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

Invoice Ackman, founder and CEO of Pershing Sq. Capital Administration.

Adam Jeffery | CNBC

Firm: Pershing Sq. Tontine Holdings, Ltd. (PSTH)

Activist: Pershing Sq. Capital Administration

Share Possession:  n/a

Common Value: n/a

Activist Commentary: Pershing Sq. has an intensive and profitable observe document 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 $1.4 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.

What’s Taking place:

Pershing Sq. Tontine Holdings, Ltd. is in discussions with Vivendi S.E. to amass 10% of the excellent abnormal shares of Common Music Group B.V. (“UMG”) for roughly $4 billion, representing an enterprise worth of $42 billion for UMG.

Behind the Scenes:

Pershing Sq. has had its finest success when it has invested in top quality companies with easy, predictable, money movement and sturdy and rising enterprise traces. That’s what it was on the lookout for with this SPAC, and that’s precisely what it has discovered. UMG is the most important proprietor of musical mental property on this planet and accordingly has a really dependable licensing income stream. Furthermore, it’s not capital intensive, has a excessive return on capital, a powerful steadiness sheet, wonderful administration group and in an business (music subscriptions) that has been rising by 25% yearly. Furthermore, a $42 billion enterprise worth could possibly be severely undervaluing the corporate. Because the market chief in an oligopoly, with Warner Brothers as its solely actual competitor, there should not lots of public comps for UMG. Nevertheless, Spotify just lately went public and has a $44 billion enterprise worth regardless of having unfavorable $205 million of EBITDA in 2020 and solely projecting $500 million of EBITDA in 2023. However, UMG is estimated to have near $2 billion of EBITDA. Furthermore, as a intermediary streaming firm, Spotify could possibly be considered as a commodity with low pricing energy. UMG alternatively owns the mental property which is a way more helpful place within the business. Within the cable business, firms 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 Abnormal 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 Trade Fee. That is primarily a late-stage funding in UMG as a personal firm earlier than it goes public.
  2. PSTH shares after the distribution of the acquired UMG shares (“PSTH Remainco”), which could 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 could have $1.5 billion in money and marketable securities. As well as, Pershing Sq. could have the proper, however not the duty, to purchase roughly $1.4 billion of PSTH’s Class A typical inventory. This offers 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 count on 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 a whole lot of potential firms and sure noticed many who had been very engaging however too small for what they had been on the lookout for. PSTH could 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 predicted to commerce on the New York Inventory Trade. Not like a standard SPAC, this Particular Function Acquisition Rights Firm doesn’t intend to lift capital by an underwritten providing wherein buyers commit capital with out understanding the corporate with which SPARC will mix. As a substitute, SPARC intends to situation rights to amass frequent 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 elevate $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 wherein 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 supplied 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 to be like 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 offers the shareholders of PSTH an curiosity in a quickly to be public firm (UMG), possession in PSTH because the car for a second, smaller acquisition that could possibly be introduced within the short-term and a chance to take part in a 3rd however a lot bigger potential acquisition over the subsequent 5 years. Furthermore, whereas it’s not formally a part of the deal, I’d not be shocked if Invoice Ackman offers 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.