Play Bill Ackman’s SPAC Without the Inherent Frothiness

InvestorPlace contributor David Moadel believes Bill Ackman’s special purpose acquisition company, or SPAC, is mostly hype, suggesting the time to buy Pershing Square Tontine Holdings (NYSE:PSTH) and PSTH stock has passed investors.

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On Jan. 13, Moadel argued that PSTH was starting to get frothy. That was at $29. 

I don’t believe this to be the case and said so several days later.

There’s an expression in sports that you ride the hot hand. If a goalie’s won a bunch of games in a row, even if he’s not the starter, you let him play his way out of the net,” I wrote on Jan. 19. 

“I don’t think it’s inappropriate to say that betting on Ackman is very much the same situation. I can guarantee you there are a bunch of smart institutional investors who’ve piled on the Ackman bandwagon.”

In the weeks ahead, we’ll see how this friendly disagreement plays out. 

For those who agree with my colleague but like the idea of backing a thoroughbred like Ackman, you might want to consider going over-the-counter to buy Pershing Square Holdings (OTCMKTS:PSHZF), Ackman’s London Stock Exchange-listed closed-ended investment company. 

Here’s why.

Pershing Square Holdings and PSTH Stock

According to the SPAC’s prospectus, Ackman indirectly, through various affiliates of Pershing Square Holdings, held 50% of its voting power after completing the $4-billion offering in July 2020. 

In terms of the equity, that worked out to an economic interest of 42.9%. Now, like most SPACs, once the target is found and the combination completed, Ackman’s stake in the merged entity will drop considerably. 

In Pershing Square Holdings’ August 202o report to shareholders, Ackman had lots to say about PSTH.

“On July 22nd, Pershing Square Tontine Holdings, Ltd. (“PSTH”) completed a $4 billion IPO on the New York Stock Exchange. We designed PSTH to be the most investor- and merger-friendly SPAC in the world. Apparently, investors agreed, as we had more than $12 billion of demand for the offering when we stopped marketing the IPO on the second day of the road show,” the report stated. 

“We capped the IPO at $4 billion, which, when added to the Pershing Square funds’ minimum $1 billion commitment, created the largest blank check company in the world.”

Ackman reasoned that by offering to only take a minority position in the ultimate target, the premium it would have to pay for this investment wouldn’t be nearly as onerous as if it were a private equity buyer. 

I won’t go into further detail. Suffice to say; you should read the report to understand better the pitfalls of SPAC investing. The content is extremely educational.

PSTH Valuation

In Ackman’s report, he points out that PSTH traded at 106% of its net asset value (NAV) on Aug. 25, 2020. That was based entirely on the SPACs cash held in trust. That’s $21.20 a unit. Six months later, PSTH trades around 145% of its NAV. 

Given the potential combination, Ackman defended the premium:

“PSTH trades at a premium to its cash NAV because the market believes that it is probable that we will find an attractive merger candidate and complete a transaction that creates significant shareholder value,” Ackman stated. 

“We believe that PSTH’s share price reflects the compound probability of our completing a transaction, the potential increase in the stock price at the time of announcement, and the timing of transaction announcement and closure.”

I couldn’t agree more, which is why I’ve argued $29 isn’t too high a price to pay for PSTH stock, even though the target’s identity is still unknown.

Six months in, if I owned PSTH, rather than being worried it won’t find a target, I’d be encouraged that it’s six months closer to making an announcement. Early in my career, I worked in sales for a guy who used to say, “Be happy for the no’s because that gets you closer to a yes.”

But I digress. 

The Rationale for Buying Pershing Square Holdings

In 2020, Pershing Square delivered a total return after fees of 70.2%. That’s on top of 58% in 2019. That’s some performance despite its investment in Howard Hughes (NYSE:HHC) losing 31% of its value over the past year, easily the fund’s worst performer in 2020.

Pershing Square Holdings’ NAV was $46.61 as of Jan. 12, 26% higher than its share price. Put another way, its share price was trading at a 21% discount to its NAV. Historically, that’s typically been the case, although the size of the discount has varied.

The downside to buying PSHZF over the counter?

You’ll pay management fees of almost 3% a year, fees that won’t go away in down markets. At the same time, you can buy Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) with no fees and plenty of long-term optimism. 

Something to keep in mind.

However, if you want to get on the Ackman bandwagon and don’t want to pay a 145% premium to NAV, Pershing Square Holdings is the only way other than a SPAC ETF that can make this happen.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared, include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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