Why Pershing Square Tontine Could Be Put In the Penalty Box

Editor’s Note: This article was updated on April 26, 2021, to remove incorrect information about its price.

SPAC hysteria has died down of late, to say the least. Investors in Pershing Square Tontine Holdings (NYSE:PSTH) stock appears to be bellwethers of this environment.

A picture of a notepad with Special Purpose Acquisition Company written on it, surrounded by office supplies.
Source: Dmitry Demidovich/ShutterStock.com

Indeed, PSTH is one high-profile SPAC which has been in the spotlight of late. Put forward by acclaimed billionaire hedge fund manager Bill Ackman, this SPAC is one of the largest ever. The SPAC’s $4 billion IPO actually had to be capped. Ackman had found investors with $12 billion in their tuxedo pants ready to put into his fund. A couple days of marketing via a road show was all it took to have a 3x-oversubscribed SPAC.

But that was way back in 2020, when the SPAC days were good.

Today, the SPAC environment is a lot different. Yes, some home runs have been hit by high-profile money managers. But for the most part, it appears the valuations ascribed to many of these venture capital vehicles (which is really what they are) haven’t caught up to the growth implied by the valuations of these SPACs.

For SPACs that have taken longer to find a merger target, discounts are increasingly being applied at an accelerated rate. Or, at least, a reduction of what many believe are obscene premiums investors are willing to pay for these SPACs. And Ackman’s fund has been without a merger target for some time.

Patience Is Not a Virtue for SPAC Investors

With the market becoming increasingly impatient with these special purpose acquisition companies, I think investors may continue to apply a “time discount” to PSTH stock.

Now, that might be a little unfair. After all, this is a massive SPAC. The $4 billion in cash PSTH holds, plus various additional investments PSTH and its sponsors can make directly and via PIPE investments could result in a mega deal.

As I’ve pointed out before, this is a supply and demand game. The supply of multi billion-dollar private companies looking to go public via a reverse SPAC merger is quite small. And Ackman’s under intense pressure via impatient shareholders to do a deal.

Thus, the fact that a deal hasn’t come about as of yet could be perceived as a good thing. With any large deal such as this, one would hope Ackman and his PSTH associates would take their time in vetting the options, however few there are. Indeed, due diligence is everything for any investment. For a deal of this size, it’s crucial.

That said, investors in SPACs are taking a shot in the dark. They want certainty, in the form of an announced merger partner. My belief is the longer this drags on, the lower the premium investors will be willing to pay for PSTH stock.

Are Investors Speculating or Investing in PSTH Stock?

In essence, I view most SPACs as primarily speculative vehicles for investors. Now, every investment involves some degree of speculation. We speculate about how fast we think earnings will grow, how the political landscape will look, or how a particular vertical might turn out for a given investment. That’s part of the game.

However, SPACs are really a shot in the dark. Investors are buying into a company that doesn’t exist yet (or hasn’t yet merged with said SPAC). In other words, they’re betting on the value they see in the fund manager running the SPAC. In this case, Ackman has proven his worth in the past and made some pretty impressive bets.

However, PSTH stock trades at a premium to NAV of around 20%. This premium coincides with a similar discount for Ackman’s primary fund Pershing Square Holdings (OTCMKTS:PSHZF).

Investors who believe Bill Ackman is the best thing since sliced bread should view this valuation discrepancy as a nice arbitrage opportunity. Indeed, it appears euphoria around SPACs has created some unique arbitrage scenarios today. Either the SPAC is overvalued or Mr. Ackman’s fund is undervalued, but at some point, these valuations should converge.

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


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