Editor’s Note: Following publication of this article, Pershing Square Tontine Holdings (NYSE:PSTH) announced that its board unanimously determined not to proceed with the Universal Music Group transaction. The acquisition of the UMG stake will instead be done by the Pershing Square hedge fund.
“PSTH has 18 months remaining to close a new transaction unless extended by the vote of our shareholders. In light of our recent experience, our next business combination will be structured as a conventional SPAC merger,” the announcement noted.
InvestorPlace will update readers as there are further developments on the company.
However, the special purpose acquisition company’s (SPAC’s) stock has actually lost 9% of its value in the month since.
InvestorPlace’s Mark Hake recently put the SPAC’s sum-of-the-parts valuation at $30.50 a share, providing hope for those who bought PSTH stock at $20 in its initial public offering (IPO) in a year ago.
According to Hake’s valuation, at current levels, the SPAC’s share offer 47.8% upside.
Don’t get me wrong; I like what Ackman’s done here. It’s an original way to generate value for his investors. But is PSTH stock the best way to play UMG?
I’m not so sure. Here’s why.
Could PSTH Stock Go Higher Than $30.50?
As the SPAC describes in its June 20 transaction overview, a buyer of 100 PSTH units in the IPO would own the following:
- 64 shares of UMG. Based on 180 million UMG shares acquired, each share is worth approximately $22.17 [$4.1 billion less $110 million in costs divided by 180 million shares].
- 100 shares of PSTH plus 11 Distributable Redeemable Warrants and 22 Tontine Warrants. Pershing Square Tontine Holdings will have approximately $1.6 billion in cash to make a second investment. As my colleague states, post-UMG distribution they’re worth approximately $5.25.
- 100 warrants to buy 100 shares of Pershing Square SPARC Holdings, another SPAC listed by Ackman, at $20 per share. Barron’s suggests these are worth $4.50 a share.
So, you put in $2,000 for your 100 units in July 2020. The three pieces come to $31.92 by my calculation or $3,192, 60% higher than the initial investment. So, that’s a little higher than my colleague’s estimate.
Ultimately, however, the only real tangible that investors have at this point are the UMG shares. Everything else is mere speculation. But, I think it’s fair to say that PSTH may have more upside.
What Are the Options?
I love coming up with alternatives. Especially when I’m looking at something with a lot of moving parts. The transaction overview suggests there are three real possibilities.
- Vivendi will own 10% of UMG once it distributes its shares to Vivendi shareholders and PSTH. So, the first option is to buy shares in Vivendi. It currently has a free cash yield (FCF) of 2.2%. That’s not a screaming value.
- Tencent Music Entertainment Group (NYSE:TME) will own 20% of UMG. It’s got an FCF yield of 3.5% [based on 4.89 billion CNY ($756.1 million) in operating cash flow minus 108 million CNY ($16.7 million) divided by a market cap of $21.0 billion]. That’s a little more attractive.
- Another big shareholder of UMG is Bollore Group (OTCMKTS:BOIVF), a French family-controlled diversified holding company with interests in transportation & logistics, communications, and electricity storage and systems. It will own 18% of UMG. In 2020, it had revenue of 24.1 billion EUR ($28.5 billion) and an operating income of 1.65 billion EUR ($1.95 billion). This is very attractive.
At the end of the day, what you’re really trying to evaluate is whether the two unknowns related to PSTH are worth the opportunity cost of sticking around for another 12-18 months to find out.
The Bottom Line
Here’s how I would rate the four companies mentioned in this article from best to worst.
- Bollore Group. It gives you UMG and Vivendi while also obtaining some excellent infrastructure assets. Plus, I love family-controlled businesses. They tend to think longer term.
- Tencent Music Entertainment does an excellent job growing its business. Despite the Chinese government’s antitrust regulator pushing TME to give up its exclusivity deals with music labels, I think there’s enough value here to make it an excellent long-term buy.
- Pershing Square Tontine Holdings and its two big unknowns. If Ackman can pull two more surprise investments out of his hat, PSTH could end up being the best of the bunch. But that’s a big if.
- Vivendi and Bollore are joined at the hip. And not necessarily in a good way. At least by owning Bollore, you’re diversified against any future repercussions of the UMG distribution.
Like all investments, there are always pros and cons to owning them. PSTH and the other three are no exception.
On the date of publication, Will Ashworth 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.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.