More SPAC News: PSTH/UMG
SEC forces Ackman to do the right thing
I wrote back in early June 2021 (in a prior version of this newsletter) about the announced plans of Pershing Square Tontine Holdings (PSTH), a SPAC affiliated with William Ackman’s Pershing Square investment companies, to acquire a minority stake in the shares of Universal Music Group (UMG), a subsidiary of the French media conglomerate Vivendi. I wrote at the time that the contemplated PSTH/UMG deal was one of the most complicated SPAC transactions I have ever come across and I encouraged readers to stay tuned for further developments. You can read the WSJ article which triggered my initial post here: “Ackman SPAC Mystery Solved, but New Questions Abound”.
The initial transaction announcement was made on June 4th, after which the PSTH shares immediately fell about 12%. Definitive share purchase agreements were nevertheless signed by PSTH and Vivendi on June 20th, following which the PSTH shares recovered briefly but then continued their decline, falling about 18% in total. Roll the clock forward a month or so and we now learn that the board of PSTH has decided to terminate the deal with Vivendi and assign its UMG purchase rights and obligations to another Pershing Square affiliate, citing insurmountable objections to the PSTH transaction made by the SEC. Here is the July 19 PSTH press release announcing the termination of the transaction.
But as noted in the original WSJ article, many questions remain unanswered. What exactly happened here, and why? And what can we learn from this aborted transaction?
In the transaction announced in June, PSTH was to acquire from Vivendi 10% of the shares of UMG for a price of about $4bn. (A 20% stake in UMG had previously been acquired by an investment consortium led by Tencent Group, which you can read about here.) The PSTH purchase was to be followed this fall by the public listing of UMG shares on the Euronext Amsterdam stock exchange and the distribution by Vivendi to its own shareholders of its remaining UMG shares. Following the Vivendi spin-off, and the registration of UMG shares with the SEC, PSTH also planned to distribute to its own shareholders the recently acquired UMG shares, leaving PSTH with about $1.5bn (potentially $2.9bn) in cash for further investment but with no remaining equity stake in UMG.
As a result of this series of transactions, Universal Music Group would have become an independent public company listed in the Netherlands and the US and owned by the former shareholders of Vivendi, the Tencent investment consortium, the shareholders of PSTH and any public investors who acquired UMG shares in connection with the Euronext listing. (This last point is unclear to me; I do not know if the Euronext listing will be a capital raising event for either UMG or Vivendi.)
The continuing shareholders of PSTH would have ended up with direct ownership of the UMG shares plus shares in a recapitalized PSTH (“PSTH Remainco”). The PSTH shareholders would also have received rights to purchase shares in another newly formed Pershing Square investment company known as a SPARC (Special Purpose Acquisition Rights Company). Both PSTH Remainco and the Pershing Square SPARC would have continued to look for acquisitions, with up to $2.9bn and $10.6bn of investment capital respectively. Importantly, neither PSTH Remainco nor the Pershing Square SPARC would have had any legally imposed time frame during which they would have had to invest the remaining shareholder funds, as is the case with SPACs. (SPACs typically have two years in which to complete an acquisition, and if this doesn’t happen the SPAC unwinds and public shareholders get their money back.) You can read more about the structure of the initial PSTH/UMG transactions here.
Note, however, that the PSTH/UMG deal as initially structured effectively disenfranchised and disadvantaged the PSTH public shareholders in some very important ways. At no point in this series of transactions was UMG itself ever going to merge into PSTH, as is typically (always?) the case in SPAC transactions. And because of the way this deal was structured, PSTH shareholders would not have been entitled to vote on PSTH’s initial acquisition of UMG shares, again a breach of standard SPAC governance provisions. Nor would PSTH shareholders have received warrants to acquire additional PSTH (or UMG) shares, as in a traditional SPAC merger. In keeping with standard SPAC practice, prior to the distribution of UMG shares PSTH would have conducted a cash tender offer for any or all shares of PSTH at price of $20 per share (the IPO price) to provide liquidity to those shareholders who wanted out of the deal.
The announced PSTH/UMG deal was not only complex but also quite controversial, and not just with PSTH shareholders. The SEC expressed concerns about the structure of the transaction and whether it complied with NYSE listing requirements for SPACs. (To learn more about the NYSE listing requirements for SPACs, read here.) At the end of the day, PSTH could not address the SEC’s concerns and it announced Monday morning that its board of directors had voted unanimously to terminate the transaction with Vivendi. PSTH’s rights and obligations under the UMG share purchase agreement with Vivendi will be transferred to another Pershing Square affiliate, which will buy the UMG stake. You can read more about this here and here.
So what are we to take away from this saga? There are no doubt many lessons to be learned, but it strikes me at first glance that the structural complexity of the originally announced transaction demonstrated the triumph of brains and aggression over common sense and good judgment. The announced PSTH/UMG transaction was quite clever in how it was structured, financially and legally. It was also very aggressive, even by Pershing Square standards. But perhaps it was all just a bit too clever and too aggressive to suit either the PSTH shareholders or the SEC. The expression “too clever by half” comes immediately to mind.
The announced transaction had a number of fundamental and in the end insurmountable flaws that should have been (and perhaps were) obvious to all concerned, including the PSTH board of directors. Perhaps Mr. Ackman and his advisors thought they could overcome these various objections with clever legal arguments, a strong investment case for buying the UMG shares and the power of the Ackman persona. And perhaps some B&B readers may feel that Mr. Ackman and his advisors should be given credit for pushing the envelope this hard and coming up with such a creative transaction structure. After all, isn’t this why hedge fund managers, investment bankers and lawyers get paid the big bucks?
But in the final analysis, it seems to me that what Mr. Ackman attempted to do was a clear abuse of the SPAC governance structure to the detriment of the PSTH public shareholders. I for one am glad the SEC shut him down on this transaction. SPACs are controversial enough when they work as intended, let alone when they are abused by SPAC sponsors playing around with large amounts of OPM. (For my recent post on the challenges and conflicts associated with managing Other People’s Money, read here.)
Ronald Reagan famously said that government exists to save us from each other, not from ourselves. I don’t know if this is right or not as a matter of political philosophy, but in this case it seems the SEC did what they were supposed to do, which is to protect public investors against the predatory behavior of overly aggressive folks like Mr. Ackman.