Well that escalated quickly. Just days after being sued by a disgruntled shareholder who alleged that Bill Ackman’s special purpose acquisition company, Pershing Square Tontine Holdings Ltd., is an illegal investment company, the billionaire hedge fund manager is asking for a do-over.
On Thursday he wrote to long-suffering SPAC shareholders to say he’d like to return the $4 billion of cash they put in his blank-check firm, the largest ever. While he firmly rejects the allegations in the lawsuit, he says it complicates the task of completing a deal in the available time.
It’s not often someone goes to the trouble of raising $4 billion and then turns around and says: On second thought, you can have the money back.
But Ackman’s not giving up entirely. He’s offering unhappy Pershing Square Tontine shareholders a tradable right to participate in a future Ackman deal via what he’s called a SPARC—a special purpose acquisition rights company. That’s provided, of course, the U.S. Securities and Exchange Commission and New York Stock Exchange go along with the proposed structure.
Many retail investors remain furious with Ackman. They were convinced his blank-check firm would serve up a juicy technology deal. Instead, all they may end up getting is their $20 per share in cash back, plus an option to participate in some unknown future transaction.
Confidence that Ackman can pull off a high-caliber deal took a hit after the SEC raised objections to his blank-check firm buying shares in Universal Music Group. Hence, it’s not clear yet how much value investors will ascribe to the SPARC.
On balance, I think it’s worth a try. Pershing Square Tontine now has too many clouds hanging over it and shareholders don’t have much more to lose. Although it’s not exactly a fresh start owing to the continued risk of legal bother, it’s at least a path forward.
But it’s odd that Ackman decided a lawsuit he deems meritless is an insurmountable obstacle to completing a regular SPAC deal with its $4 billion pot of cash. While legal uncertainty may have put off potential merger suitors, there may have been other factors playing on Ackman’s mind.
Pershing Square Tontine warrants—rights to purchase shares at an agreed level—once traded at nearly $18. Currently, they’re languishing at less than $3. If the SPAC fails to complete a deal due to prolonged legal rancor, those warrants would be at “grave risk.” Holders now at least have an opportunity to realize some value as they’ll also get a SPARC warrant.
Meanwhile, the SPAC’s shares recently fell below the $20 per-share value of the cash it holds for the first time, a level at which shareholders might be motivated one day to demand their money back anyway.
One could forgive shareholders for wanting to have nothing further to do with Ackman. Those who bought shares at February’s peak have lost about 40% of their investment. Even those who bought at the $20 issue price would have done much better just putting their money in a regular index fund.
All this doesn’t mean the SPARC is necessarily a bad idea. Right now a lot of SPACs are paying underwriters to raise cash in an IPO, and then seeing massive cash redemptions when they close a transaction. This is hugely inefficient and adds to the costs incurred by those shareholders who don’t opt to redeem. Far better for sponsors to find a company to buy and then persuade shareholders to fund it, as Ackman is proposing.
The SPARC also wouldn’t be under pressure to find a deal within the two year limit blank-check firms typically have, which critics say can lead them to strike poor transactions. Shareholders’ cash also wouldn’t be locked up for so long.
There are still lessons here for Ackman. The transaction he attempted with with Universal Music was too byzantine. Even now he seems enamored by such complexity: The SPARC will require a New York Stock Exchange rule change and sign-off from the SEC. Currently having tradable warrants also requires the shares into which those warrants are converted to be listed too, which they wouldn’t be in Ackman’s conception until a transaction is agreed.
Only Ackman would quit and double down all at the same time.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.