Bill Ackman (pictured), the founder and CEO of Pershing Square Holdings [PSH.L], is rewinding plans to take Universal Music Group public via a special purpose acquisition company (SPAC) after pushback from the US market regulator.
Pershing Square Capital Management, Ackman’s investment firm, will instead make a long-term investment in Universal. Ackman had hoped that this June agreement to purchase 10% of the company from its parent, Vivendi [VIV.PA], for $4bn via his SPAC, Pershing Square Tontine Holdings [PSTH], would become the first deal of its kind. However, the Securities and Exchange Commission (SEC) wasn’t convinced that the proposals fell in line with the rules surrounding SPACs.
SPACs normally take companies public via a merger, with the SPAC having already listed prior to the deal. However, Ackman’s plan was for Pershing Square Tontine Holdings, which is listed on the New York Stock Exchange (NYSE), to become a shareholder in Universal ahead of the music group’s planned listing in the Netherlands. This would have provided tax and legal advantages for Vivendi while freeing Ackman from some of the legal constraints that normally accompany SPAC mergers. There were no plans for shareholders to be given a vote on the deal.
“The SEC raised a deal killer. They said that in their view the transaction did not meet the NYSE SPAC rules. I would call that a dagger in the heart of the transaction” - Bill Ackman
However, the SEC effectively ended the deal’s hopes when it deemed that the proposals fell short of NYSE SPAC rules. In an interview with CNBC, Ackman said: “The SEC raised a deal killer. They said that in their view the transaction did not meet the NYSE SPAC rules. I would call that a dagger in the heart of the transaction,” only to later clarify that he respected the SEC’s decision and wasn’t criticising the agency.
Shares in Pershing Square Tontine Holdings [PSTH] fell 18.6% between the deal’s announcement on 4 June and its collapse on 19 July.
In a letter to shareholders, Ackman acknowledged he had overlooked issues when structuring the deal. “We underestimated the reaction that some of our shareholders would have to the transaction’s complexity and structure,” his letter said. “We also underestimated the transaction’s potential impact on investors who are unable to hold foreign securities, who margin their shares, or who own call options on our stock.”
Pershing Square Holdings will take a 10% stake in Universal Music Group, drawn from Vivendi’s majority shareholding in Universal. The other major shareholder with 20% in Universal is Chinese technology platform Tencent Holdings [TCEHY].
Ackman sounded positive on the prospects for his investment firm becoming a long-term shareholder in the label, telling CNBC: “Owning a royalty on people listening to music is really a great place to be.
“Netflix [NFLX] is amazing, but they have to spend billions and billions of dollars to create content that is not so valuable the day after you watch it. Music content is really forever.”
Pershing Square Tontine Holdings, the SPAC, now has 18 months left to complete a conventional SPAC merger. Ackman may be running out of suitably large, attractive targets available in that time, having previously fuelled rumours linking the vehicle to the likes of holiday rentals provider Airbnb [ABNB], payments platform Stripe and news and trading platform Bloomberg.
“There are a number of [family-owned] companies that we started a dialogue with a year ago that weren’t ready to go public… A year is a long time, and family owners get older, they make different decisions about estate planning, etc... I think we’re going to find something interesting to do” - Bill Ackman
“The good news is we have a running start,” said Ackman. “We talked to a lot of people. We can easily reengage in those conversations.
“There are a number of [family-owned] companies that we started a dialogue with a year ago that weren’t ready to go public… A year is a long time, and family owners get older, they make different decisions about estate planning, etc... I think we’re going to find something interesting to do.”
Ackman’s struggles over Universal reflect a difficult year for the SPAC market generally, with appetite for the vehicles cooling in 2021 after a record-breaking 2020.
Pershing Square Tontine Holdings is held by one of the largest exchange-traded funds (ETFs) dedicated to tracking SPACs and SPAC-derived stocks. The Defiance Next Gen SPAC Derived ETF [SPAK] counts Pershing Square Tontine Holdings as its sixth-largest holding with 2.42% of net assets, as of 27 July. The fund fell 18.1% in the year-to-date to 28 July, despite gaining 19.2% to 16 February. The Defiance Next Gen SPAC Derived ETF’s top holding, Draftkings [DKNG], has a weighting of 5.88% of net assets and gained 6.9% in the year to 29 July.
The fund’s competitor, the Morgan Creek-Exos SPAC Originated ETF [SPXZ], doesn’t hold Pershing Square Tontine Holdings as of 29 July, and has underperformed its peer. As of market close on 29 July, the fund had fallen 32.6% since 9 February (through 29 July), with its top holding as of 29 July being $388,932 worth of US Treasury bills.