Special purpose acquisition companies, or SPACs, have been a part of the investment world for years, but to say they surged in popularity in 2020 and 2021 would be an understatement. Seeking to capitalize on the opportunities in the market created by the COVID-19 pandemic's disruption, hedge fund billionaire Bill Ackman launched Pershing Square Tontine Holdings (PSTH +0.00%) in June 2020.
Pershing Square Tontine was, and still is, the largest blank-check company ever created, raising $4 billion in capital. And while investors had high hopes that Ackman would use the vehicle to take a massive private company to the public markets, it didn't play out like that. We recently learned that Ackman has decided to throw in the towel and dissolve the mega-SPAC as its deadline to complete a merger nears.
NYSE: PSTH
Key Data Points
Pershing Square Tontine Holdings is dissolving
Pershing Square Tontine Holdings was one of the most hyped SPACs of the 2020 boom. Investors expected the company to land a whale; fintech giant Stripe had been a rumored target, and it is confirmed that the SPAC even held discussions with Airbnb (ABNB 1.84%) before it decided to complete a traditional initial public offering (IPO) instead. Ackman ultimately reached a deal to use some of the SPAC's capital to buy a 10% stake in Universal Music, but regulators had a problem with this unconventional deal structure.
In a July 11 letter to shareholders, Ackman said that he and Pershing's management team believed capital markets would be disrupted for an extended period of time when the pandemic hit, creating favorable conditions for SPACs. But markets recovered quickly, and hundreds of other SPACs came to the market as well, which effectively prevented Ackman to find a deal that met Pershing's investment criteria. In the two years since the IPO, poor performance of other recent SPACs that have completed deals, high SPAC redemption rates, and new SPAC regulations proposed by the U.S. Securities and Exchange Commission (SEC) certainly didn't help.
So, what does this mean for investors in the SPAC? Pershing Square Tontine will distribute the cash in its trust account to investors, and the SPAC will cease to exist. There is a little over $4 billion in the trust account, and management expects to distribute approximately $20.05 per share (they sold for $20 in the IPO). The last day Pershing Square Tontine Holdings will trade on the public markets is July 25, and the funds will be distributed on July 26. No action needs to be taken by shareholders; the shares will automatically be cancelled, and the funds will be automatically paid out.
This could be the first of many
There are still more than 600 SPACs on the public markets that have not yet identified a target. Many are relatively small, but there are some rather large SPACs still looking for targets as well, including Social Capital Hedosophia Holdings VI (IPOF +0.00%), which raised over $1 billion, as did Churchill Capital Corp VII (CVII +0.00%), launched by the same sponsor that took Lucid Motors (LCID 2.33%) via SPAC. These SPACs launched in October 2020 and February 2021, respectively.
NYSE: IPOF
Key Data Points
To be fair, the SPAC market hasn't dried up entirely. We've seen a few merger announcements in the past couple of months. But we've also seen several pending mergers cancelled due to current market conditions, and unless something drastically changes, it's tough to imagine a scenario in which most of the outstanding SPACs end up getting dissolved just like Pershing Square Tontine. Most SPACs have a two-year period to complete a deal, and the bulk of the outstanding SPACs will reach that point by early 2023. So, we could potentially see a wave of similar announcements in the months ahead.
