Description

Pershing Square Tontine Holdings, Bill Ackman’s SPAC, has raised ~$4B in the largest SPAC offering to date. Bill Ackman’s explicit goal is to secure outsized capital and execute a deal with a large ($20B+) private company, with deal ideas raning from AirBnB (reported yesterday) to Stripe. Total equity committed to the deal will be up to $6B, with up to $3B pre-committed by Pershing LPs.

Rather than the heavy dilution from sponsor economics and underwriting fees in traditional SPACs, the Pershing vehicle is notable for minimizing both aspects and aligning Pershing fully to the deal outcome. Instead of Sponsor promote or carry, Pershing’s economics are based on warrants worth up to 5.95% of the full capitalization of the deal, struck 20% above the offering price. These warrants will be purchased by Pershing for ~$50M in true, at-risk capital  (i.e., a zero-dollar outcome if the SPAC does not find a deal or the deal does not return a minimum 20% to the investors). The warrants have a 10 year term and Pershing has agreed not to exercise the warrants for 3 years. In addition, Pershing has been able to negotiate 1.5% underwriting fees compared to the typical 5%; this was achieved through the scale of the offering and Pershing’s preexisting reputation in the markets.

To illustrate the sizable impact of these features: a typical SPAC might raise $500M, with ~10% going to sponsors up front and additional economics in the form of warrants (up to 20% up front historically), and $25M in underwriting fees in a consummated deal and ~$10M offset from the sponsors’ risk capital in the vehicle. Having paid $10 par, the cash NAV at deal consummation is ~$8.80 (though investors still maintain ability to redeem their investment at $10 even par). More likely the SPAC will raise additional capital anywhere from $500M-1B, reducing the above dilution to some extent, as PIPE fees are lower and promote dilution is borne by a larger base of capital, but still placing NAV below par. 

For a SPAC to trade up 20%+ to $12 (or $24 in this case), the deal likely has to be struck nearly 30%+ below market in the eyes of public investors due to the immediate dilution, which is naturally difficult to achieve and low likelihood. In contrast, with the Pershing SPAC, $20 dollars invested (par value for 1 share) is worth $20 in cash NAV, with underwriting fees of 1.5% offset by risk capital contributed by Pershing (warrant purchase price + operating costs and some fees). Like-for-like, a +10-20% typical SPAC positive deal outcome would result in a +20-30%+ outcome in the Pershing structure. This higher degree of upside for a well-executed deal, plus the sheer scale of the capital raise and the Pershing investment platform ensuring far greater quality deal flow, makes the Pershing SPAC an attractive structure and potential trade.

In addition, given the up to $3B forward purchase agreement committed by Pershing LP capital (fund and coinvest), there is not likely to be a PIPE or any other follow-on equity opportunity at the IPO share price, should the structure find a very good acquisition target. The only option thus for other investors is to buy the SPAC vehicle shares at market, likely up from the $20 IPO price. The dynamic suggests the security should trade at a premium to IPO and through the yield-to-trust. 

From the current unit investors standpoint, receiving a unit for ~$22 gets you 1 common share + 1/3 of 1/3 of a warrant (i.e. 1/9) in total as only 1/3 will be separately tradable. This is where the “tontine” aspect comes into play; the remaining portion of the warrant is going to be distributed to investors pro rata based on redemption activity. In other words, the greater the percentage of holders who choose to redeem out, the greater those who stay in the vehicle’s warrant coverage will be. For example, if 50% of holders redeem, you would end up with 1 Common + 5/9 of a warrant vs. 1/2 of a warrant if 40% redeemed. 

While the unit today is trading ~9% through NAV, we see the risk/reward as positive on a probability weighted basis.

Key Thesis Points:

1.  Low risk opportunity:

a.      Investing in the SPAC today at $21.98 presents minimal capital impairment risk due to the traditional US blank check company structure allowing investors to vote out of the deal with capital returned plus accrued interest. Analyzing 17 recent SPAC trading ranges, with some actively trading during the COVID-crash, shows that the worst drawdown experienced was 7% off NAV while the largest move higher was +135%. The average SPAC traded off at times of volatility by -2%, while the average upside range was 25%. Regardless, the cash invested here is 100% money-good with a finite, maximum term of 2.5 years (2 years + extension option).

2.  Valuable optionality:

a.      With the size of this SPAC and Bill’s track record, there is optionality around the structure finding a great deal whereby the equity trades well above $20 with a kicker coming from our 1/9 of a warrant. Similar to other SPACs, we believe the equity may trade higher through the marketing period, and thus even if you have no intention of being a longer-term fundamental buyer of the PF business, there is likely a path to exit the SPAC above the current price. Additionally, because of the lack of a PIPE to round out financing for the prospective deal, the equity should trade with scarcity value as it will be the only way to enter at attractive levels. Recent examples of strong SPAC deals being rewarded by the market at announcement and through the marketing period are (1) Diamond Eagle Acquisition Corp / DraftKings (2) Churchill Capital Corp / Clarivate (3) Thunder Bridge Acquisition / REPAY Holdings. Upon deal announcement, and pre-deal consummation, the SPAC equity traded +80%/+40%/+15% respectively. It should also be noted that the Thunder Bridge SPAC since close in July 2019 is up +90%, indicative of what can happen when a good business is brought public in the structure.

b.      We believe there is a very real chance that Pershing finds an all-time great private business to take public, which investors may want to own at size.

