Bill Ackman is a polarizing figure. Some investors love it, others hate it.
It can be easy to see why. The US hedge fund manager’s activism has produced significant returns in recent years for shareholders of companies such as Canadian Pacific Railway Ltd. and Chipotle Mexican Grill Inc. It also brought in US$2.6 billion to investors using derivatives. sell short the stock market in response to the emerging COVID-19 pandemic, according to a letter to his clients in March 2020. But he also encountered well-known difficulties with several holding companies, such as Valeant Pharmaceuticals International (now called Bausch Health Cos. Inc.) and Herbalife Nutrition Ltd.
It was this polarization of opinion that opened up the possibility of buying shares of Mr. Ackman’s latest investment vehicle at a price below its underlying value. Consider it a low-risk proposition for bargain hunters everywhere.
In the summer of 2020, Mr. Ackman started a special purpose acquisition company (SPAC) called Pershing Square Tontine Holdings Ltd. (PSTH-N). With PSTH, Mr. Ackman raised US$4 billion at US$20 apiece, giving him a large pool of capital. Like other SPACs, PSTH’s goal is to find a private company and essentially take it public by acquiring it.
When searching for a suitable acquisition, SPAC funds are held in trust, primarily invested in US Treasury securities. Once a trade is pending, investors can either remain invested or redeem their shares for their prorated portion of the trust account. SPACs often trade at a small premium to this “liquidation” value until a deal is announced. In contrast, PSTH is trading at a discount to this liquidation value, currently trading at US$19.89 per share.
With any investment, I consider four things: why is it cheap, what is it worth, what are the downsides, and are the interests of investors aligned with those of insiders? Here are the answers to each question.
Why is it cheap?
In the spring of 2021, PSTH concluded a rather complex transaction to acquire 10% of Universal Music Group NV. While this transaction may have been a worthwhile investment for shareholders, PSTH’s involvement with Universal Music quickly fell apart due to Securities and Exchange Commission concerns and shareholder litigation. In July 2021, the PSTH ended its involvement. The result was that PSTH was left, as they say, “at the altar”.
Investor enthusiasm for the deal had the shares soaring to nearly US$33. Obviously, it was a disappointing result and many sold out. The announcement that PSTH was considering converting to a Special Purpose Acquisition Rights Company, or SPARC, a proposed new type of security that is simply the right to participate in a future deal – much like having an option to purchase – added to investors’ apprehension. in an initial public offering. The SPARC structure has not yet received SEC approval and there is currently no SPARC.
Finally, in late fall, there were tax-loss sales as investors who paid more than US$20 decided to take a capital loss and apply it against taxable gains. made elsewhere.
What is it worth?
I think there are four potential outcomes.
The first two would involve investors receiving around $20 per share, or their prorated share of the trust account.
For example, if Mr. Ackman does not find a trade by July 24, PSTH will be liquidated and net proceeds of $20 per share plus a small amount of interest on assets held in trust will be returned to investors.
Alternatively, Mr. Ackman can find a transaction. If an investor doesn’t like it, he or she can redeem shares and receive US$20.
The third outcome is that Mr. Ackman finds a good trade, and presumably the stock appreciates well above US$20.
The end result would be PSTH getting permission to convert to SPARC. Investors would then receive $20 in cash plus one new SPARC share. Since this new SPARC stock would be similar to existing SPAC warrants, I suspect that a SPARC warrant would be worth north of US$2 per share.
What are the negative points?
As my former boss, value guru Peter Cundill, used to say, when you buy a cash-rich business there’s always the risk that management will do something stupid with the money or you will. Fly. In the case of PSTH, if an investor doesn’t like the deal, they can redeem. The more likely negative is that an investor’s ability to redeem is delayed due to litigation or perhaps shareholder approval to extend the life of the SPAC. Either way, I believe an investor’s downside continues to be protected.
Are the interests of investors aligned with those of insiders?
Unlike some structures, directors did not receive discounted founders’ shares. With PSTH, the directors purchased out-of-the-money units and warrants (a strike price higher than the current price of the underlying shares) worth approximately US$9 million and, with the remaining Mr. Ackman’s funds, have additional share purchase commitments of US$1 billion at the time of a trade. Ultimately, insiders have “skin in the game.”
I realize this is a bit of a complicated situation. As a value investor, the first question is always: what’s my downside? In the case of PSTH, an investor will either receive their investment plus a modest mid-summer return or the potential for outsized returns. It’s the equivalent on the financial markets of heads that I win, and tails I get my money back.
In an accident-prone and expensive market, PSTH is a comfortable position.
Full disclosure: The McElvaine Value Fund invests approximately 7% of its net asset value in Pershing Square Tontine Holdings.
Tim McElvaine founded and manages McElvaine Value Fund.