Bill Ackman's SPAC liquidation may not be the end

Jump to heading Bill Ackman's SPAC liquidation may not be the end

Market hysteria, a tougher SEC, and lawsuits all played a role in Pershing Square Tontine Holdings' demise - but Ackman hasn't given up completely.

Bill Ackman's $4 billion special purpose purchase business seemed to be a clever move two years ago. The CEO of Pershing Square Capital had just won $2.6 billion on a timely Covid short bet, recapturing the enchantment that had made him famous. Meanwhile, the markets were volatile, and so-called unicorns — private firms valued at $1 billion or more — were seeking for a means to go public.

Ackman believed his SPAC would be ideal for the situation. "We started Pershing Square Tontine Holdings (PSTH) in the middle of the pandemic because we expected capital markets to be affected by the economic uncertainties produced by the pandemic" said Ackman to investors in a letter this week reporting the liquidation of his SPAC. However, Ackman admits that he was mistaken: "The swift rebound of the capital markets and our economy was wonderful for America but terrible for PSTH, as it made the traditional IPO market a formidable rival and a preferred choice for high-quality enterprises looking to go public."

Ackman's decision to return cash to investors this week was so predictable that it almost feels anticlimactic given all the headlines surrounding his SPAC over the last two years, on top of the market's woes. Nearly 600 SPACS are still seeking firms to merger with, with half or more predicted to follow Tontine's downfall. At least seven additional SPACS created since 2020 have already been liquidated. Even those who have found a mate are in trouble: According to Bloomberg, thirty transactions have been terminated this year.

But if anybody could have defied the odds, it would have been the CEO of Pershing Square. He was no stranger to SPACs, having purchased Burger King via one in 2012. And this time, Ackman designed an innovative structure that he believed would sidestep some of the dangers of SPACs that are now generally acknowledged. Pershing Square, for example, accepted no free sponsor shares and devised a warrant structure to deter investors in his IPO from fleeing, as they sometimes do when the blank check company combines with a real firm. It also didn't require a PIPE — or private investment in public equity — to complete the purchase since Ackman would provide the funds.

However, the hedge fund manager was unable to resist the Covid-induced euphoria that swept the markets, causing the values of several private firms, including Airbnb and Stripe, to be too high for him. Likewise, the SEC started clamping down on SPACS, including refusing to approve Ackman's new agreement.

That transaction was not a merger to take a firm public, as is usual with SPACs. Because Tontine was so enormous and so many other possible targets were coming public, the SPAC intended to invest in Universal Music Group when it was split off from Vivendi. Following the deal's demise due to regulatory obstacles, Tontine shares plummeted, resulting in millions of dollars in losses for the numerous retail investors who considered Ackman's SPAC as the best of the bunch. Then, attorneys wanting to use Ackman's SPAC as a test case sued it, arguing it was truly an investment business that should be subject to harsher restrictions.

Ackman attempted to locate another acquisition, but as he explained to investors, the once-buoyant SPAC market had deflated. He mentioned the bad performance of SPACs that completed mergers over the last two years (an index ETF of post-merger businesses is down 75 percent this year alone), as well as high redemption rates and a slowdown in PIPE financing, which raise dilution from ongoing shareholder warrants.

And, although the bubble caused problems in the past, the sudden and rapid fall to bear market area is also troublesome. "Top quality and profitable lasting growth firms may often delay going public until a point when market circumstances are more attractive," said Ackman to investors. "Although there were deals that were technically doable for PSTH during the last year," he said, "none of them matched our investment criterion."

Last on the list of difficulties was Ackman's SPAC lawsuit, which alleged that PSTH ought to be subject to the Investment Company Act's requirements since it invests IPO funds in government securities held in trust while looking for a target. That case foreshadowed the SEC's strong new regulations proposed this year, and Ackman said that the "risk and uncertainty" of the current litigation, along with the new rules, was impeding its ability to reach an agreement.

Tontine's lawyers have previously said in court documents that they would drop the case if the SPAC liquidates and refunds cash to investors. Meanwhile, its goal of attracting the attention of the SEC seems to have been met. According to one of the proposed SEC regulations, SPACs would be subject to investment company laws if they have not announced a transaction within 18 months and have not completed it within two years.

Despite all of this, Ackman notified Pershing Square Tontine Holdings investors last week that the SPAC will refund their money. As is the case with SPACS, if an agreement isn't completed within a particular time frame - often 24 months — the money held in trust must be returned. In Tontine's instance, it equates to $20 per share, which is close to the price at which the company has traded over the last year. Warrants, including the one Pershing Square holds, expire worthless.

But, as is customary with Ackman, he isn't giving up.
"With the SPAC and IPO markets virtually closed today," he added, "this is a very opportune investing climate for a public acquisition vehicle that does not suffer from the terrible image of SPACs." Despite the SEC's obstacles, Ackman is still attempting to establish Pershing Square SPARC Holdings, Ltd., which would issue publicly traded, long-term warrants known as SPARs. In the case of the SPARC, investors would not be required to commit money up front, removing that legal hazard.

On June 16, Pershing Square SPARC submitted an amended registration statement with the SEC. If it ever gets off the ground, Ackman's SPAC common share and warrant investors will obtain warrants on the new entity.

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(As of July 15, 2022, funds managed by Cohanzick Management, LLC and its affiliates do not own a position in Pershing Square Tontine Holdings, nor Universal Music Group.)