Bill Ackman’s decision to return US$4 billion to investors rather than pursue a suboptimal SPAC deal shows admirable restraint. But it’s unlikely to mollify the punters who piled into his Pershing Square Tontine Holdings (known to most as PSTH). Not only did he fail to pull off an attractive merger but amateur investors got burned speculating in PSTH securities hoping he would. Ackman’s offering them a consolation prize: it’s just not clear yet how viable and valuable that gift is.
Ackman isn’t the first SPAC sponsor to realize that blank-check firms have reached a dead end, but as PSTH is the largest ever raised it’s still a grim milestone for the asset-class.
More than half a dozen blank-check firms have been liquidated so far this year, according to SPAC Research data, and I anticipate plenty more will fold in the coming months. The Securities and Exchange Commission has made banks leery of facilitating mergers, and shareholders are increasingly asking for their money back rather than funding transactions. Many of these cash-shells are also running up against the two-year deadline they have to complete a deal.
It’s ironic that Ackman’s vehicle met this fate, as he was early in identifying many of the problems that have proven SPACs’ undoing, in particular the skewed sponsor incentives and the tendency of investors to pull their money out (aka redeem).
Listed in July 2020, PSTH tried to correct for these faults – Ackman declined the traditional free shares SPAC founders award themselves, and he offered additional warrants to shareholders who agreed not to redeem. And yet PSTH ended up being tarnished by the same negative connotations as other SPACs.
The deal he tried to do with Universal Music Group NV last year was shot down by the SEC. This was much to the chagrin of retail investors who felt they were being deprived of a good opportunity (Universal Music ended up dealing with Ackman’s hedge fund instead). The flop also contrived to make PSTH the target of (in my view, spurious) shareholder litigation that contended it was acting as an illegal investment company, which PSTH has denied.
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The upshot of all this drama is PSTH shareholders who bought at the IPO price will later this month get their money back, plus interest. That isn’t such a bad outcome, when you consider how much some SPACs have lost for their shareholders in ill-conceived deals. An index of former SPACs has declined more than 75% in the past year. Unfortunately, many retail investors unwisely bought at a premium to the US$20 per share value: those who dabbled in PSTH options or warrants will have lost even more.
They won’t be left empty-handed. Ackman is offering them rights, known as SPARs, to participate in an unspecified future deal. In theory, Pershing Square SPARC Holdings, Ltd. is an improvement on a regular blank-check firm. Investors won’t have to park money at a low rate of return until the SPARC finds a target, which might take years. Instead they’ll be invited to opt in once Ackman finds something to buy. Hence the SPARC saves on underwriting fees (about 7% for a tradition IPO and 5.5% for a SPAC).
IPOs are moribund and SPACs’ reputation is in the gutter, so a company wanting to go public might find the deal price certainty offered by the SPARC quite attractive. PSTH’s public warrants are due to expire worthless so the fact they’re trading a little above US$0 implies investors have some faith in Ackman’s dealmaking prowess.
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But SPARs have to be blessed by the SEC and at least initially, they’ll trade over-the-counter rather than on the New York Stock Exchange. That could limit their price and liquidity.
Convincing a unicorn to take a punt on a novel listing structure won’t be easy and investors once bitten by Ackman’s financial innovations will also tend to be twice shy. Only by serving them up a juicy deal will he earn their forgiveness. - Bloomberg Opinion
