With Pershing Square Tontine Holdings (PSTH) Now Moving To Take a Stake in Universal Music Group (UMG), Is the SPAC Also Eyeing a Merger With Plaid?
Pershing Square Tontine Holdings (NYSE:PSTH), one of the highest-ranked Special Purpose Acquisition Companies (SPACs) currently in the market, rocked the financial world earlier this month when it unveiled a one-of-a-kind deal to acquire a 10 percent stake in Universal Music Group (UMG) while retaining its SPAC structure for a future merger. Even though the identity of the SPAC’s merger target is still unknown, Stripe and Plaid remain at the forefront of potential candidates.
As we explained in a previous post, Pershing Square Tontine Holdings bucked the prevailing trend by pricing its IPO at $20 per share instead of the usual $10/share for almost all other SPACs. After months of speculation, PSTH announced that it would acquire a 10 percent stake in UMG, a global music company that has Vivendi as its major shareholder. Bear in mind that this is merely an investment and that PSTH and UMG would not merge following the closure of this transaction. Interestingly, the SPAC will use only $2.5 billion from its IPO proceeds to acquire a $4.1 billion stake in UMG, with the residual $1.6 billion coming from the exercise of PSTH’s forward purchase agreements with Pershing Square Funds and affiliates. Consequently, PSTH would still retain $1.5 billion in its trust account to pursue a merger with another entity.
Pershing Square Tontine Holdings shareholders are now set to receive three separate securities:
- UMG ordinary shares at an approximate price of $14.75 per PSTH share once UMG undergoes an IPO later in 2021
- Residual PSTH shares to account for the remaining $5.25 per share in cash held in trust
- Finally, PSTH shareholders would also receive transferable 5-year rights to acquire a stake in Pershing Square SPARC Holdings, a SPARC or Special Purpose Acquisition Rights Company, at $20 per share. Bear in mind that a SPARC essentially flips the concept of a SPAC on its head. Instead of raising cash in an IPO and then merging with a target, a SPARC only issues rights (called SPARs) to acquire shares in the merged company without raising any cash. Once the transaction is finalized, the cash is raised as investors exercise their SPARs
The first major test for Pershing Square Tontine Holdings is set for the 22nd of June, when Vivendi shareholders are expected to vote on this deal. Given that Vincent Bolloré, the CEO of the Bolloré investment group and a proponent of the deal, owns a 30 percent stake in Vivendi and that a simple majority is required for approval, the deal is likely to be approved. Nonetheless, readers should note that Third Point’s Dan Loeb, an activist investor, is actively lobbying for the rejection of this transaction.
This brings us to the crux of the matter. The deal with Pershing Square Tontine Holdings has valued UMG at around $40 billion, a substantial discount to the company’s recent valuation of $53 billion. With FY 2021 revenue expected to total around $12.7 billion, the deal represents substantial value for PSTH investors. However, this transaction has also highlighted the immense importance that PSTH places on generating shareholder value. Consequently, a merger with Stripe seems unlikely now, given that the PayPal competitor is now valued at around $95 billion. Even if Bill Ackman were to stake an additional $1.4 billion in cash from forward purchase agreements to buffer PSTH’s residual $1.5 billion cash balance, the entire quantum would likely amount to only a very small stake in the payment giant, thereby corresponding to a muted potential for generating shareholder value. Moreover, with over $600 million comfortably sitting on Stripe’s balance sheet, I don’t think that the company is in any hurry to go public.
In light of all these factors, I believe that Plaid is now one of the leading candidates for a merger with Pershing Square Tontine Holdings. After all, with a valuation of around $13.4 billion, PSTH would be able to obtain a 20 percent stake in the company with ease (by incorporating cash from forward agreements). Moreover, with Visa’s (NYSE:V) acquisition bid failing recently, Plaid is now looking to take either the SPAC route or an IPO. As to why I think PSTH’s merger target is a payment company, Bill Ackman is on record stating that the best business is one where you can earn royalties on people spending money. While this statement was made in reference to Visa and Mastercard (NYSE:MA), it is also equally applicable on Plaid, which is essentially a data transfer network that powers fintech and digital finance products.
The PSTH ride is far from over and there are sure to be lots of twists and turns before we get to know the SPAC's definitive merger target. So, stay tuned!