Bill Ackman’s Pershing Square Tontine Holdings (NYSE:PSTH) announced a new proposal in an 8-K filing on Nov. 26 that would issue a new kind of warrant to its shareholders. The warrant would be free and would have the short form name SPARs (Special Purpose Acquisition Rights). As a result PSTH stock is now trading above $20, its proposed liquidation value.
But here’s the problem. These SPARs, even if they trade on the NYSE (which has not yet been approved by the SEC) will have a nebulous value. They don’t even have an exercise price.
Here is what the 8-K said:
“SPARs would become exercisable, and SPARC would raise public capital, only after SPARC had 1) entered into a definitive agreement for a proposed business combination, 2) announced the exercise price of the SPARs (which would be no less than $10.00 per SPAR, and could be higher based on the amount of capital required to consummate the proposed business combination; SPARC refers to the announced exercise price as the “final exercise price”), and 3) delivered comprehensive disclosure..”
Did you catch that? The most important point is number 2. The SPARC (special purpose acquisition rights company) would only set the exercise price once they had a deal to buy a private company.
That makes it literally impossible to properly value the SPARs as a security. Somehow however, Bill Ackman believes that this makes it a tradeable security that both the NYSE and the SEC would amend their rules and approve. That seems to be an uphill battle to me.
I suspect that SPAR securities are unlikely to be approved by either body. They would want shareholders to at least have some certainty or probability.
What Ackman Could Do To Provide More Value
There are several ways Ackman could provide more clarity for SPARs securities.
First, SPARs could be set within a certain price range, and the capital raise could be set within a certain dollar value. The only limit that the present 8-K outlines is that the exercise price will be $10 per SPAR warrant or higher. What if Ackman’s SPARC would receive a minimum of $10 billion and a maximum of $20 billion, and the SPARs exercise price would be set accordingly?
As a result, once all the SPARs had been issued, based on the current share count of PSTH shareholders, the exercise price could be then be set. For example, right now there are 200 million of Class A shares outstanding (plus 100 Class B shares with voting rights). Therefore, the exercise price would be between approximately $50 and $100 per share (slightly less due to the Class B shares).
I think investors — and regulators — could live with that level of uncertainty.
Follow Traditional Rights Offerings
Another suggestion would go something like this. Make the SPARs equivalent to traditional rights offerings. Traditionally rights offerings come out right before a major corporate event. They are announced, issued and can trade weeks before they have to be exercised.
At the time of the rights offering the company sets the exercise price (usually the price of the underlying stock at the time). Since there is no underlying stock here, the SPARs would trade right before the exercise price period ends. At least then shareholders can value the SPARs properly then since there would be a target acquisition and the total capital raised would be a known quantity.
The second suggestion would avoid SPARs trading on the NYSE for years without any way to properly value them. The first suggestion would at least provide some boundaries and parameters.
Where This Leaves PSTH Stock Owners
As a result, these suggestions will allow future SPARs owners the ability to do more than just literally gamble. Owners of PSTH stock would receive free SPAR shares now just so that PSTH stock can close down at $20 as Bill Ackman proposes.
As a result, the SPARs would still have no real value. There would be no way to value the SPARs warrants. In fact, there would be no guarantee that an acquisition would ever be made. The SPARs could expire in 5 years worthless. This makes it impossible to properly value even PSTH stock now. Therefore, careful investors are better off waiting for PSTH stock to fall below $20.00, its liquidation value.
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.