(Bloomberg Opinion) — Bill Ackman wasn’t content just to raise the largest SPAC ever — the $4 billion Pershing Square Tontine Holdings Ltd. He wanted to reinvent how blank-check firms operate. The deal he proposed in June to purchase a stake in Universal Music Group was also one of the most complex the world of special purpose acquisition vehicles had ever known. A slide deck outlining its various contortions ran to 130 pages.
Ackman may now have to ponder whether there’s perhaps a thing as too much complexity. On Monday $PSTH, as it’s referred to by its retail investor devotees, announced it will no longer proceed with the Universal transaction. The U.S. Securities and Exchange Commission raised objections and shareholders also gave the deal the thumbs down by pummeling the stock. So that Universal’s owner, Vivendi SE, isn’t left hanging, Ackman’s investment firm, Pershing Square Holdings Ltd., and affiliates will buy a Universal stake and assume the transaction costs. Universal will still become a public company, it’s just that Ackman’s SPAC won’t be involved.
Ackman’s determination to innovate and reform SPACs remains admirable. They’re often ridden with conflicts, excessive fees and potential shareholder dilution. But confidence he can pull off a top-caliber deal has taken a hit here. In short: He was too clever for his own good.
The SEC apparently had several issues with the way the Universal deal was structured. Pershing Square didn’t spell out precisely what these were but said the primary sticking point was whether the structure of the Universal deal qualified under New York Stock Exchange rules.
It was certainly unique and complex undertaking. For starters, Universal wasn’t intending to take over PSTH’s stock market listing on the NYSE via a merger as is usually the case. Universal is being listed in Amsterdam and Ackman’s SPAC planned just to acquire a 10% stake and then distribute shares of the world’s largest music company to its shareholders. Instead of offering them a vote on the transaction, Ackman proposed a speedier redemption tender offer, whereby anyone who didn’t like the deal could get their money back (as they can in regular SPAC transactions).
With the $1.6 billion cash left over after buying the Universal stake, Ackman’s SPAC planned to pursue another deal. And the final twist, shareholders would also get a right to put cash into another future Pershing Square transaction. He dubbed that a “SPARC,” a special purpose acquisition rights company. Instead of asking for money upfront, as most SPACs do, Ackman would find a target first and then shareholders could decide if they wanted to put money in. This would avoid expensive underwriting fees and investors parking money in the SPAC for a long period for little return. Unlike a regular blank-check firm, it wouldn’t be under time pressure to find a deal.
Elements of this were quite attractive and Ackman was adamant the SPAC shareholders were getting a lot of value. However, it appears that the novel approach was a stretch too far for the SEC. PSTH decided the regulator’s objections couldn’t be overcome.
It wasn’t just the SEC that had doubts though: Trading at a large premium to the value of its cash holdings prior to the Universal deal being announced, the stock has since declined 18% to $20.63, not far from the $20 price at which shareholders could tender to get their money back. Surprisingly, the company said it hadn’t anticipated the potential impact on investors who couldn’t hold foreign securities, who margin their shares or who own call options on the stock.
PSTH has a large cohort of retail investor followers and many of them were convinced Ackman would serve up a juicy transaction. Instead, they’ve received an unpleasant lesson that paying more for a blank-check firm share than the value of the cash it holds is risky when you don’t yet know what it will buy.
When outlining the deal to shareholders last month, Ackman allowed himself a little boast: “I think I’ll put out a little advertisement — we’re pretty good at this stuff. And so if you’re a counterparty that has got some complex legal, tax, cross-border or other issues, we’re here to solve your problems.”
Unfortunately, the plan brought on headaches instead. Ackman has 18 months to find an attractive target and restore the retail crowd’s faith in him. He’s promised that next time the deal will be structured as a “conventional SPAC merger.” After this searing experience, the simpler the better.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.