Right here’s what buyers can anticipate from Invoice Ackman’s Common Music SPAC deal

Enterprise: Pershing Sq. Tontine Holdings is a particular function acquisition firm (“SPAC”). The agency doesn’t have important operations. It intends to impact a merger, capital inventory alternate, asset acquisition, inventory buy, reorganization, or comparable enterprise mixture with a number of companies. The corporate was included in 2020 and relies in New York.

Inventory Market Worth: $4.57B ($22.86 per share)

Proportion Possession:  n/a

Common Price: n/a

Activist Commentary: Pershing Sq. has an in depth and profitable observe file as an activist investor and has beforehand been concerned in a really profitable SPAC funding. Pershing Sq. served as cosponsor of Justice Holdings, with Nicolas Berggruen and Martin Franklin. Justice Holdings raised roughly $1.5 billion in its preliminary public providing in February of 2011 (together with a $458 million funding by Pershing Sq.). In April of 2012, Justice Holdings bought from 3G Capital a 29% stake in Burger King Worldwide Holdings Inc. for $1.Four billion in money, and subsequently merged with Tim Hortons, to kind Restaurant Manufacturers Worldwide. Pershing Sq. stays the second-largest investor in Restaurant Manufacturers Worldwide.

Pershing Sq. Tontine Holdings, Ltd. is in discussions with Vivendi S.E. to accumulate 10% of the excellent unusual shares of Common Music Group B.V. (“UMG”) for roughly $Four billion, representing an enterprise worth of $42 billion for UMG.

Pershing Sq. has had its finest success when it has invested in prime quality companies with easy, predictable, money stream and sturdy and rising enterprise strains. That’s what it was on the lookout for with this SPAC, and that’s precisely what it has discovered. UMG is the biggest proprietor of musical mental property on the earth and accordingly has a really dependable licensing income stream. Furthermore, it isn’t capital intensive, has a excessive return on capital, a robust steadiness sheet, wonderful administration group and in an trade (music subscriptions) that has been rising by 25% yearly. Furthermore, a $42 billion enterprise worth may very well be severely undervaluing the corporate. Because the market chief in an oligopoly, with Warner Brothers as its solely actual competitor, there are usually not numerous public comps for UMG. Nevertheless, Spotify not too long ago went public and has a $44 billion enterprise worth regardless of having destructive $205 million of EBITDA in 2020 and solely projecting $500 million of EBITDA in 2023. Alternatively, UMG is estimated to have near $2 billion of EBITDA. Furthermore, as a intermediary streaming firm, Spotify may very well be seen as a commodity with low pricing energy. UMG then again owns the mental property which is a way more worthwhile place within the trade. Within the cable trade, corporations like Spotify (i.e., Constitution Communications) commerce at a lot decrease valuations than content material suppliers (i.e., Disney). However the UMG funding is simply a part of the transaction. In a particularly progressive construction, PSTH shareholders will obtain the next three securities:

1. UMG Atypical Shares, which represents roughly $14.75 per PSTH share, earlier than accounting for any dilution from PSTH warrants. Following PSTH’s acquisition of the UMG Shares, UMG will full its beforehand introduced itemizing on Euronext Amsterdam within the third quarter of 2021. As soon as the itemizing is full, PSTH will distribute the UMG Shares on to PSTH’s shareholders in a transaction registered with the Securities and Alternate Fee. That is primarily a late-stage funding in UMG as a non-public firm earlier than it goes public.
2. PSTH shares after the distribution of the acquired UMG shares (“PSTH Remainco”), which may have roughly $5.25 in money per share, earlier than accounting for any dilution from PSTH warrants. After funding the UMG buy and associated transaction bills, PSTH Remainco may have $1.5 billion in money and marketable securities. As well as, Pershing Sq. may have the suitable, however not the duty, to purchase roughly $1.Four billion of PSTH’s Class A standard inventory. This provides PSTH $2.9 billion to do one other deal. Furthermore, PSTH will not be handled as a SPAC so it is not going to have a time restrict to discover a deal. Nevertheless, we anticipate that PSTH will discover one thing earlier than the top of the yr. As a part of their course of with respect to UMG, they checked out lots of of potential corporations and certain noticed many who have been very engaging however too small for what they have been on the lookout for. PSTH may have the suitable quantity of capital to effectuate a minority funding in an approximate $10 billion firm.
3. One transferable five-year proper per share of Pershing Sq. SPARC Holdings, Ltd. (“SPARC”), which is anticipated to commerce on the New York Inventory Alternate. Not like a standard SPAC, this Particular Goal Acquisition Rights Firm doesn’t intend to lift capital by means of an underwritten providing by which buyers commit capital with out figuring out the corporate with which SPARC will mix. As an alternative, SPARC intends to problem rights to accumulate widespread inventory in SPARC for $20.00 per share to PSTH shareholders (“SPARs”) which might solely be exercised after SPARC enters right into a definitive settlement for its preliminary enterprise mixture. Assuming all SPARs are exercised, SPARC will increase $5.6 billion of money from SPAR holders. SPARC can also be anticipated to enter into ahead buy agreements with Pershing Sq. for a minimal funding of $1 billion, and as much as $5 billion. That is the true innovation of PSTH’s construction. It’s primarily a $6.6 billion to $10.6 billion SPAC that has 5 years to discover a deal by which the SPAC holder doesn’t must put up any capital till a deal is introduced. When Pershing Sq. initially launched PSTH, it was progressive in that it did away with founders shares and provided a tontine warrant construction. This takes it a step additional by fixing the urgency to discover a deal inherent in different SPACs, typically resulting in sub-par offers and never requiring holders to lock up their capital whereas the corporate appears for a deal. Furthermore, with as much as $10.6 billion to do a deal, Invoice Ackman has sufficient capital to do a deal bigger than UMG and has sufficient time to be affected person whereas it waits for the right timing for an organization like Bloomberg, for instance.

In sum, this transaction provides the shareholders of PSTH an curiosity in a quickly to be public firm (UMG), possession in PSTH because the automobile for a second, smaller acquisition that may very well be introduced within the short-term and a possibility to take part in a 3rd however a lot bigger potential acquisition over the following 5 years. Furthermore, whereas it isn’t formally a part of the deal, I might not be stunned if Invoice Ackman provides PSTH shareholders a proper to take part within the subsequent SPARC he launches if or when the current SPARC consummates a transaction.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments. Pershing Sq. Tontine Holdings is owned within the fund.