With my InvestorPlace colleague Ian Bezek stating that Pershing Square Tontine (NYSE:PSTH) stock is in its “final chapter,” I don’t think there’s any point in pursuing this Bill Ackman-led special purpose acquisition company (SPAC).
In a successful SPAC venture, the end game is a pleasant concept, representing the last few touches before it completes its business combination with a target enterprise. That’s not what’s going on with PSTH stock.
No, at the risk of misunderstanding Bezek, he made sure to clarify his headline, noting that “PSTH stock represents little more than a low-interest bond at this point.”
Again, not only do I agree with this assessment, I’m not even sure a factual basis to counterargue exists. So long as Ackman is firm in giving up in completing a reverse merger, there’s hardly any upside in staying on this ship.
It’s unfortunate that it came to this. When PSTH stock first launched, skepticism still filtered the airwaves because SPACs are, well, SPACs. Nevertheless, this was also a rare opportunity to wager with a celebrity hedge fund manager.
Yes, the hedgies are bullies but in this case, Ackman is our bully — or so the thought process was for many retail speculators.
Further, PSTH stock was close to that redemption point (morally speaking anyways). On the verge of acquiring a stake in record label Universal Music Group, it seemed there was some hope left in this tired dog.
Instead, Bezek wrote that the Securities and Exchange Commission nixed the complicated deal.
“Ackman instead purchased that UMG stake through his other holdings instead of the Tontine SPAC,” he wrote.
Moving forward, Bezek noted that “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.”
It’s the Credibility Suck That Hurts PSTH Stock Now
On paper, the SPARC route should give additional time for Ackman to pull something out of an orifice. I’m sure that if anyone can make something out of nothing, it’s the famous (or infamous, depending on your perspective) hedge fund manager.
Still, the window of opportunity for PSTH stock is fading. While time is an enemy of SPACs — since they usually have around two years to get a deal done or give back the money invested to shareholders — I’m not entirely that’s the primary headwind here. Instead, it’s the credibility suck.
Actually, let me walk back for a second. The inability for PSTH stock to merge with an actual viable business before the SPAC craze went wild was pivotal to Tontine’s struggles today. So yes, time is a factor. But the bigger problem is that retail investors have been warned to stay away from speculative blank-check firms.
Much has been made about Ackman’s investor letter, where many perceived him to play the blame game regarding the disappointment of PSTH stock, including the negative environment around SPACs. But he’s also right.
On a year-to-date basis, SPACs have underperformed benchmark indices and poorly so, if we’re starting the comparison in mid-February.
As I mentioned in my analysis about SPACs for Benzinga, post-merger business combinations are incredibly dilutive. In a cynical way, your typical SPAC is a license to give away shares and warrants on its journey to a reverse merger. Should the merger materialize, it’s a great opportunity for these folks to dump equity on an unsuspecting public.
But PSTH stock has also turned off well-educated Wall Street professionals. Thus, irrespective of Tontine being structured differently than your average SPAC, it doesn’t matter. This particular investment vehicle is leaving a bad taste in a lot of mouths.
Even the ‘Guaranteed’ Play Is Unenticing
Finally, Bezek makes the argument that a fixed-yield opportunity is at play with PSTH stock, so long as no deal happens. That’s because if you buy shares at their current price (it’s trading a little above $19.7o now) you are entitled to a buyback at the initial offering price of $20.
Therefore, we’re talking about a risk-free gain of nearly 1.5%. But the thing is, you’re taking a risk as Bezek later explained: you can hold up capital for a 1.5% reward or you can put that same capital to work somewhere else.
Through ownership of high-quality stocks, you stand a good chance of making well more than 1.5%.
So the way I see it — and most others too I suspect — you can bank on a very unlikely scenario where Ackman finds something of interest. Or you can take a 1.5% guaranteed profit which in the grand scheme of things isn’t that much of a reward considering the time locked up to get it.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.