It’s increasingly clear that the boom in SPACs (special purpose acquisition companies) turned into a bubble. The question for SPACs like Pershing Square Tontine (NYSE:PSTH) stock is how much further the bubble has to deflate.
By the standards of the group, PSTH stock actually has held up well. A current price at about $25 represents a healthy premium to its $20 redemption price. According to Bloomberg, some $81 billion worth of SPACs now trade below their redemption price (usually $10 per share).
That’s not necessarily good news, however. PSTH still assumes a substantial amount of equity value will be created whenever Pershing Square Tontine finally finds a merger target. That itself shows that the core belief that created the SPAC bubble still exists — which in turn suggests that the bubble isn’t quite done inflating.
The Math Problem Still Holds
Back in February, I walked through the detailed math surrounding PSTH stock.
There are warrants — some of which admittedly will be issued to PSTH shareholders once the merger closes — and a forward purchase agreement for potentially $1 billion in new units (shares plus warrants for a total price of $20 each).
When you account for that dilution, there should be 333.2 million shares outstanding, including the original 200 million shares plus warrants plus the forward purchase agreement. Including cash generated from warrant exercises, those shares cover a cash hoard of about $6.9 billion.
This structure actually is far better than most SPACs. The standard structure often sees 20% of the SPAC’s shares granted to the sponsor for minimal consideration (often $25,000). In this case, the sponsor — an affiliate of Pershing Square Capital, run by Bill Ackman — gets nearly 6% ownership in the post-merger company via warrants exercisable at $24 three years after the merger closes. (PSTH directors get another 0.26% on the same terms.)
So, ostensibly, Ackman and Pershing Square get nothing if the merger does not perform well in the long term.
Still, even disregarding those warrants, PSTH has about $20.74 per share in cash. It’s now just below $25. The market still is acting as if Pershing Square will create roughly $1.5 billion in equity value in its deal — simply to support the current PSTH stock price.
First Is Better
That’s not an easy task. Investors forgot that in bidding up so many pre-merger SPACs well past their redemption price. In retrospect, it was Churchill Capital IV (NYSE:CCIV) that highlighted the insanity, as CCIV stock moved near $60 even before the details of its merger with Lucid Motors were confirmed.
The problem now is that there are simply so many SPACs out there. Three hundred went public in the first quarter alone. And with a couple of hundred mergers agreed to and/or closed, the potential supply of SPAC targets has diminished.
This is a particularly big problem for Pershing Square Tontine, simply given its size. It’s far and away the largest SPAC ever.
Ackman has said among his targets would be “mature unicorns.” But several companies fitting that description already have gone public: Airbnb (NASDAQ:ABNB) (which reportedly turned Ackman down), DoorDash (NYSE:DASH), and cryptocurrency exchange Coinbase.
What targets remain will have leverage with PSTH. They can negotiate better terms with one of the hundreds of SPACs also looking for a deal. Or they can go the initial public offering route.
Expecting $2 billion in value creation — the minimum really needed to own PSTH, even after the pullback — seems awfully aggressive in that context.
The need for significant value creation still is a problem for SPACs more broadly, owing to the substantial dilution created by founder shares. For PSTH, the combination of the premium to the cash hoard and the sheer size creates its own issue.
Why PSTH Stock?
And that gets to another core problem here: why are investors so excited about betting on Ackman?
Ackman’s track record in the market admittedly is impressive. But, again, consider PSTH’s size and potential targets.
The value that Ackman and PSTH create isn’t coming from deep-dive fundamental analysis or finding an unloved business with unlocked potential. Again, there aren’t that many businesses left in the SPAC’s potential universe.
As a result, PSTH’s promise comes down to its ability to negotiate. Do we have much evidence that Ackman and his advisors will be or can be that savvy?
Nor does Ackman have much in the way of operational experience. Ackman famously took an activist position in Procter & Gamble (NYSE:PG) a few years back which led to the departure of P&G’s chief executive officer. But PG stock remained dead money for years after that before finally rallying in 2019.
The story SPAC sponsors like to tell is that the role of the sponsor itself has real value, and can help guide the target toward prosperity. We have little evidence Ackman and PSTH can provide that kind of value to the “mature unicorns” or family-controlled businesses Ackman says he is targeting.
The SPAC Problem
And so PSTH shows that investors still haven’t quite grasped the fact that the SPAC trend really didn’t make much sense.
The vehicles have a spotty long-term track record. The explosion in capital raise created a serious imbalance of supply and demand. And the likes of Nikola (NASDAQ:NKLA) and Clover Health (NYSE:CLOV) show that sponsors either don’t always do proper due diligence or don’t feel the need to share that due diligence with minority investors.
There’s a case for PSTH stock to trade for a modest premium, given the value of the tontine warrants. But $1.5 billion over the redemption price, and $1.2 billion above the value of the cash in the pot, is not a modest premium. PSTH stock probably has further to fall, and it’s likely that SPACs as a whole do as well.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
