Bill Ackmans SPAC Tanks on the proposed deal with Universal Music Group

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    According to a Wall Street Journal Report yesterday, Pershing Square Tontine Holdings (NYSE: PSTH) confirmed that talks are in fact going on to acquire part of the Universal Music Group (UMG).

    The Special Purpose Acquisition Company (SPAC) intends to buy a 10% stake in UMG for $ 4 billion and value the world’s largest record label at $ 40 billion, and distribute those shares to its shareholders. UMG represents many of the greatest artists in the world including Taylor Swift, Alicia Keys, Elton John and Pearl Jam and many others.

    Investors appear disappointed as Pershing Square Tontine shares fell 11% on Friday at 12:30 p.m. EDT.

    This is not a typical SPAC merger

    The transaction is as unique as it is complex. Unlike most SPAC transactions where SPAC merges with a target company, Pershing Square Tontine does not actually merge with UMG.

    The SPAC sponsor (Pershing Square Capital Management) creates a new Pershing Square SPARC Holdings. Once the transaction is complete, Pershing Square Tontine’s current shareholders will own three different securities:

    • A pro rata share from UMG worth approx. 14.75 USD.
    • One proportionate share of Pershing Square Tontine valued at $ 5.25 per share in cash.
    • A transferable right to buy one share of SPARC for a period of five years known as SPAR.

    While most SPACs go public with a net asset value (NAV) of $ 10 per share, Pershing Square Tontine was unique in that it went public last summer with a NAV of $ 20 and around 4 billion US dollars, making it one of the largest SPACs on the market.

    Since the proposed transaction is not a merger, Pershing Square Tontine Warrants will not become exercisable as would normally be the case with a merger. Instead, the SPAC will enable warrant holders to exchange their warrants for additional Pershing Square Tontine shares through an exchange offer. Warrants are derivatives that allow investors to buy the underlying stock at an exercise price and are included free of charge in SPAC Shares as a sweetener for institutional investors.

    There is also no PIPE (private investment in public equity) component. Instead, Pershing Square Capital Management has entered into various forward purchase agreements with various affiliates to bring an additional $ 1.6 billion to the table. After using the $ 4 billion trust assets combined with the additional capital and paying the transaction fees, SPAC expects to have approximately $ 1.5 billion in cash remaining.

    Early SPAC Investor Reward

    The SPAR received by SPAC shareholders represents the right to purchase shares in SPARC for $ 20 per share, which can only be exercised if SPARC identifies a target company for the merger. The SPARC will not raise money through a traditional offering, but instead will receive money from the exercise of SPARs.

    Assuming all SPAR investors exercise this right, SPARC will have between $ 6.6 billion and $ 10.6 billion to use to fund another merger deal. The tangled terms reflect Bill Ackman’s commitment to rewarding early Pershing Square Tontine investors. The famous activist value investor previously said on social media that he would find a way to allow these investors to buy into Ackman’s next SPAC. The SPARC is not quite a SPAC, but it will work in a similar way.

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    Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Millennial Money is part of The Motley Fool Network. Millennial Money has a disclosure policy.

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