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Turn Out the Lights, the SPAC Party is Over
Pershing Square Tontine Holdings (PSTH) announced on July 11, after the markets closed, that it would redeem all of its Class A outstanding shares as part of the special purpose acquisition company (SPAC) winding up its business.
Bill Ackman’s SPAC IPO went public to tremendous fanfare in July 2020. Twenty-four months later, with no initial business combination under its belt, PSTH has hit the end of the road.
So, too, I’m afraid, has the SPAC phenomenon. May it rest in peace.
PSTH IPO Was Very Popular
The Barron's headline in June 2020 said it all: Bill Ackman’s Pershing Square Files for Largest-Ever SPAC IPO. The SPAC raised $4 billion on July 22, 2020, at $20 a unit. It tried to take a 10% interest in Universal Music Group (UNVGY) a year later, but the transaction's complicated nature forced Ackman to abandon the plans.
In the year since he’s been unable to find an appropriate target to meet the 24-month rule for SPAC mergers. Hence, the wind-up.
Here’s what he had to say at the time of the SPAC’s IPO:
“Our goal is to buy a minority interest in a business, and what I mean by that is we’re going to merge with someone. We’re going to take them public and our shareholders will own 20%, 25%, 30% of the company,” CNBC reported Ackman’s comments on July 22, 2020.
“We believe we can make an advantageous deal for our shareholders, really bringing a great opportunity for a company to accelerate its growth, deleverage the balance sheet, and provide capital for investors seeking to make an exit.”
Ackman also said that the SPAC process was better than the traditional IPO process. I doubt he feels that way today.
He did say in his July 11 letter to shareholders that he looks forward to getting Pershing Square SPARC Holdings Ltd. off the ground. It’s a privately-funded acquisition vehicle that will use publicly-traded long-term warrants, known as SPARs, enabling their owners to buy common stock in the merged entity created by SPARC combining with a public company.
If SPARC can get a green light from the Securities and Exchange Commission to issue SPARs, at least something good will come of Ackman’s SPAC debacle.
Ackman’s Assessment of SPACs Very Accurate
In Ackman’s letter to shareholders, he discussed three problems that held back PSTH:
“(1) [T]he extremely poor performance of SPACs that have completed deals during the last two years which has damaged market perceptions of going public by merging with a SPAC,
(2) [T]he high redemption rates of SPACs which has reduced the capital available for the newly merged company, increased the dilution from the shareholder warrants that remain outstanding, and heightened transaction uncertainty, and
(3) [R]isk and uncertainty created by the Investment Company Act litigation brought against PSTH, particularly when coupled with new SPAC rules proposed by the SEC on
March 30, 2022.”
As Ackman pointed out in his letter, when PSTH was proposed in late spring 2020, the markets had just come out of the March 2020 market correction. It looked as though IPOs would remain unappealing to investors. Unfortunately, the equity markets rebounded quickly, IPOs became popular again, and SPACs went out the window.
In 2021, according to Statista, there were 613 SPAC IPOs, up 147% from 248 in 2020. Except for 2020 and 2021, the maximum number of SPAC IPOs in a single year was 66 in 2007, followed by 59 in 2019. So far in 2022, SPACs are off to a good start. Through the first four months, there have been 58, so it’s possible the bloom might not be entirely off the vine.
In a letter to SEC Chair Gary Gensler recently, Massachusetts Senator Elizabeth Warren discussed why she agrees with the agency’s proposed rules to regulate SPACs. The Senator believes that the structure of these investment vehicles favors insiders to the detriment of regular investors who can’t get in on the PIPE (private investment in public equity) deals offered to large institutional investors.
Investors knew the writing was on the wall for SPACs when Donald Trump’s SPAC merger candidate, Digital World Acquisition Corp. (DWAC), traded as high as $175 in March 2022.
Even with the Twitter (TWTR) sale to Elon Musk off the rails, the odds of DWAC going ahead are limited. It is currently under investigation by the SEC, the Department of Justice, and the Southern District of New York. Where there is smoke, there is fire.
The Party Is Over for SPACs
Even though the number of SPACs going public in 2022 has been adequate, the news from Bill Ackman is not good for the long-term prognosis of SPACs.
Bill Ackman is one of this country’s most accomplished investors. If he couldn’t find an appropriate investment candidate for PSTH to merge over 24 months, I doubt those less connected will be excited about going public in the current environment.
However, should Gensler, Warren, and other government officials deliver SPAC rules in the future that are fair for all shareholders, it’s possible they could make a comeback. Until then, PSTH’s demise signals the party's over in a big way.
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