Ackman’s withdrawal could be a SPAC mood killer

A deal for Universal Music, yes, but not through the much-vaunted SPAC route.

As has been widely reported, hedge fund titan Bill Ackman has abandoned his plan to take a stake in Universal Music Group through a Special Purpose Acquisition Company (SPAC).

And the stumbling block was probably due to: rules and regulations.

More on that in a minute, but it’s worth noting that Ackman decided to use a more traditional conduit – his investment firm, Pershing Square Holdings (a hedge fund) – to invest in Universal, taking up to 10 percent of the capital. The hedge fund should not be confused with the SPAC, Pershing Square Tontine Holdings Ltd.

In a nod to how quickly sentiment could be exerted on these special purpose acquisition companies, shares of Ackman’s SPAC have fallen about 24% year-to-date.

Ackman stated in a letter to shareholders on Monday, July 19, “Our decision to seek another Initial Business Combination (IBC) was prompted by issues raised by the SEC with several elements of the proposed transaction – in particular, whether the structure of our IBC qualified under NYSE rules. “In other words, it looks like Ackman and his company haven’t been able to convince the Securities and Exchange Commission (SEC) that the deal has been done.

The letter also stated that PSPC would seek a new partner for the merger and had 18 months to do so.

“Based on our recent experience, our next business combination will be structured as a conventional PSPC merger,” Ackman said. The deal with Universal would in fact not have been structured like a traditional SPAC transaction – instead, Pershing Square Tontine Holdings would have become a holder of a listing by Universal in the Netherlands.

Ackman said in Monday’s letter that its SPAC stock price fell about 18% following the June SPAC-for-Universal announcement. Ackman said in the letter that this decline could be linked in part to “the complexity and structure of the transaction,” adding: “We also underestimated the potential impact of the transaction on investors who may not own foreign securities, which put their shares on the sidelines or which have option calls on our shares.

Part of it is inside baseball, relating to Wall Street. As Ackman told CNBC, the SEC feared that the merger between SPAC and Universal could lead to a new investment firm.

“In order to address the concerns of the SEC, we changed the structure of the deal to provide that we were going to bring the shares we bought to a trust – we thought that would solve the problem,” Ackman told CNBC. “Then we signed the deal, then we went ahead with the deal, and then in fact this week, over the last few days, the SEC raised, I would say, a ‘okay killer’, that is – say they said they believed the transaction violated New York Stock Exchange PSPC rules.

The main takeaway, in our view, might relate less to this particular deal than the fact that the SEC, in general, is and will be pulling a bit more into signing PSPC deals. As reported in this space earlier in the year, the commission launched an investigation into the wave of startups made public through PSPCs and had polled a number of banks on transactions, fees and how investments are managed. .

Beyond that, it’s a key feature of SPAC that the forward-looking statements that combinations make – especially for, say, a rapidly growing company that has yet to post profits – can generate more interest. from the SEC. Read “more interest” as proxy statement for “tighter control”. Limiting some of the hyper-growth projections posed by the PSPC targets would in turn dampen some of the valuations that could be attributed to those quotes (resulting, of course, in lower stock prices). With PSPCs flying lower than before, with target companies a little more discreet in their outlook, it is possible that the entire industry will face more severe headwinds.



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