Pershing Square Tontine to buy 10% stake in Universal Music
Pershing Square Tontine is a Special Purpose Acquisition Company, better known as a SPAC. These are also known as blank-cheque companies that list on an exchange and raise money from investors so they can buy an existing business that wants to go public but avoid a traditional initial public offering.
In fact, Pershing Square Tontine, also known as PSTH, is the biggest SPAC to have ever-listed, having raised $4 billion at $20 per share when it went public in July 2020.
PSTH has taken those funds and agreed to buy a 10% stake in Universal Music Group for $4 billion, giving the record label an enterprise valuation of EUR35 billion.
However, this is not a traditional SPAC deal. Usually, the SPAC would merge with the company it buys but, under the more complex deal, PTSH and Universal Music Group will remain as two distinct and independent businesses. Technically, the deal is being classed as a straightforward purchase of stock in Universal by PSTH.
The deal will result in PSTH shareholders owning three different securities, which we explain in more detail below:
- Their shares in Universal Music Group
- Their shares in PSTH
- And rights to invest in a new SPARC.
Universal Music Group shares
Universal Music Group is currently majority-owned by Vivendi, which confirmed earlier this year that it was listing the business on the Euronext Amsterdam stock exchange in the third quarter of 2021. Vivendi will distribute a 60% stake in Universal to its shareholders as a form of special dividend.
Vivendi has already sold-down its stake in Universal to Chinese firm Tencent and a consortium of other investors. The most recent deal saw a 10% stake sold to Tencent at a price that valued the music label at EUR30 billion.
PTSH intends to buy the 10% stake in Universal before the IPO and then distribute those shares to its investors after the listing has been completed.
This will mean, upon the IPO being completed, that 60% of Universal will be in the hands of Vivendi investors, 10% with PSTH shareholders, 20% with Tencent and the consortium, and 10% owned by Vivendi.
Universal is the largest music label in the world and will be the only major pure-play to be in the hands of the markets.
The company is primed to benefit as people continue to shift toward streaming services, with the company’s subscription revenue jumping 20% in the first quarter of 2021, as demand grows for its expanding catalogue of music IP. It benefits from predictable and recurring revenue and is able to grow the business with very little investment or spending, positioning it to also deliver improved margins going forward.
Universal Music delivered 9% revenue growth in the first quarter of 2021 to EUR1.80 billion from EUR1.76 billion the year before, with Ebit rising to EUR322 million from EUR248 million.
PSTH will continue as a smaller SPAC listed on the NYSE once the shares in Universal have been distributed to its shareholders, and investors will continue to hold their stake in the business. This means PSTH will effectively return to being a cash shell with no assets apart from cash that will be used to pay for another acquisition.
The $4 billion raised from investors is all being put toward the acquisition of the shares in Universal. However, it also has another $1.6 billion in additional funds coming from Pershing Square funds, which will own around 29% of PSTH at this point. Pershing Square funds could contribute up to a further $1.4 billion, meaning PSTH will have up to $2.9 billion in total to fund its next deal.
Importantly, buying shares in Universal is enough to satisfy the requirement for a SPAC to complete a deal within two years of being established. This means it won’t face the same time constraint as it searches for the next deal.
Rights to invest in a new SPARC
The third and final element of the deal will see PSTH investors have the right, but not the obligation, to invest in a new company named Pershing Square SPARC Holdings that will be floated on the NYSE.
This is also not a SPAC but a SPARC, a Special Purpose Acquisition Rights Company. Whereas SPAC investors usually blindly invest in a blank cheque company without knowing what the money will ultimately be used for, the SPARC will only ask investors for money once it has found a suitable target.
Once the SPARC has organised a deal, it will give PSTH shareholders the option to buy shares in the SPARC for $20 each. They will be able to buy one share in the SPARC for each share they own in PSTH, but will be able to buy more than their entitlement if others choose not to take up their rights.
Assuming that all the rights are exercised, the SPARC will be able to raise $5.6 billion from PSTH shareholders. Pershing Square plans to contribute more funds and will be highly flexible depending on the size of the target and the appetite among PSTH shareholders to invest in the SPARC by contributing anywhere between $1 billion to $5 billion.
This means the SPARC could have anywhere between $6.6 billion to $10.6 billion to play with assuming investors snap up the opportunity to invest – potentially paving the way for the SPARC to strike an even bigger deal than any struck by PSTH.
Notably, the SPARC will also have longer to search for a target than the traditional SPAC, stating it will have up to five years to pen a purchase with the option to extend that further if necessary.
What does it mean for investors?
Ultimately, PSTH shareholders will own a slice of Universal Music Group, retain exposure to yet another acquisition by keeping their shares in PSTH, and the opportunity to invest in what could be the biggest deal of all through the SPARC.
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Is this the start of SPAC 2.0?
This deal is complex but could be an innovative solution to solve major problems facing traditional SPACs.
The first problem is the pressure for SPACs to strike a deal in an increasingly competitive environment. There are around 415 SPACs in the US – over 75% of all the blank-cheque companies currently listed – currently searching for a suitable target.
Theoretically, that means 415 businesses need to be bought by SPACs in a relatively short space of time. That has become far more difficult now that the number of deals being completed has slowed, partly because of higher valuations being assigned by private companies following the boom in SPAC deals earlier this year. That is fuelling fears that many SPACs will fail to acquire a target in time and that the quality of deals could decline.
But PSTH will not have to rush to strike its next deal like the wider market, while the new SPARC will have at least five years. That will put them both at an advantage over other SPACs in the market. The fact the SPARC could have more than double the budget of PSTH – the biggest SPAC ever launched – means it will also benefit from having significantly more firepower than its predecessor.
The second problem is the growing criticism of SPACs, and the list of complaints seems to only be getting longer and the threat of tighter regulations is looming. Some argue against the fact that big companies avoid going through a lot of the hurdles associated with a traditional IPO by using SPACs to go public. Others disagree with the fact they ask investors for money with no guidance as to what they intend to buy. A report from Refinitiv in May showed that SPACs from around the world had raised over $100 billion from investors since the start of 2021 alone, and most of them are in the US.
Many are also starting to look at how the people and institutions establishing these SPACs seem to get perks. For example, the chair of the House of Representatives committee on financial services, Maxine Waters, said ‘it appears SPAC mergers are structured to ensure Wall Street insiders receive huge profits, and retail investors pay the costs’ at a hearing last month.
But Pershing Square has gone to efforts to not only try to improve the reputation of SPACs but to evolve them. It did away with some of the traditional perks for insiders, such as free shares, when it launched PSTH and the evolution of the SPARC should prove more favourable as it gives investors greater flexibility and more insight as to what they are actually investing in.