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Understanding the Sponsor Warrants

o   Language: “The sponsor warrant will become exercisable [●] years after the date of our initial business combination, and will be exercisable, in whole or in part, for that number of shares constituting 5.95% of the common shares of the post-combination entity on a fully diluted basis as of the time immediately following the initial business combination, at an exercise price equal to $24.00 per common share of the post-combination entity. The term “fully diluted basis” means that the number of shares deemed to be outstanding at such time will include all shares issuable upon the exercise of redeemable warrants and the forward purchase warrants, upon the exercise of stock options issued by the post-combination entity, and the shares underlying any other instrument issued by the post-combination entity, whether debt or otherwise, that is convertible or exercisable into shares of common stock, without regard to whether such warrant, option or other security is exercisable or convertible or “in-the-money” as of the time immediately following the initial business combination. The sponsor warrant will not be redeemable by us and will be exercisable, in whole or in part, on a cashless basis (in addition to being exercisable for cash). The sponsor warrant will have a term of ten years from the consummation of our initial business combination. The sponsor warrant and the shares underlying the sponsor warrant will be subject to certain transfer restrictions and registration rights described herein. If the holder of the sponsor warrant elects to exercise such warrant on a cashless basis, in whole or in part, they would pay the exercise price by surrendering all or such part of the sponsor warrant for that number of shares of the post-combination entity equal to the quotient obtained by dividing (x) the product of the number of shares to be issued upon such whole or partial exercise, multiplied by the excess of the “fair market value” (defined below) over the exercise price per share issuable thereupon ($24.00, subject to adjustment as described herein) by (y) the fair market value. The “fair market value” shall mean the average reported last sale price of a share of the post-combination entity for the 10 trading days ending on the third trading day prior to the date on which the notice of warrant exercise is sent to the warrant agent.”

o   Takeaway:

§  Pershing will own 5.95% of the F/D capital of the full equity capitalization of the new business which includes (1) SPAC Shares & Warrants (2) Shares Issued to the Target and (3) FPA Shares and Warrants which are being put up by Pershing itself

§  The alignment seems to come in the form of how the warrants are being exercised. I read the language as saying on the cashless exercise, you essentially use the treasury stock method to get his ownership. In other words, at a $26 price, Pershing’s share issuance from the warrant exercise would be equal to (# of shares to be issued upon the exercise * ((10 day trading average price at time of warrant notice - $24 strike / $24 strike))

·        The # of shares to be issued upon exercise I read as saying 5.95% * F/D Shares Outstanding

·        Thus the dilution factor minimizes the equity ownership Pershing gets, aligning him with us to get the stock higher

§  Pershing has ten years to get the equity above $24

§  Cashless Exercise: Gets net number of shares

·        The warrants once struck will be valued based on 10 trading days which will be counted as such: 10 trading days with the 10th day being the 3rd trading day before Pershing sends their notice of exercise

o   In other words, I read this as incentivizing Pershing to not exercise until there is clarity (or as much as you can have) that the equity will be above $24

o   The pessimist would say well the stock likely moves to ~$23-24 on announcement, and through the marketing period you can be sure it trades above this so they can exercise right away

§  Cash Exercise: Has to put up the capital to buy the $24

·        Sponsor warrants are not publicly traded and he can do this whenever it hits $24

o   Timing:

FPA Impact

o   Language: “We have entered into a forward purchase agreement with the forward purchasers, pursuant to which the forward purchasers have agreed to purchase an aggregate of $1,000,000,000 of committed forward purchase units, which will have a purchase price of $20.00 and consist of one share of Class A common stock and one-third of one warrant. The purchase of the 50,000,000 committed forward purchase units will take place in one or more private placements in such amounts and at such time or times as the forward purchasers determine, with the full amount to have been purchased no later than simultaneously with the closing of our initial business combination. The forward purchasers’ obligation to purchase the committed forward purchase units may not be transferred to any other parties. The forward purchase agreement also provides that the forward purchasers may elect to purchase up to an aggregate of $2,000,000,000 additional forward purchase units, which will also have a purchase price of $20.00 and consist of one share of Class A common stock and one-third of one warrant. Any purchases of the up to 100,000,000 additional forward purchase units will also take place in one or more private placements in such amounts and at such time or times as the forward purchasers determine, but no later than simultaneously with the closing of our initial business combination. We and the forward purchasers may determine, by mutual agreement, to increase the number of additional forward purchase units at any time prior to our initial business combination. The forward purchasers’ right to purchase the additional forward purchase units may be transferred, in whole or in part, to any affiliate transferee, but not to third parties. The forward purchasers’ obligation or right, as applicable, to purchase the forward purchase units will be allocated among the forward purchasers from time to time as described herein.”

o   Takeaway:

§  The FPA is the pre-funded PIPE

§  This is how they are effectively justifying the 6% PF Dilution of the full business – it is not just $45M to get 6%, rather it is 45M plus the commitment of $1-$3B

Catalyst

Deal execution of all-time great business

Scarcity value