Has Anything Changed For Pershing Square Tontine Holdings?

The last time I wrote about Pershing Square Tontine Holdings (NYSE:PSTH) was at the beginning of May. At the time, PSTH stock was down 27% from its February high. But without a target, investors were losing patience.

A picture of a series of cubes stacked up to get taller as they go to the right, with the word SPAC on them.
Source: Dmitry Demidovich/ShutterStock.com

That began to change in early June. Bill Ackman, the SPAC’s founder, announced his intention to buy a stake in Universal Music Group (UMG) from parent company Vivendi (OTCMKTS:VIVEF). There are many elements of this deal that are atypical. Two of the most newsworthy are first that UMG will not merge with PSTH stock, and second Pershing Square will distribute is stake to shareholders as UMG common stock.  

Additionally, the $4 billion dollar that Pershing Square is investing in UMG will still leave the SPAC with approximately $1.5 billion of cash to pursue an additional target.  

It’s safe to say that this is not the deal that investors were expecting. However, whether or not it’s a bad deal will take a long time to determine. Since this is my first time writing about PSTH stock since the announcement, I’ll give you my perspective.

 

The Barroom Debate Continues 

Let me start with a caveat. I’m writing this article the day before Bill Ackman will host an Investor’s Day presentation. At that time, I imagine more details about the structure of the deal will emerge.

In my prior article, I described the fascination about Bill Ackman finding his “mature unicorn” as an interesting barroom debate and not much more. 

If you’re a sports fan, then my barroom analogy may have resonated with you. The announcement of Pershing’s target is like the time when your favorite sports team makes an unexpected, polarizing trade. In many cases, your first reaction turned out to be incorrect. And so it may be with Pershing Square’s decision to buy a stake of Universal Music Group (UMG).  

So what do we know? Well, if recent analysts are to be believed, Ackman may be on to something. UMG is Vivendi’s most lucrative business segment. And in 2020, Universal delivered 7.43 billlion euros ($8.84 billion) in revenue which was up from 7.16 billion euros in 2019.  

Pershing Square’s 10% stake of UMG is valued at $4 billion. That would give Universal Music a presumptive valuation of around $40 billion. However, in April, Goldman Sachs (NYSE:GSvalued Universal Music at $53 billion in advance of its initial public offering (IPO) which is expected this fall.  

And other analysts suggest Universal may be even more significantly undervalued. The largest catalyst for this expected growth is summarized in one word, streaming. And a key piece of the company’s projected growth in streaming will come via its multi-year licensing agreement with Spotify (NYSE:SPOT).

  

PSTH Stock is Still About the Jockey 

I know that you read articles like this expecting a big, bold take with a lot of conviction. However, this is one of those times when a shoulder shrug may say a thousand words. Beauty seems to be in the eyes of the beholder.  

There is some sentiment that the “evolving” deal reflects desperation to save face from one side or the other. On the other hand, John Vincent wrote for Seeking Alpha that the deal is significant for two reasons. First, because Pershing Square will only benefit if UMG stock goes up. And second because the SPACs rewards are proportional to the capital committed creating a balance between the upside optionality for the SPAC and the shareholders. 

Whichever side you may fall in, or if you fall somewhere in between, this deal keeps Ackman front and center. And that’s a bit unusual. After falling over 11% immediately after the announcement, PSTH stock appears to have found a floor. But the ceiling may depend on what investors hear from Ackman and how they feel about UMG’s long-term fortunes. 

On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines. 

Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.


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