Everything with Bill Ackman’s Pershing Square Tontine Holdings (NYSE:PSTH) SPAC (special purpose acquisition company) is complicated. When it comes to SPAC stocks, PTSH is just a little different than the rest.
First, Ackman set up the deal with a different structure ($20 par value vs. $10 for other SPACs) compared to others. Then, he tried to use PSTH stock to buy a 10% stake in Universal Music Group (OTCMKTS:UMGNF) in a complicated pre-public deal structure.
Then the SEC turned it down. Interestingly, UMG later went public in Europe and Ackman’s hedge fund bought a 10% stake in the IPO.
That left PSTH stock out in the cold, albeit with a year and a half left for it to find another deal.
What Is Happening Now
On August 21, Bill Ackman sent a complicated but interesting letter to shareholders. He told them he was going to close down PSTH and return everyone’s money (i.e., $20 per PSTH share).
He said he was doing this because the company received a lawsuit from two college professors and a law firm claiming PSTH is actually an unregistered “investment company” (i.e., a mutual fund). They need to register with the SEC if that is the case.
Enter the SPARC. That is short for “special purpose acquisition right company,” an Ackman-coined term, as Barron’s noted.
Everyone will get a special right to buy into Ackman’s next deal. That right (the SPARC) does not require them to put up any money in a trust as a SPAC does. In fact, with the money returned, everyone will have control of their $20 per share and it can be anteed up when the SPARC deal is ready.
This is a simplification of the whole process. Let’s look at what the reality is.
Where This Leaves PSTH Stock Owners
First, PSTH stock is at $19.72, as of Oct. 26, 2021. That is 1.4% below the $20.00 takeover price. It’s a better yield than most bank deposits would pay. But the real reason to buy PSTH stock at this point is to get the free SPARC warrant. That SPARC will allow former PSTH stock owners to exercise their warrant once Pershing Square, the hedge fund, has found a new deal.
But the problem is Pershing Square is now under no time limit to find a deal. There is no “shot clock” as Ackman calls it, where after two years the cash has to be returned as with most SPACs.
He could take five years. Meanwhile, the SPARC warrants will likely trade on the NYSE (although he is still trying to get approval for that to happen).
One Seeking Alpha analyst recently postulated that he thought that the SPARC warrants (which everyone will receive who owns a PSTH share) would be worth $2.00 once they are sent out.
I am not sure how he came up with that valuation. For example, right now PSTH warrants (under symbol NYSE:PSTHWS) trade for $1.30. I doubt seriously they will trade higher than the PSTH warrants which will be delisted once the SPARC deal and the PSTH stock redemption occurs.
What To Do With PSTH Stock
I’m not sure anyone should buy PSTH stock now just to earn the free SPARC warrant. For example, here is what the Seeking Alpha analyst says. At $19.72, the value returned is $20 in cash plus $2.00 in a free SPAC warrant. Therefore, the potential return is $22.00/$19.72 -1, or 11.56%.
However, I suspect the more likely ROI is ($20.00 + $1.37)/$19.72 -1, or 8.37%. Moreover, the SPARC warrant is likely to be highly volatile and could easily take at least a year before it could be exercisable. Therefore, the possible 8.60% is not that exciting.
That is especially the case since you can just as easily buy the SPARC warrants once they are listed on the NYSE. Then you won’t even have to put up the $19.72 for the PSTH stock shares.
In fact, you could just buy the PSTH warrants now. They will be given 1 new SPARC warrant when the deal goes through. In that case, if you really think the SPARC warrants are worth $2.00, you will have made a 46% return on your money (i.e., $2.00/$1.37-1). However, this is a much more speculative route to take. For one, the PSTH warrants could continue to drop in price until the SPARC deal goes through.
Bottom line: work through all the details if you plan on buying PSTH stock or warrants right now in order to obtain the SPARC warrants.
On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any position in any of the securities mentioned in this 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.
