Pershing Square Tontine Holdings Trades Well Below the Sum of Its Parts

Pershing Square Tontine Holdings (NYSE:PSTH) announced its deal to buy 10% of Universal Music Group about a month ago. Shareholders will receive those shares as a spin-off from their stake in PSTH stock. They also get two other things: shares in PSTH stock and shares in a new company.

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If we add up all of these to determine their sum-of-the-parts (SOTP) worth, the total value is over $30.40 per share. That implies that at $22.51 at Friday’s close, an investment in PSTH stock is worth 35% more than today.

Most of the SOTP value is in the measure of Universal Music Group (UMG). It plans on going public sometime in September. It will trade on the Amsterdam Stock Exchange, but Bill Ackman, the CEO of PSTH says it might consider listing as well in the U.S. That would make it easier for US shareholders to trade their stock in UMG.

What PSTH Stock Is Worth

Since most of the SOTP value for PSTH stock is from UMG, let’s estimate its value. Initial indications are that Pershing Square Tontine Holdings bought $4 billion worth of the UMG at a pre-money valuation of EUR 35 billion.

At $1.18 per EUR today, this means it is worth $41.3 billion today. Therefore, the 10% PSTH stake is worth $4.13 billion. Since there are 200 million shares outstanding, that means it is worth $20.65 per share. That is worth 91.73% of the $22.51 value of PSTH stock today. However, this is before any dilution from any PSTH warrants that can be exercised at $20 per share.

In addition, shareholders still get to keep their stake in PSTH stock, which it calls the “remainco.” However, since it will have just paid $4 billion for the UMG stake, PSTH will have just $1.5 billion remaining in the company. After dividing by 200 million shares outstanding that works out to $7.50 per share. However, according to CNBC, they are actually worth $5.25 per share, probably after the warrant dilution.

So now we have a total SOTP of $25.90 (i.e., $20.50 plus $5.25 per share). Lastly, PSTH shareholders will get rights to buy into another deal that Ackman wants to bring. He calls them SPARs (special purpose acquisition rights). They will trade on the NYSE and will have an indeterminate value other than what others are willing to pay. There is nothing of value underlying them. Barron’s says they will be worth $4.50 per share.

As a result, the total SOTP is $30.40 per share. This implies a gain of 35% over today’s price.

What to Do With the Stock

Keep in mind that there is bound to be dilution from both the remaining PSTH stock owners’ warrants, as well as in the underlying value of UMG. Moreover, it is not really clear what the value of the SPARs shares will be. They essentially just give shareholders the right to buy into another Ackman deal.

So far, this is a pretty complicated deal for most shareholders. Moreover, when the UMG shares get spun off, many people will try to sell them. That will likely bring down their value. In other words, there will likely be more time to buy into the PSTH, UMG and SPARs shares to lower your initial cost.

But sometimes, it works out to take an initial pre-spinoff stock, leaving room to buy more in the entities remaining after the spin-off deal. That way you can lower your cost, even though the total SOTP value is still significantly higher.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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