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Breaking Down Bill Ackman's Universal Music SPAC Deal

By Matthew Frankel, CFP® - Updated Jun 22, 2021 at 3:39PM

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This could be the most complicated SPAC deal yet, but we've got you covered.

Investors finally learned what Pershing Square Tontine Holdings (PSTH) will be acquiring, and instead of taking an entire company public, the special-purpose acquisition company (SPAC) will be investing in a 10% stake in Universal Music Group. As if that wasn't different enough, there are two more components to this deal that investors need to know. In this Fool Live video clip, recorded on June 7, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser break down the deal and tell investors what they need to know.

Matt Frankel: I could spend the entire episode breaking down this deal; it's that complex. First of all, it's not official yet, Ackman confirmed that these talks are happening and gave details of what it would look like. It's not confirmed, we don't know that it's going to happen, and they don't even know if they can do everything that Ackman wants to do. Take this with the grain of salt. There's three big components to what Pershing Square Tontine Holdings is doing. Number one, they're buying 10% of Universal Music for $4.1 billion. It values that company at $42.5 billion including debt. Massive and he was right when he said it was targeting an iconic company before we knew what it was.

Jason Moser: Yeah.

Frankel: That's a pretty iconic music business. They have some of the biggest artists in the world. They have the best intellectual property in music. There's a lot of value there, no doubt about it.

Moser: Sure.

Frankel: Unlike most SPACs, this is not an acquisition. They're just buying a 10% stake, and Universal is actually going public on its own, on the Euronext, so in Europe, they're going public.

Just to break that part of the deal down, Pershing Square Tontine raised $20 a share in its SPAC IPO. This part of the deal is consuming about $14.75 a share, a little less than three-quarters of the SPAC's capital is going into the Universal part of the deal. The average analyst values Universal at about $50 billion, so Ackman's getting a deal. That's about 15% more than Pershing Square is paying for its stake. It's a pretty good deal if they're right and that's what it's actually worth. That's part one.

With the other $5.25 a share, where about $1.5 billion all together that Pershing Square Tontine will have, that's going to stay in the SPAC. Pershing Square Tontine, even after the universal acquisition and spinout of shares, there's still going to be searching for a deal with that other $1.5 billion. Pershing Square itself has about $1.6 billion in money, it could commit to that if it wanted to, so Pershing Square Tontine will still have $3 billion or so to look for another acquisition target. But since they've already found the Universal one, it removes a lot of the constraints that most SPACs have, in that specifically, there's no time limit now.

Moser: Yeah.

Frankel: Most SPACs have two years to find a deal. They found the deal, they found the Universal deal, so with the rest of the money, they could take their time, that could sit for 10 years until they find another deal. That's a big advantage and remember Buffett said, give me money and tell me I have to find the business in two years, I'll do it. But I'd rather have all the time I need to find the best deal.

Moser: Yeah.

Frankel: Now that's part two. There's still some money in a trust that Ackman could use to acquire another business. Part three, and this is the most interesting part in my opinion, is the SPARC, S-P-A-R-C, which stands for special purpose acquisition rights company. Say that three times fast. For every square of Pershing Square Tontine that investors hold, they're going to get one SPAR, special-purpose acquisition right. This is a security. It's similar to a warrant that allows them to buy a share in that SPARC that is being created at $20 a share, but only after a new merger target is announced. Think of this as like Ackman's next SPAC, except it's different in that, it doesn't even exist, really, until a new merger target is announced.

So shareholders are essentially getting a warrant to buy one of these shares at some point in the future, and this component itself could have a good bit of value that Pershing Square Tontine warrants themselves right now trade for $6 a share roughly, and they have a higher exercise price, $23, whereas these would have a $20 exercise price. These won't have any redemption clauses, they won't have any time constraints. This company, like I said, could take 10 years to find a deal if it wants to. [Correction: The SPARC will have five years.] It eliminates a lot of the downsides to SPACs. Like the big chunk of the company that the sponsor gets for free, it eliminates a lot of the bias toward the sponsor.

The SPARC that is being created, and then I'll shut up after this point. The SPARC that's being created will have up to $10.6 billion to put toward a deal. If you've got Pershing Square Tontine, which is already the biggest SPAC ever, created with $4 billion, had a lot of money. This one will have up to $10.6 billion to commit to an acquisition deal, and the Pershing Square Tontine holders are getting these for free. I've read 10 different sum-of-the-parts estimates from different analysts since this was announced; they all ranged from about $27 to about $33 a share.

Pershing Square Tontine is trading for like $23 a share. There's some upside potential the SPARC investors, especially, are going to have to be patient on, but hopefully, that broke it down a little bit, at least a little clarity to it.

Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP owns shares of Pershing Square Tontine Holdings, Ltd. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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