Shares of Pershing Square Tontine Holdings (PSTH) have tanked today, down by 11% as of 11:30 a.m. EDT, after the special-purpose acquisition company (SPAC) confirmed that it is in negotiations to acquire 10% of Universal Music Group (UMG) for $4 billion, valuing UMG at $40 billion. The Wall Street Journal reported yesterday that the SPAC was nearing a deal with UMG, the largest record label in the world.
UMG is currently owned by Vivendi, which already sold a 20% stake in UMB to Chinese tech giant Tencent. Vivendi is preparing to go public and previously acknowledged that it was contemplating selling another 10% to an unnamed "American investor." It now appears that Pershing Square Tontine, the SPAC run by activist value investor Bill Ackman, is that investor.
Pershing Square Capital Management, the SPAC sponsor, has established Pershing Square SPARC Holdings as a vehicle to distribute transferable rights to existing Pershing Square Tontine shareholders, allowing them to purchase SPARC shares. Under the proposed transaction, current investors of the SPAC would receive a pro-rata share of UMG at an estimated cost of $14.75 per share and another pro-rata share of Pershing Square Tontine, which will remain a SPAC and represent $5.25 per share in cash.
The deal is different from most SPAC transactions. Pershing Square Tontine is not merging completely with its target company, but rather buying a stake and distributing those UMG shares to its investors. Pershing Square Tontine has a net asset value (NAV) of $20 per share in cash, compared to the $10 NAV that the vast majority of SPACs have.
The transaction is structured in a complex way with additional details around warrants and convertibles that investors should assess fully. Pershing Square Tontine is among the largest SPACs in terms of the cash that it raised, so expectations were running high for a blockbuster acquisition. It appears that investors are disappointed with the target that Ackman selected.