(Bloomberg Opinion) -- What do you do when enthusiasm for blank-check companies is waning, but you still have $4 billion burning a hole in your pocket?
For hedge fund billionaire Bill Ackman, the answer is to use most of the money for a different kind of deal. He’s also proposing another twist on special purpose acquisition companies, or SPACs, where investors give a shell corporation funds to buy an unidentified target.
SPACs usually raise that money in an initial public offering, telling investors they will use the proceeds to acquire a minority stake in a private company that has actual operations. A deal then lets the acquisition target receive a pile of cash and become publicly traded in the process, without the rigorous — and indeed laborious — rigmarole of staging its own IPO.
Ackman raised his record sum in July with a SPAC called Pershing Square Tontine Holdings Ltd., where he is chairman and chief executive officer. He promised to use those funds to “marry a very attractive unicorn,” and proceeded to drop hints about interest in the secretive Silicon Valley data analysis firm Palantir Technologies Inc., as well as in Elon Musk’s space travel company SpaceX. Airbnb Inc. reportedly rebuffed an approach.
After 11 months of searching for an acquisition target, the proceeds now won’t be used for a typical SPAC deal at all. Instead, he is simply acquiring 10% of record label Universal Music Group from Vivendi SA, the French media conglomerate. UMG, which is home to artists like Taylor Swift and Lady Gaga, won’t be merged into Ackman’s SPAC to receive a U.S. listing. Instead, the world’s biggest record label will proceed with its own planned listing in Amsterdam later this year, and Pershing Square Tontine investors will get a 10% stake.
Sure, online streaming has returned the recording industry to growth and profitability. But it’s not quite the sexy tech company that was mooted last year. However, Ackman isn’t stopping there — and this is where things get complicated.
The deal, which values UMG at some 35 billion euros ($42 billion), will leave Pershing Square Tontine with $1.5 billion of cash , which Ackman plans to keep and use for another deal. He’s also creating something new entirely: a SPARC, or special purpose acquisition rights company.
Unlike a SPAC, where investors blindly pledge capital to acquire an unknown company, the SPARC won’t ask for money just yet. Ackman will seek out another acquisition target, and tell his investors what it is. If they like the prospective deal, they can pony up cash to fund it.
Financially, it’s complex. In the initial SPAC, the shares were sold for $20 apiece. Of that, $14.75 is being used to acquire the stake in UMG. The remaining $5.25 will fund another deal. The SPAC’s investors will also get rights to invest in the SPARC, which when combined with Pershing Square’s money could create as much as $10.6 billion in financial firepower for dealmaking.
It’s a neat piece of financial engineering that lets Ackman parlay his initial SPAC into several deals. And in many ways, the SPARC structure is kinder to investors than the SPAC, since it gives them more visibility into what they’re actually buying, won’t incur big underwriting fees and isn’t subject to the same two-year limitation that SPACs have to find a target.
Even so, it’s a whole lot more complex than what they surely thought they were investing in last July, and is a piecemeal way of letting investors realize the full value of their initial commitment. The SPAC’s shares dropped 7% in premarket trading, which suggests Ackman needs to do more to convince investors of the transaction’s merits. Ackman’s SPAC was itself supposed to be an innovative approach that gave investors more protection by offering a different incentive structure than usual.
Now that a traditional SPAC deal isn’t happening, he’s ginned up another innovation in its stead.
The UMG deal will cost Pershing Square Tontine $4 billion, but it will also exercise rights to raise an additional $1.6 billion from forward purchase agreements with Pershing Square Capital Management, the hedge fund that Ackman also runs.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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