Pershing Square Tontine Holdings (NYSE:PSTH), the massive SPAC controlled by billionaire investor Bill Ackman, recently announced a complicated deal that involved taking a 10% stake in Universal Music. In this Fool Live video clip, recorded on June 21, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the details of the deal and why it could be an excellent value for long-term investors.
Jason Moser: I think that this is a story worth following, but Bill Ackman’s SPAC has officially signed, I think this is a really big deal in clearly a market that is going to remain relevant, I suspect at the very least the rest of our lifetimes.
Matt Frankel: Yeah. It’s not only a very relevant deal, but it’s a very complex one. I think actually it was so complex that the title of our last episode on Industry Focus was “A Very Complex SPAC Deal” when we discussed this. We learned a little bit more over the weekend about this. Bill Ackman, a little after one o’clock, he tweeted out, “Happy Father’s Day,” and then at two o’clock he tweeted out an updated press release that said the deal had been finalized. If not long enough of a show for me to go through the complex deal again go through the new points, but there’s three points to the deal. I want to briefly just discuss the new stuff we learned, if that’s OK.
Frankel: See what Jason has to say about this.
Frankel: First, the Universal Music business in general, which is not taking up all of the SPAC’s money, but it’s the primary focus of the deal. They are buying a 10% stake. They’re going to distribute those shares to investors. We already knew all that. We got a few more details about Universal’s business. According to the press release, Universal has a 32% share of the worldwide music market. That’s pretty big. About third of the music market is Universal. They have all of the top 10 artists in the world. All 10 are universal recording artists.
Frankel: Not only is it a valuable businesses generating revenue, they’re building up some of the most valuable intellectual property in the industry. They’ve grown revenue at about a 10% annual rate recently. It was down to 5% last year because of COVID, which is to be expected. The music business wasn’t having a good year in a year when no one could do anything. The businesses were running at a pretty impressive 19% operating margin. The bottom line operating margin, 19% is pretty impressive.
Moser: Particularly, when you look at the economics of the music business. Generally speaking, it is a business seems fraught with red tape, but then also probably most investors out there when they think about the music business, they’re thinking about Spotify (NYSE:SPOT) or Apple (NASDAQ:AAPL) Music. Really, Spotify and Apple music, are the ones that are licensing that music from Universal, aren’t they?
Frankel: Yeah. Universal is considered like a legacy player. That’s the margin a tech company would like to get.
Frankel: Roughly 20% bottom line operating margin, that’s pretty impressive for any company.
Frankel: That’s what we learned about Universal, that’s the big part of the deal money-wise, then you have the remaining SPAC, Pershing Square Tontine Holdings is still going to be trading under PSTH. We had a few new details about that. Ackman gave a lot of new details about what happens with the warrants. Remember all SPAC’s were issued with warrants as well. He gave us some color on those. That was a big unanswered question from the original press release. Sometime after the deal starts going they’re going to have a warrant exchange period, where current warrant holders can just exchange their awards for a certain amount of shares. There’s a whole table that says what exchanges is going to be, and the time team part of it, it means a community aspect of those. Ackman wants this to be like the most shareholder friendly SPAC. The units of the SPAC originally came with one-third of a warrant. Only one-ninth of a warrant was distributed to shareholders. The other two-ninths is still attached to their shares, and it’s only given to people who hold through the business combination. As an incentive to not sell.
Moser: I like that.
Frankel: Those are called the Tontine warrants in the presentation.
Moser: That does sound like a Star Wars sequel or something. I’m just saying. You can go on.
Frankel: Yes it does. For every nine shares you own, you’ll get two of those Tontine warrants upon the business combination. They will be adjusted in price because about three-quarters of the SPACs assets are going to buy the Universal stake. The remaining shares will be worth like $5. I think it was $5.50 or so, is going to be remaining in asset value. The exercise price will be adjusted downwards. It will no longer be a SPAC, which means now they have a total of almost $3 billion to find another business acquisition, which Ackman specifically said it’s going to be an acquisition, not something like the Universal deal when they’re buying a stake.
Moser: So full-on acquisition?
Frankel: Full-on SPAC acquisition.
Moser: Got you. OK.
Frankel: But it’s no longer a SPAC now because it already did the universal deal, which means that they no longer have that two-year time frame working against them. They have a $3 billion war chest and they can pick and choose their spot. They can work on whatever timeline works best for their shareholders, which is nice. That’s what we learned about the remaining assets and immediately after that, they undergo a 4-for-1 reverse split or 1-for-4 reverse split. Because like I said their shares are going to be like $5 after Universal comes out. He wants to bring it up to a $22 net asset value per share in the remaining SPAC.
Moser: Wow. That’s interesting. It does go to show you, and I always like to say this, but investing is as easy or as difficult as you want to make. It does feel like that’s a pretty complicated process. This has been going through.
Frankel: We’re not done yet.
Moser: Okay. Well, go on.
Frankel: That was part two of the three. Then you have the SPAC, which is like the new SPAC.
Moser: That’s right.
Frankel: I discussed what the SPAC was. Essentially, it’s a blank check company that’s not raising any money initially. They don’t raise money until they actually find an acquisition target. It’s a cross between a SPAC and the traditional IPO. By the time they’re raising money, investors know what they are buying. For every share of Pershing Square Tontine Holdings you own, you’ll get one of these SPAC warrants that will allow you to participate in whatever the eventual business combination is, at an exercise price of $20. This SPAC will have up to $10.6 billion, which is a lot more than Pershing Square Tontine ad even, to pursue a mega acquisition and they have a 10-year time frame, which is a big competitive advantage over a SPAC. If one of these big companies says, we’re not quite ready to go public yet, but give us five years, Ackman can wait for that. Other SPACs can’t.
Frankel: That’s a big competitive advantage here. Everyone’s getting a one of these warrants, which I think is probably the most underappreciated part of this transaction. The Universal part alone is worth about what the shares are trading for today. Then you are getting that remaining part of the company then you’re getting that SPARC warrant, which the Pershing Square Tontine SPAC warrants trade for like $7 right now and they have a higher $23 exercise price. They are about to be forced to be exercised. These could be worth more than that and you’re getting one for every share you own. I like the value in this deal a lot. I have actually increased my position since they announced it. Now because I know what the deal is, I call this a lot more of a value investment than a growth investment, especially Universal is a big established company. The SPARC warrants are very investor-friendly. I would actually call this a lot more of a value investment than growth investment at this one. I actually bought some in my retirement account.
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