Bill Ackman’s SPAC (special purpose acquisition company) Pershing Square Tontine Holdings, Ltd. (NYSE:PSTH) has 24 months from its IPO (initial public offering) to complete a merger or combination. The IPO was completed on July 22 at a price of $20. I think meeting this deadline is not going to be an easy task, and PSTH stock may languish from here unless it can execute.
The fact that this is not going to be easy is inherently acknowledged in the original Trust account agreement with the SPAC. This is seen on page 4 of the Trust Agreement filing in July 2020. If the company has a letter of intent to complete a combination signed within the initial 24 months of the IPO, it has 30 months to actually complete the deal.
So far, the company has not completed any letter of intent with any company.
Putting A Lot of Money To Work
One reason this is not going to be easy is that PSTH wants to put a lot of money to work. The $4 billion that PSTH has on its balance sheet, plus the $1 billion extra it is allowed to invest in the target company implies that the target company has to be quite large. And there aren’t a lot of such targets that are private.
The sponsors of the PSTH SPAC are two of Bill Ackman’s hedge funds, and a publicly traded London-based company called Pershing Square Holdings (OTCMKTS:PSHZF). These three companies formed another company called Pershing Square TH Holdings. They have the right to put another $1 billion into PSTH once a target deal is announced. They can also buy up to $2 billion of PSTH stock.
As I pointed out in an earlier article, this means that this SPAC could have at least $6 billion to invest — and possibly more, if the sponsor or PSTH uses leverage. So, theoretically let’s assume that Bill Ackman is looking to invest $10 billion.
Then there are the “hangers-on,” as I call them. These include co-investors. (They work out agreements to invest at the same time and with the same rights as a SPAC. Often these are large mutual funds.)
In addition, there are a whole set of hedge funds that make PIPE investments (private investment in public equities), often with the same entry point as the SPAC. This could multiply the investment to say $15 billion.
This implies that the target company will have to be very large for a SPAC reverse merger. Assuming that the target is twice as large, the deal valuation would be at least $30 billion. There aren’t many private companies with deal valuations of $30 billion or higher.
What To Do With PSTH Stock
This leaves the public market. Maybe PSTH SPAC could make a secondary investment in new shares of a large public company. Or it could even acquire existing shares of a large shareholder in a public company. Last year there was speculation that Bloomberg LP would sell a stake (either from Michael Bloomberg or one of his investees in the company).
Recently Bill Ackman apparently told investors that he would not create a second SPAC until he had a target for PSTH stock.
The net result, I believe, is that PSTH stock will languish around its present price. This will last until Bill Ackman can find a large target willing to let him invest in their company. Investors see him as a sort of activist. So I think the management of the target company will have to either be his friends or willing to take him on board.
That is not a really good reason to buy a stock. Even though PSTH stock is at a premium to its $20 IPO, you might find it languishes around that price for a while. After all, the company still has 15 months or so until July 22, 2022, to announce a business combination.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.