If history in finance and the stock market repeats itself, then my last article on Pershing Square Tontine Holdings (NYSE:PSTH) back in March deserves credit for mentioning “This is a SPAC that represents the unknown. That’s exciting — and cause for concern.” A few months later and PSTH stock is making headlines, but unfortunately not good ones.
Pershing Square Tontine Holdings is a special purpose acquisition company (SPAC), or a “blank check” company. It doesn’t have any significant operations as it seeks a merger or a capital acquisition related to a private company. In that article, I focused on a few key points:
- PSTH has strong management
- Pershing Square Tontine bucked some of the factors common to other SPACs
- The company had a solid business plan and rules for finding its acquisition target
I concluded that “PSTH stock seems to be heading in this direction. But as long as it is too far from its initial $20 per share price, it’s still not attractive enough. … As such, I’d recommend that you only consider buying it as close as possible to the $20 mark.”
When I wrote that article on PSTH stock, its price closed at $28.40. It had a 52-week high in February at $34.10. I think this sell-off as of March is fully justified.
After all, Pershing Square Tontine differed from most SPACs by pricing at $20 and not $10. Without revenue, any price above $20 suggested an overvalued stock with high risks. So it makes complete sense now that the current price of PSTH stock hovers around $20.
But there are others reasons for the selloff in PSTH stock too. Let’s get into them.
PSTH Stock Has Only Bad News Right Now
For a while, Pershing Square was in negotiations with Vivendi (OTCMKTS:VIVHY), the owner of Universal Music Group, to buy a stake in the company. But the deal fell through. The reason behind this failed attempt was explained in a letter to the shareholders. What stopped this merger was the SEC.
In a letter to the shareholders, it was stated, “Our decision to seek an alternative initial business combination (“IBC”) was driven by issues raised by the SEC with several elements of the proposed transaction – in particular, whether the structure of our IBC qualified under the NYSE rules.”
Now I admit that this is worrisome because in my article in March I wrote about the management of the company as a positive factor. My concerns now are simple. How come an experienced management team did not know or predict that the SEC would have an objection and would block this deal with Universal Music Group?
What exactly went wrong and why? Because the explanation to the letter is both vague and not enough. This is a big negative for Pershing Square Tontine.
A Big Lawsuit Spells Trouble for PSTH Stock
It is tough to be on the management of a company and having a merger failing. But when you are also facing a lawsuit, things get worse.
An article on CNBC mentioned that “Bill Ackman’s SPAC was hit with a lawsuit that alleged the blank-check company promised ‘staggering compensation’ to directors.”
Furthermore, the suit also alleged that, “The Company agreed to repurchase some of those warrants at a valuation that implied the warrants were worth, in the aggregate, more than $880 million — thirteen times what the Sponsor and Director Defendants originally paid for them.”
And once again I had written then back in March expressing my concern over these warrants. “Why did management make things complicated by offering ‘Distributable Tontine Redeemable Warrants’ as well? I don’t know for sure, but in general, making things too complex when it comes to investing is not always a good thing.”
The company says the suit is meritless, but time will tell.
Now, investors should consider now that as long as PSTH stock is near $20, there is very little risk. If the company does not succeed in any reverse merger with a private company in time, it should return the $20 in capital to its investors.
Still, I do not personally think that it is a great strategy to invest in a company with no operations waiting for something great to happen. Money has a time-cost attached to it.
Why I Do Not Like SPACs
I have explained in my previous articles why I do not like SPACs. They are risky bets on the unknown. But if I could find another explanation it would add the “self-promotion” effect.
According to Reuters, “A SPAC sponsor gets the biggest cut in the form of a so-called promote – free, or nearly free, shares, typically totaling 25% of the number sold in the vehicle’s initial public offering – once a merger is secured. In just under half the deals struck last year, according to an analysis by lawyers at Freshfields, sponsors gave up some of the shares they were due to receive, but only some.”
So, the returns for the management versus the investors are asymmetrical. The management tends to win big if a merger is to become a reality. The investors may win, but most probably not at the extent of the management profit.
Where does this leaves us for PSTH stock? With a failed merger and a lawsuit, it is advisable to avoid Pershing Square Tontine now. The bad news is dominant, why take the risk now as there is an unknown future? The odds are not good.
On the date of publication, Stavros Georgiadis, CFA 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.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.