per share, before accounting for any dilution from PSTH warrants. After funding the UMG purchase and related transaction expenses, PSTH Remainco will have $1.5 billion in cash and marketable securities. In addition, Pershing Square will have the right, but not the obligation, to buy approximately $1.4 billion of PSTH's Class A common stock. This gives PSTH $2.9 billion to do another deal. Moreover, PSTH will no longer be treated as a SPAC so it will not have a time limit to find a deal. However, we expect that PSTH will find something before the end of the year. As part of their process with respect to UMG, they looked at hundreds of potential companies and likely saw many that were very attractive but too small for what they were looking for. PSTH will have the appropriate amount of capital to effectuate a minority investment in an approximate $10 billion company.
- One transferable five-year right per share of Pershing Square SPARC Holdings, Ltd. ("SPARC"), which is expected to trade on the New York Stock Exchange. Unlike a traditional SPAC, this Special Purpose Acquisition Rights Company does not intend to raise capital through an underwritten offering in which investors commit capital without knowing the company with which SPARC will combine. Instead, SPARC intends to issue rights to acquire common stock in SPARC for $20.00 per share to PSTH shareholders ("SPARs") which can only be exercised after SPARC enters into a definitive agreement for its initial business combination. Assuming all SPARs are exercised, SPARC will raise $5.6 billion of cash from SPAR holders. SPARC is also expected to enter into forward purchase agreements with Pershing Square for a minimum investment of $1 billion, and up to $5 billion. This is the true innovation of PSTH's structure. It is essentially a $6.6 billion to $10.6 billion SPAC that has five years to find a deal in which the SPAC holder does not have to put up any capital until a deal is announced. When Pershing Square initially launched PSTH, it was innovative in that it did away with founders shares and offered a tontine warrant structure. This takes it a step further by solving the urgency to find a deal inherent in other SPACs, often leading to sub-par deals and not requiring holders to lock up their capital while the company looks for a deal. Moreover, with up to $10.6 billion to do a deal, Bill Ackman has enough capital to do a deal larger than UMG and has enough time to be patient while it waits for the perfect timing for a company like Bloomberg, for example.
In sum, this transaction gives the shareholders of PSTH an interest in a soon to be public company (UMG), ownership in PSTH as the vehicle for a second, smaller acquisition that could be announced in the short-term and an opportunity to participate in a third but much larger potential acquisition over the next five years. Moreover, while it is not officially part of the deal, I would not be surprised if Bill Ackman gives PSTH shareholders a right to participate in the next SPARC he launches if or when the present SPARC consummates a transaction.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Pershing Square Tontine Holdings is owned in the fund.