So the SEC won't let Bill be... $PSTH

Hola from Spain! I’m on my first post-covid vacation, but I woke up this morning to news that Pershing Square Tontine (PSTH) was dropping their deal with UMG due to pushback from the SEC; instead, PSTH will pursue a “traditional” SPAC merger while Pershing Square (the fund) will take PSH’s place and buy 10% of UMG. In response to this drastic overstep by the SEC, stock market futures crashed:

Front page of CNBC this morning (July 19)

Ok, I’m just kidding about the later part; futures are down in part because markets move randomly and in part because Delta is awful (seriously, go get vaccinated. It’ll save both your family and my portfolio). Still, while I can see where the SEC is coming from not wanting this deal to happen, I’m pretty disappointed as a PSTH shareholder. I’ve done extensive work on PSTH (some might say it became an obsession), and I stand by everything I said: PSTH was getting UMG at a very good price, and the deal would have been a masterstroke for PSH and created a ton of value for shareholders. So, again, I’m disappointed that the deal was blocked, and I wanted to put some thoughts down because I’m sure plenty of shareholders have questions similar to the ones floating in my mind!.

Let’s start with why the deal was blocked: the SEC pushed back on the deal structure. I’m not 100% shocked by that; I had previously expressed surprise at the transaction; the SEC had turned down a “Spinning Eagle” SPAC that would have been somewhat similar to the PSTH / UMG deal structure.

Why would the SEC push back on the structure? I think it’s pretty clear the SEC is worried that SPACs are going to be used to fleece retail investors. I can’t blame them; the shenanigans at Lordstown, Nikola, and plenty of other SPACs are awful. The PSTH deal was structured very creatively; in order to meet Vivendi’s objectives, PSTH would use ~75% of the cash in trust to buy shares in UMB (which would be an already public company) while spinning the remaining ~25% cash to shareholders in a “remainco” that would effectively function as a permanent cash shell. In Ackman / PSTH’s case, I think the creative structure was done to create shareholder value…. but if the SEC approved this, you could imagine all sorts of hucksters getting creative with structure in order to fleece shareholders and pointing to the SEC approving the PSTH transaction as precedent for allowing their deal?

An example might highlight this best: a fly by night SPAC sponsor could raise $200m, then announce a deal to buy $100m of Tesla stock and spin the remaining $100m into a permanent cash shell remainco that was free of all the traditional SPAC restrictions (as PSTH remainco would have been). In order to tempt shareholders not to redeem, the sponsor could offer to inject $20m in cash into remainco for “free”. What shareholder could turn that down? You’d have a choice to redeem and get $10/share in cash, or you could not redeem and get $5/share in TSLA stock plus a remainco with $6/share in cash. $11 is greater than $10; I bet there wouldn’t be a ton of redemptions…. but the issue is the SPAC sponsor just backed into a massive cash shell that they could now use with pretty much no restrictions. They could just start paying themselves huge bonuses out of that cash shell and eventually take all of the money for themselves, or they could massively overpay for a company they own in an awful related party deal. Either way, a shady SPAC sponsor could find a way to put a lot of that money into their own pocket, and the SEC wouldn’t really have a leg to stand on. If the SEC tried to block the deal, the SPAC sponsor could sue and say “hey, you let PSTH do this; you’ve already blessed this structure. How can you block ours?”

So I think I get it: the SEC couldn’t let a deal like this go through because the precedent would be awful / encourage hucksters to abuse the financial markets and particularly retail investors. Still, as a shareholder, I’m a little upset; I really liked the UMG deal and I was excited to get the remainco / SPARC exposure.

Where does PSTH go from here? Bill indicated this morning that they’ll be back to work looking for a “traditional” SPAC deal. I’d imagine it will take a little time to ramp the deal pipeline back up; while remainco was prepped to go after some smaller targets, I’m guessing PSTH hasn’t been in recent contact with the larger targets that could handle PSTH’s massive trust. I’m sure PSTH will work diligently to get a deal done as soon as possible, but if I had to guess the absolute earliest we could see a deal announcement is late September. Still, that’s pushing it; I’d be surprised if we saw a deal before November, and I think sometime in Q1’22 is most likely just given the complexities of negotiating a multi-multi-billion dollar deal.

The natural question is who will PSTH’s next deal be with. It’s near impossible to guess, but it is fun to speculate so I’ll throw a few thoughts out. I had previously listed my top 10 PSTH targets (UMG was #3 on that list) and followed that up with some reader thoughts / suggestions on a deal. I’d stand by a lot of that list, but with two caveats.

• First, I think Ackman / PSTH were surprised by the retail shareholder response to UMG. You can see that in Ackman retweeting the sock puppet video breaking the deal down and in the PSTH announcement noting “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.” So I think Ackman realizes a lot of PSTH shareholders want something a little “buzzier” than a “compounder” like UMG.

• If you look at my original target list and think “buzzier”, the first name that would pop up is Mark Anthony Brands, which owns White Claw. But that brings me to my second point: I don’t think Ackman wants the hassle or ESG headache of buying a “sin” stock. So I’d take that off the list.

I personally think TPG would be a good target; it’s looking to go public, it’s a good company in an industry Ackman understands, and I think the big alt asset managers have a bright future. But it’s probably not buzzy enough if you think about my new criteria. I think the new target is going to be a “buzzy” consumer brand with steady financials. Companies like Chick-Fil-A or In-N-Out come to mind. It takes two to tango, so who knows if any of them are willing to deSPAC right now, but I think it’ll be someone like that. The company I keep coming back to is Lego. It’s a great brand with a steady business and a lot of optionality. It’s something that would probably be buzzy as a SPAC (it’d play to a lot of the childhood memory tendencies that have gotten things like Gamestop meme’d), and we’ve already seen a loose parallel do well as a SPAC through the MUDS / Topp transaction.

Will it be Lego? Probably not; again, it takes two to tango, and calling any specific SPAC deal is a moonshot. But that’s the one that checks the most boxes for me.

One last thought while I’m here: it’s probably going to be a little hard for PSTH to get a deal done. The world is awash in capital, and I think companies are leery of SPACs that are running long in the tooth. But PSTH is unique; they’ve got a lot of money and given PSTH always traded above trust post UMG deal, I think it proved to potential merger targets PSTH can offer deal certainty (and the big PSH check to back it up doesn’t hurt!). So Ackman has his work cut out for him, but I think he’ll find something that will be good for everyone. With PSTH trading just a hair above $20 (remember, they have ~$20/share in trust and 2/9 of a tontine warrant attached to shares), I continue to think PSTH is a fantastic risk / reward.

Ok, I’m back to the beach. Sorry if this post is a little out there; I’m a little jet lagged and in vacation mode! I’ll follow up next week if I have any new thoughts or if anyone points out some new angles.