Is Pershing Square Tontine Holdings (NYSE:PSTH) another special purpose acquisition company (SPAC) to consider investing in, or is it a stock to avoid? I have written several articles about SPACs and, in general, I do not like them. However, PSTH stock has potential to be an exception.
Reading the general information about Pershing Square Tontine, investors get the feeling that serious consideration and due diligence are being exercised by the management team. This, of course, is positive. The company states:
“PSTH will seek targets in four principal market segments: high-quality IPO candidates, mature unicorns, private equity portfolio companies, and family-owned companies […] PSTH believes that its unique structure and willingness to acquire a minority interest in a company will help facilitate the completion of a transaction on attractive terms.”
But is management alone a good reason to invest in PSTH stock? To me, the answer is no. What I do not like about SPACs is that, until a target company and a business deal is reached, you invest in the unknown.
What will that company be? What are its prospects? Is the deal good, or is it just being made because SPACs have to get a deal within two years of going public? These are the questions that make me not want to invest in blank-check names.
PSTH Stock: Management Is an Asset to Consider
Originally, I did not know a lot about PSTH’s CEO, Bill Ackman, but it turns out he has a long history in the investment industry. Given that, I tend to believe that his expertise — along with the rest of the management team — should deliver value to its stockholders. But this is not a guaranteed recipe for success. In the end, PSTH stock will have to deliver value and capital gains to its stockholders based on history, financial results, its merger target and the valuation.
Pay too much or inflate a merger and acquisitions (M&A) deal and it’s not attractive. Pay the right price and it gets much more appealing to investors. So, the target decision will create value, not just expectations.
But this brings up an argument I’ve made before: should you pay less or more for a SPAC. My answer is simple — you should not. With no other assets other than cash, SPACs often get inflated stock prices. And that’s for no apparent reason other than simple speculation.
Is Pershing Square Tontine Any Different?
According to an official press release, management of the company decided to go public at $20 per share of PSTH stock. This is opposed to the more common practice of $10 per share, what the majority of SPACs list for.
What does this mean? Management may have wanted to make a bold statement — that they are unique and have confidence about their ability to find a great target company. But only time will tell.
On top of that, though, why did management make things complicated by offering “Distributable Tontine Redeemable Warrants” as well? I don’t know for sure, but in general, making things too complex when it comes to investing is not always a good thing. In the end, PSTH has made a statement, but I’m not sure that that makes it different in the right way.
Acquisition Criteria and a Well-Detailed Business Plan
However, what I do like a lot about Pershing Square Tontine is its strict list of investment criteria for the acquisition opportunities it considers. This shows commitment and professionalism. But there is also a big “but” to consider here.
Pershing Square Tontine notes on its site that “we may decide to complete our initial business combination with a target business that does not meet all of these criteria.” So, the SPAC is contradicting itself a bit. While it has narrowed the list of potential target businesses, it also has the option to bypass its own rules.
Personally, I would prefer that any exceptions would not be present so that PSTH’s own criteria is met. More specifically, I’d like the company to merge with a target that meets these marks:
- “Simple, predictable, and free-cash-flow-generative”
- “Formidable barriers to entry”
- “Strong balance sheet”
- “Attractive valuation”
- “Exceptional management and governance”
The other criteria that Pershing mentions — such as a large capitalization and minimal capital market dependency — are not too important to me. In fact, if I had to pick only two criteria, I would choose the strong balance sheet combined with an attractive valuation.
That’s because most SPACs ignore valuation and fundamentals completely. This makes them too risky. So, if PSTH stock is to be worthwhile, I’d prefer a more prudent, fundamentally minded approach.
Is This an Exception to the Rule?
At the beginning of this piece, I talked about PSTH being a possible exception to my dislike of SPACs. So, what could make it that exception to my philosophy on investing in SPACs? A target company with a history of consistent profitability, recurring revenue, strong fundamentals, an attractive valuation and an economic moat.
PSTH stock seems to be heading in this direction. But as long as it is too far from its initial $20 per share price, it’s still not attractive enough. On the contrary, it has become too expensive and too risky.
As such, I’d recommend that you only consider buying it as close as possible to the $20 mark. Today, it’s trading over $28 and I cannot justify that premium, especially without a merger target picked yet. Needless to say, expectations are high. But paying a premium 42% above the IPO price now, only to still have wait for a high-quality pick, does not make PSTH a buy. Right now, it’s too high to pay to wait.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.