Description

Let’s remember back to a much simpler time. A time when rolling a truck down a hill created tens of billions in equity value. A time when pre-deal Chamath SPACs traded at twice the value of the cash in the trust. A time when stock promoting dreams could really happen…

Into this orgy of greed and insanity, Bill Ackman chose to wade. He could have simply rolled a spaceship down a hill (in fact, many people probably preferred that he did that). But instead, he decided to use his financial engineering skills to reinvent the SPAC universe. Some may have said that the existing equation of,

SPAC + EV Fraud = $$ 

was more than sufficient, but instead, Ackman created the AckSpac—which would naturally be a tontine because, well, it sounded like a great idea at the time…

Of course, everyone figured that Ackman would wow and dazzle with his transaction. What sort of magical EV fraud would Ackman bring public?? In anticipation of the unveiling, the shares of Pershing Square Tontine Holdings (PSTH – USA) traded at a 70% premium to the value of the cash in the trust—financial engineering at its finest. But then, Ackman brough his creation forward and underwhelmed…

Which brings us to yesterday’s news. With no deal completed, Ackman is going to wind down PSTH. Long-suffering Tontards will receive $20.05 or a 12.5 bps CAGR over the 2 years they held on and watched the magic unfold. Admittedly, this is a better return than the TGT YOLO Call Fund, but not quite as well as my checking account has performed during that time. If this were the end of the AckSpac, we’d all shrug our shoulders and call it the peak of SPAC financial engineering… 

But of course, this isn’t the end for PSTH, it isn’t even the beginning of the end, though it is perhaps the end of the beginning... PSTH will try to live on as only a failed tontine SPAC can... I now present you with Ackman’s newest financial engineering creation, the SPAR…

On July 26, all remaining Tontards will receive the aforementioned $20.05 in cash, and also half of a SPAR? What is a SPAR you ask?? Well, let’s turn to the June 16, 2022, registration statement that tries to explain it…

Yes, there’s simply page after page of run-on sentences that display the many permutations envisioned for potential SPAR and SPARC combos, due to their tontine nature… 

It really is enough to make a quant blush and when I started reading, I realized that some financial engineering wonk had finally had an orgasm in a public filing. This is the height of financial engineering. We shall go no further in this industry. Finance has now peaked…

With this all out of the way, let me put this into layman terms for you;

If you own a share of PSTH, you get half a SPAR. There will be 122,222,222 SPARs (unless they decide to re-engineer it again—which almost seems oddly inevitable). A full SPAR lets you invest in 2 shares of SPARC II if you should feel inclined. As you can invest on similar terms as Ackman, there’s a good chance that whatever the deal is, will be attractive and will trade up beyond the value of the transaction—hence the SPAR should have some implied value before a transaction is announced. How much value? 

I haven’t got the foggiest clue. However, I cannot imagine that Ackman’s “notoriety” would allow these SPARs to trade too cheaply. Could they be worth $1.00 each? Maybe $2.00? I mean, PSTH traded at $1.4 billion of goodwill over cash value. Why couldn’t the SPARs trade at a $245m value or $2.00 each or $1.00 per imbedded half SPAR per PSTH share? And that’s even before considering the odd tontine feature of them—which will likely get adjusted a few times more. Could the SPARs birth additional SPARs? Why not cue up SPARC III just in case? Why stop there?? Who wouldn’t want a CDO of SPARs with multiple tranches??? These are free options and there are infinite combinations of free Theta that can be gifted here… 

As with every aspect of PSTH, there’s still a wrinkle. Will the SEC let these things exist? Will the registration be declared effective? Will they trade OTCQX as envisioned or on some other exchange? I really have no answers for you. I just know that with the shares at $20.08, I’m paying 3 cents for a fractional interest in Bill Ackman’s next financial engineering adventure. I also think the odds of Ackman conjuring the SPARs into existence on some potential exchange seems high—in which case the forward value of 3 cents seems mispriced. 

On a final note, while making fun of this klusterfuk of financially engineered excess has been fun, I think that PSTH has been something of a blight on Bill Ackman’s record. As a result, I believe strongly that Ackman will work hard to find a way to eventually create value here (in a highly financially engineered manner just for giggles)…

Catalyst

July 26