This week, Bill Ackman is going to make history by IPO’ing the largest special purpose acquisition corporation (SPAC) to date, raising $4B to acquire a venture-backed unicorn to take public. Pershing Square Tontine Holdings (NYSE: PSTH/U) is positioned for success given its size, sponsor and structure. It will trade at $20 per unit, which includes one share of common stock and 1/9th of a warrant (with potential for an additional 2/9th warrant post-business combination). Here’s what you need to know when $PSTH will likely go public on Wednesday (7/22/2020). If you want some background on SPACs before diving in, check out our SPACs 101 article.
Activity: BUY at <$24
12-month Price Target: N/A
WX Capital Portfolio Allocation: 0% (time frame does not match)
WX Capital Anticipated Investment Timeline: Long-term (>12 months)
Qualitative Risk Level: Medium
Key Stock Drivers
SPACs have had tremendous returns on investment (ROI) before and after identifying a target company to bring public, averaging at 9.2% and 41.4% respectively. According to SPAC Insider, the average SPAC that has IPO’d and is searching for a target company to acquire is trading at a 9.2% premium. This premium may range from 0% to 40% depending on the sponsor of the SPAC, which we’ll get into later in this article. Similarly, the average SPAC that has announced an acquisition target trades at a 41% premium. The premium here ranges greatly from 10% - 200% and depends heavily on the target company. Based on our assessment of SPACs, $PSTH has the potential to trade on the upper end of both ranges post-IPO and post-acquisition announcement. Here’s why…
$PSTH is raising $4B to acquire a company - this gives them an advantage over other SPACs because $PSTH will have access to companies other SPACs won’t. The SPAC space is getting competitive as the number of SPACs going public increased from 7 in 2010 to 65 in 2020. The more SPACs on the market means more competition for high-quality private companies to bring public. $PSTH has an advantage by raising $4B because it can access more expensive, higher-value private companies than others. Because of this, $PSTH has a higher chance of success and the target company will likely be high-quality, which will result in a higher trading price post-IPO and post-acquisition announcement.
$PSTH has a big name sponsor which has been shown to drive the SPAC share prices post-IPO. Investing in SPACs is similar to investing in venture capital (VC) or private equity (PE). It effectively allows investors who do not have the capital requirements to allocate capital towards an investment vehicle (the SPAC) which a team of seasoned investors will leverage to invest in a private company and take it public. SPACs with name brand sponsors often draw the most attention because they are well connected in the VC/PE world and have a higher chance of acquiring a coveted private company. For example, Chamath Palihapitiya acquired Virgin Galactic through his first SPAC and his second SPAC, Social Capital Hedosophia II, is trading at a 20% premium because investors are looking for him to acquire another company like Virgin Galactic, which is trading at a 150% returns since going public one year ago. Similarly, RA Capital’s SPAC is trading at a 45% premium since IPO’ing despite not having a target company because investors know RA Capital is a leading firm in the biotech space. $PSTH has the benefit of having Bill Ackman backing it, which will draw significant attention as Ackman is a well known activist investor who recently turned $27M into $2.6B during the COVID crisis in March.
Finally, $PSTH has a unique tontine structure which will increase the likelihood of a successful business combination and for the SPAC price to trade on the higher end of the average range of SPAC returns post-acquisition announcement. The concept of “tontine” comes from a popular insurance policy during the early 1900s where investors are paid out more as other members of the fund die. The concept is relevant to $PSTH because the SPAC will distribute warrants from investors that redeem their units at the initial business combination (these are investors who “die”) to investors who decide not to redeem. This will promote a more successful business combination because a SPAC can lose a lot of traction if investors decide to redeem their units for the base price if they do not like the target company.
Key Stock Risks
Potentially high opportunity cost given $PSTH has stated a time frame of up to 2 years to find a target company. SPACs typically have a two year time frame in which they need to identify and acquire a company. By investing in a SPAC early on, investors are committing their money to a 2 year time frame in which the SPAC’s share price may not increase significantly. Until the SPAC announces an acquisition, the shares may remain at a slight premium and sometimes may drop under the initial SPAC IPO price.
Potentially high premium at IPO given excitement around SPACs and $PSTH in particular. Given the current market conditions and the excitement around $PSTH in particular, the share price may trade at a premium at IPO. This puts investors at risk of paying too much before any real value-add catalysts have happened.
Bill Ackman has had a history of taking large risks which resulted in nearly $1B in losses. Ackman is known for shooting for the stars and sometimes landing on his face, such as his Herbalife short, which cost him nearly $1B. There is no guarantee that Ackman will find a coveted target company that will result in significant returns for SPAC investors. SPACs that have done poorly post-acquisition announcements have traded at 30 - 40% of their IPO price.
$PSTH is a SPAC that will catch many eyes because of its size, sponsor, and structure. Excitement will be enhanced even further as SPACs have had a lot of success recently with DraftKings, Virgin Galactic, and Nikola going public and have seen upwards of 700% returns. While there are a lot of drivers for $PSTH success, there are some risks to be considered. However, given the excitement around SPACs right now and the promising sponsor backing it, $PSTH is certainly a SPAC to consider.
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We do not own shares of Pershing Square Tontine Holdings. However, we may take a position in Pershing Square Tontine Holdings once the company IPO’s. This article expresses our own opinions, not Pershing Square Tontine Holding’s or any other party’s opinion. We are not receiving compensation for this report. We do not have a business relationship with the company mentioned in this report.