It’s the Final Chapter for Pershing Square Tontine

In August, Pershing Square manager Bill Ackman announced that his special purpose acquisition company (SPAC), Pershing Square Tontine (NYSE:PSTH) would be returning its cash to shareholders instead of executing a deal in the SPAC’s current form.

Cubes with words 'SPARC, SPAC' on white background
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Ackman blamed a shareholder lawsuit for bogging down his efforts to come up with a new merger target. This came after the Securities and Exchange Commission nixed his complicated Universal Music Group purchase. Ackman instead purchased that UMG stake through his other holdings instead of the Tontine SPAC.

This cash return decision is a disappointment. I’d been hoping Ackman would have another deal lined up after the UMG deal fell through. Ackman had been looking at potential merger targets for a year, so it seemed logical to assume he had at least another prospect or two in waiting. Apparently, however, he did not. His letter warned that it was unclear if PSTH could come up with another deal before the two-year “shot clock” expired. If a SPAC fails to consummate a deal within that period, it must return the capital to shareholders.

Ackman has chosen to pursue that path, and instead of a deal, he wants to give shareholders SPARC warrants in a new entity. A SPARC is essentially a SPAC without the pool of money.

This, in theory, should reset the deal clock and give Ackman more time to come up with something.

The Faintest Glimmer of Hope

Following the bitter shareholder reception of Ackman’s Aug. 19 letter, he soon issued another missive. In this one, he blamed a variety of factors, such as the poor SPAC market, for PSTH’s failure to succeed. While most of the communication was along those lines, there is one bit that stood out.

Ackman noted that his Pershing Square Fund would lose $65 million if it fails to complete a deal for PSTH in time. While explaining the merits of his proposed SPARC arrangement, there’s a hint that potentially Pershing Square Tontine could still do a deal even if his proposed SPARCs replacement don’t come about.

The latest letter in fact noted that Ackman is not giving up on doing a deal for PSTH. PSTH’s warrants crashed in value following the letter. But they’ve recovered a portion of their former value on the newer letter. Still, this looks like a long shot. PSTH owners should not count on getting anything more than their original $20 back.

What’s Left For PSTH Stock?

There’s potentially a path where people make a decent profit buying PSTH stock here at $19.75. After all, assuming no deal happens, $20 of cash will be coming back in (probably) just under a year from now. Shareholders would also get newly created SPARCs, which would serve as a sort of opportunity to participate in Ackman’s next transaction.

So that’s a fixed yield, albeit it not a particularly high one. Pay $19.75 now, get $20 back in 2022. That’s a risk-free 1.3% interest rate at the worst. In today’s unfavorable fixed income environment, a 1.3% return in under a year isn’t the worst option out there.

And then, if the SEC approves the SPARC warrants arrangement, those rights may be worth something meaningful. Or they may not. Ackman has thoroughly shot his reputation with the PSTH affair. Besides, the SPARC deal is a whole new concept, and it’s hard to guess what sort of value these might theoretically be worth.

Pershing Square Tontine Verdict

My bottom line personally is that I sold my PSTH stock and took the loss. Previously, I’d suggested that downside risk for PSTH stock was almost gone with shares at $20.20 after the UMG deal collapsed. And that was true enough, PSTH stock only fell a couple more percent after Ackman’s latest maneuver.

But while the share price didn’t fall much more, now, almost all reasonable odds of upside are gone if he’s just going to hand the $20 back. With Ackman’s celebrity status, he was supposed to be able to pull off one of the most lucrative SPAC deals of all time. Instead, he seemingly came up empty-handed.

As far as I see it, I can come up with better uses of capital than earning 1.3% or so over a year waiting for liquidation. And the potential SPARC warrants hold little appeal either. Unless you want the modest interest rate waiting for your $20 back, it makes sense to sell and move on to fresh opportunities.

On the date of publication, Ian Bezek 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.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


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