re: Pershing Square Tontine Holdings (PSTH) and Universal Music Group (UMG)
First of all, who the f*ck is Bill Ackman? There's no doubt that a lot of the pre-merger hype around this SPAC was with him being involved in what is/was the largest SPAC. He's one of the most well-respected deep value investors of our time. Part of his "hype" (I'll call it for what it is) was recently due to predicting – and profiting – from the downturn in the market from the coronavirus sell off in March 2020.
Bill Ackman’s ‘single best trade of all time’ turned $27 million into $2.6 billion.
But, like anyone, he's NOT always right. In fact, he lost close to $1 billion on betting against Herbalife, by suggesting it was a complete scam and MLM (which is kind of is, imo). Unfortunately the stock's price didn't exactly play out that way, and we had another one of the greatest investors of our time, Carl Icahn, take the other side of the bet. In 2013, Bill Ackman got into an unforgettable smackdown over Herbalife with Carl Icahn on live TV (watch some clips in the YouTube video above). They eventually got over the beef, in case you were interested.
OK, so the question we all care about now... Is Bill Ackman right or wrong about Pershing Square Tontine Holding ($PSTH) SPAC merger with Universal Music Group?
First, let's start by saying the deal is confusing as f*ck! But, I'll break it down for you as simply as possible.
So, PSTH, unlike a typical SPAC with a $10 NAV decided to go with a $20 NAV. It's a $4bn SPAC – the largest one yet. The promote shares, in the case of PSTH, are only awarded at $24 after the merger. Otherwise, they get nothing. This aligns the sponsors, like Bill Ackman, with the investors.
But, it only got more complicated (but still more aligned with investors) after the deal with Universal Music Group (UMG) was announced...
For a variety of reasons, PSTH was able to acquire only 10% of UMG at a valuation of €33bn (or $39.5bn using agreed 1.20 FX rate). After accounting for transaction costs, this results in a ~$4.1bn investment into the company.
At this valuation, PSTH shareholders will receive UMG shares for $14.75. It might sound like a ripoff at first, considering the NAV is $20... but wait, there's more!
After PSTH directors exercise $1.6bn of Forward Purchase Agreements (FPA), PSTH will have $5.6bn in cash. Which leaves another $1.5bn in trust...
RemainCo will continue to trade as a (not so) "mini" SPAC forked from PSTH, and look to acquire a similar, large, mature business.
Existing PSTH shareholders will receive $5.25 into RemainCo.
Above all this, there are the (1/9th) warrants and (2/9th) Tontine warrants assuming you don't redeem, which I won't get into in this discussion, which adds further upside to this deal for investors.
But wait, there's more...
On top of this, investors in PSTH who hold for the merger, will also be awarded a Pershing Square SPARC Holdings, Ltd. (SPARC) warrant. Consider this the cherry on top! A SPARC, similar to a SPAC will look to transact with another large business to which there will be no opportunity cost of tieing up your capital (like a SPAC). It's basically a free warrant. Why not?
There's a lot here in aligning the investors in PSTH with sponsors for the long-term. The way I see it, you have to be a believer in Bill Ackman (basically going to bed with him) and be in it for the long-run. But, of course, you can always exit.
With regards to UMG, it appears that we're getting a good deal. UMC has been reported to have a valuation of $29 billion and $42 billion in 2019 (even a whopping $50 billion by JP Morgan).
The upsides to the valuation are the rapid growth of online streaming and potential for NFTs. There are risks to this, however; not to mention the risk of the deal falling through.
There are more details on an investor presentation of UMG that hasn't been released (should be coming out tomorrow) which will allow us to do a deeper dive on the valuation and expectations of UMG – because, at the end of the day, that is the heart of this deal.
For now, PSTH is a hold for me... I'm not sure if I'm really interested in getting into bed with Bill Ackman despite his stellar performance as a value investor – but, I'm not opposed to it either.
Let me know if this is helpful, and if you'd like to stay informed on this deal!
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