“Doomed To Fail” – Ackman’s SPAC Backs Out Of Deal To Buy 10% Of Universal Music Group

Bill SPACman is about to have some explaining to do to an army of frustrated retail shareholders in his SPAC who have anxiously watched its post-offering premium shrink with a growing sense of trepidation.

In a statement to shareholders in his SPAC – Pershing Square Tontine Holdings, or PSTH – Ackman announced on Monday that a deal between his SPAC and French conglomerate Vivendi to purchase 10% of Universal Music Group (which Vivendi is planning to spin off into a separate business controlled by a conglomerate of investors later this year) has fallen apart.

The deal for UMG would have been the biggest SPAC deal in history, according to CNBC. However, its complexity troubled regulators, and increasingly aroused opposition from investors. Dimming demand has seen shares of PSTH fall 18% since the deal was first announced in early June.

But there’s a twist. Ackman isn’t backing away entirely (UMG is after all an extremely profitable business, made more so by the advent of streaming services like Spotify). Instead, the wealthy investors in Pershing Square, Ackman’s hedge fund firm with more than $13 billion in assets under management, will walk away with a piece of UMG when the company lists on the Amsterdam Stock Exchange with an expected valuation of €35 billion. It will be controlled a consortium of investors, including Tencent.

As WSJ reported, the news marks an unceremonious conclusion to one of “the biggest guessing games on Wall Street” as investors tried to guess which target Ackman might pursue. Given his firm’s unparalleled largess, options appeared limited. Which is one reason why the structure of the PSTH-UMG deal was so complex. With UMG set to list publicly, the deal’s structure would have been exceedingly complex, as WSJ attempts to explain:

Mr. Ackman’s deal was different: New York Stock Exchange-listed Pershing Square Tontine Holding Ltd. didn’t intend to merge with Universal but instead become a shareholder ahead of an already-planned listing by Universal in the Netherlands. People familiar with the matter said it was structured that way because of tax and legal implications for Vivendi, The Wall Street Journal reported.

The structure was hailed by some as a feat of financial engineering that also freed Mr. Ackman from some of the usual constraints of SPACs.

Some observers, though, saw the structure as a concession to the reality that in an increasingly crowded SPAC market, and because of the relatively large size of the vehicle, Mr. Ackman wasn’t able to pull off a more conventional deal, as had been expected. In a sign of waning investor enthusiasm, Pershing Square Tontine shares have fallen 18% since the original transaction was announced on June 4.

After Ackman failed to strike merger deals with Airbnb and Stripe, reports of the deal to take a stake in UMG were greeted with celebration, at least initially. But investors and analysts quickly questioned whether the complexity of the deal, which would leave the publicly traded SPAC with a stake in another publicly traded company, would fly with regulators. Turns out, they were correct. In Pershing’s statement, Ackman cites the SEC’s misgivings as the main reason for scrapping the deal.

“Our decision to seek an alternative initial business combination (IBC) was driven by issues raised by the SEC with several elements of the proposed transaction – in particular, whether the structure of our IBC qualified under the NYSE rules.”

Ackman explains that he hadn’t anticipated shareholders’ apprehensions about the structure of the deal and its “potential impact on investors who are unable to hold foreign securities, who margin their shares, or who own call options on our stock.” Of course, as we noted earlier, Ackman isn’t leaving anyone “at the altar.”

“Yet, despite the inability of PSTH to consummate the UMG transaction, our counterparty was not left at the altar. Pershing Square will be fulfilling PSTH’s commitment to Vivendi.”

One rival institution appeared to question whether Ackman really believed the deal would succeed, Bloomberg reports.

“It was an ill-fated transaction doomed to fail and it did,” said Bluebell Capital Partners Chief Investment Officer Giuseppe Bivona, who had launched an activist campaign against the company earlier this year and still owns Vivendi shares. “There’s not much we know at this stage but it doesn’t seem to be just the change in entities. It’s not clear if Pershing Square is buying the full 10%.”

As Bluebell says, it’s unclear whether Ackman will actually walk away with 10% when the deal is finished. Vivendi says if the stake is less than 10%, it will sell an equivalent amount of shares to whatever is left on the table to investors ahead of the September listing. Given UMG’s market dominance – it controls 40% of the American music market – it’s likely the deal will draw considerable interest from institutional shareholders.

Ackman’s SPAC still has another 18 months to complete a deal, but given it’s size and the seeming shortage of suitable targets following years of frenzied dealmaking activity which has left slim pickings even for investors with a fraction of the money Ackman has to put to work.

He now as 18 months to strike a deal, or being forced to return capital to shareholders. Ultimately, it’s an example of retail investors being left exposed, while Ackman’s wealthy hedge fund investors are left with a stake in an extremely profitable business.