When the boom of special purpose acquisition companies was in full swing in late 2020 and early 2021, it was obvious that the market was becoming saturated and not all of the hundreds of blank-check companies would find deals. And of those that did find acquisition targets, not all of them would be worth investing in.
That's why I initially added Pershing Square Tontine Holdings (PSTH) to my portfolio. For one thing, its size put it in a class by itself. Its $4 billion war chest meant it could pursue targets that none of the hundreds of others could. Early speculation was pointing toward fintech giant Stripe as a potential target. And, with billionaire investor Bill Ackman at the helm and an investor-friendly "tontine" warrant structure, it seemed like a good place to park some capital.
However, to call the past couple of months a disappointment would be an understatement. After the latest shareholder letter from Ackman, I'm preparing to cut my losses and put my capital to better use elsewhere.
The latest developments
If you aren't familiar with Pershing Square Tontine Holdings' original deal, it essentially had three parts:
- Acquire 10% of Universal Music Group with about three-fourths of the SPAC's capital.
- Leave the remainder in the SPAC to find another acquisition target.
- Create a new type of investment vehicle known as a SPARC (the "R" stands for "right"), which is similar to a SPAC but doesn't collect any investor money until a deal is reached, and distribute one warrant per Pershing Square Tontine share to allow investors to eventually participate.
Unfortunately, this deal fell apart shortly after it was announced due to regulatory issues. In simple terms, a SPAC is designed to combine with a business and take it public, not to buy a minority stake in a business going public via other means. While I was disappointed with the outcome (specifically the apparent lack of due diligence before the deal was announced to figure out if it could be completed), I was willing to hold on with the hopes Ackman would find another target.
However, Ackman recently issued a letter to investors with a big change in strategy. Essentially, because of a shareholder lawsuit, which Ackman feels is without merit, it will be extremely difficult for the company to complete a business combination in the time it has left to do so. You can read the full letter for Ackman's commentary on the matter and details of the pending litigation.
Now, Ackman has a two-part plan:
- Accelerate the formation of the SPARC and distribute warrants to Pershing Square Tontine shareholders. The formation of the SPARC will require a New York Stock Exchange rule change and is by no means guaranteed at this point.
- If and when the SPARC gets regulatory approval, dissolve Pershing Square Tontine Holdings, and distribute the $4 billion in the trust account ($20 per share) to investors.
Why I'm selling
Simply put, there seems to be little reason to keep my money parked in this SPAC indefinitely now that a traditional SPAC business combination is essentially off the table. I was willing to hang on after the Universal deal was abandoned because there was still plenty of time to find another target, and management indicated that's exactly what it planned to do.
However, after Ackman's latest update, all Pershing Square Tontine Holdings seems to be is about $20 per share that will remain idle in a trust account, and the possibility of receiving a warrant to participate in a future deal if and when the proposed SPARC structure is approved. Not only is there absolutely no guarantee a SPARC will even be allowed, but if it is, the vehicle has several years to identify a target.
In other words, the entire investment thesis at this point is centered around a theoretical new investment vehicle being launched and finding a business to acquire at some point in the future. It just doesn't seem like a smart idea at this point to keep capital tied up, so I've decided I'm going to move on. If the SPARC is approved, I may end up investing in a small amount of the SPARC warrants. But at this point, that's a very big "if," and the waiting game doesn't seem worth it.
Should you sell or hold on?
In a nutshell, I'm disappointed in how Pershing Square Tontine Holdings has played out so far and I personally think that it's a lot to ask of investors to keep substantial amounts of capital tied up with the hopes that a SPARC will be allowed to exist.
Having said that, if you're a believer in Ackman's deal-making abilities and you want to get in on the ground floor of his SPARC if and when it happens, you may want to hold on. One silver lining is that with about $20 per share sitting in a trust account, downside risk is rather limited at this point. The best thing you can do is to weigh the pros and cons of the situation and make the decision that makes the most sense for you.