Bill Ackman’s special purpose acquisition company (SPAC) Pershing Square Tontine Holdings (NYSE:PSTH) has eight criteria for its target. His PSTH stock lists them in the latest 10-K.
Unfortunately, they may be so stringent that there may only be a few companies that meet the standards.
The criteria are also very exclusive. Even if any target company were to meet all of these criteria, they would also have to be willing to sell to a public SPAC.
And they would have to be willing to be public after that.
PSTH Stock and the SPAC Criteria
The SPAC wants a large-cap company that could be a candidate to be in the S&P 500, with a track record of growth and free cash flow. That alone could narrow the search down to less than 500 companies. Then the company has to have a “formidable barrier to entry” in its business, with limited exposure to factors PSTH cannot control.
Next, the company must not have any dependency on capital markets or “not highly reliant” on capital markets to operate and grow its business. This criterion is fairly difficult. Why would any company in this situation even want to sell to a highly visible and controlling SPAC character like Bill Ackman?
And that is not it. Bill Ackman’s PSTH SPAC insists on an attractive valuation in relation to its “long-term intrinsic value.” In addition, the balance sheet has to be “conservatively financed,” which probably means not deep in debt.
So it may take a long time, much longer than expected, for a high-quality company to be willing to sell to PSTH SPAC. It has to be large, cheap, self-sufficient, free cash flow positive, growing nicely, without large debt. It also must have a moat and/or not be dependent on outside non-controllable factors.
Good luck with all that. That probably accounts for why the SPAC is taking its time to find a suitable target company. Good thing it has until July 22, 2022, to find the target.
What to Do With PSTH
PSTH stock is trading around $24, which is 20% over the IPO price of $20 per share. It has not moved much, as there is no indication now whether the SPAC will ever be able to find a company to meet all these criteria. Plus, they have to be willing to sell in a reverse merger to PSTH.
The most likely possibility is that the stock is going to languish for a good while. And then suddenly one day the company will make an announcement about a potential merger. Or there will be a news story someday indicating that Ackman’s SPAC has found a likely target.
One cannot fail to see the irony in this. Ackman has a reputation as a gentleman activist in the market. But now he is seeking a company that willing will allow him to be on its board, even though the company doesn’t apparently need Ackman. And if the company meets all Ackman’s criteria, it likely wouldn’t need the capital from a SPAC reverse merger. Ironic indeed.
And by the way, now the SEC is getting more interested. The agency apparently is scrutinizing all the new big SPAC deals, according to The Wall Street Journal. The point the article made is that the SEC may have recognized that it has not had as much oversight on SPAC deals as it does on IPOs.
So, not only does the target have to pass all these criteria, but now they have to be willing to endure SEC scrutiny.
Sorry to say this, but I think that this means that PSTH stock is going to have limited upside from here. It is not even a clear-cut case that if Ackman can find a target that the deal will go through.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
