The stock market love affair for Special Purpose Acquisition Company is fading very fast. Fortunately, investors in Pershing Square Tontine Holdings (NYSE:PSTH) did not give up on its prospects. When Bill Ackman affirmed that he would reward loyal investors on Feb 24, buying volume in PSTH stock rose.
Pershing is a compelling SPAC as it nears a deal.
PSTH Stock Investor-Friendly
Unlike Churchill Capital (NASDAQ:CCIV), whose dilutive deal hurt investors, Pershing appears friendly for investors. For example, the firm may give investors the first preference to buy into PSTH-II at the IPO price. This would reward shareholders because they will not have to buy the stock in the secondary market. The stock typically rises sharply after launching. That would erode much of the initial gains.
Another positive from PSTH getting close to a deal is “PSTH2.” Getting a deal done the first time would win investor confidence. This would attract investor capital when Pershing sets up a second SPAC.
Merger Rumors
Previously, markets speculated that PSTH would merge with Stripe. On Dec. 2020, Stripe Chief Executive Officer Patrick Collision said that there was no such deal. In Oct. 2020, Ackman said he was looking at companies within the $10 billion to $15 billion range. On its website, PSTH said it would “seek targets in four principal market segments.” Those are “high-quality IPO candidates, mature unicorns, private equity portfolio companies, and family-owned companies.”
Once PSTH announces a minority interest in one or more firms, the markets may “sell on the news.” The market is expecting a big and aggressive deal. If Ackman fails to deliver, disappointed investors will find an excuse to sell the SPAC holding. Already, CCIV stock fell by 42% post-merger with Lucid, announced on Feb. 22, 2021.
Ever since it completed its merger with Trine Acquisition, Desktop Metal (NYSE:DM) flew higher. But last month in Feb., the market erased nearly all of those gains. DM stock topped $34.94 only to end at around $20 last week.
Brilliant value investor Seth Klarman, who manages Baupost, reduced his holdings in PSTH. At the end of Sept. 2020, Pershing Square was the fund’s six-largest position.
Rising Uncertainties
After PSTH announces its target announcement, the stock should pop just as the other SPACs did. After that happens, investors may “sell on the news” to book their gains.
A PSTH merger with a company in the $70 billion range would raise the value of the target company. The value of the associated sponsor warrants would fall.
Bill Ackman’s SPAC execution is also a risk factor. History has shown that when he focused too much on one investment idea, investors suffered. For example, his Herbalife Nutrition (NYSE:HLF) and Bausch Health (NYSE:BHC) – then known as Valeant – investments faltered. Fortunately, the stock market is still in a euphoric state of mind. Investors are open to speculation, giving PSTH plenty of latitude to make a deal.
Though a Bloomberg spokesperson denied it at the time, a PSTH deal with Bloomberg would give investors the best outcome. Redditors discussed this notion over four months ago. Still, media reported at the time that PSTH wanted to take Airbnb (NASDAQ:ABNB) public. And although that did not happen, the market has a high expectations of a mega deal on the way.
Your Takeaway
SPAC investing looked like a sure thing for months. That ended in the last week as markets faltered. The technology index fell when investors grew wary of risk. Pershing stock held up while many SPAC stocks fell hard.
Pershing stock is not immune to the same selling pressure. Ackman has a proven track record and is taking his time to find the right deal. Shareholders may get a decent payout when that happens. Still, the stock is already above its $22 low. So, investors should not expect massive short-term returns.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
