Analysis-SPAC u-turn mars Ackman's hedge fund pivot

[July 20, 2021]  By Svea Herbst-Bayliss

(Reuters) - It was poised to be William Ackman's brilliant pivot from activist hedge fund manager to prominent dealmaker. It ended up souring his rebranding.

Ackman last year launched a $4 billion special purpose acquisition company (SPAC), the largest blank-check acquisition firm ever raised. With backing from his investors and available bank debt, he amassed enough firepower to take public a company worth tens of billions of dollars.

Last month, however, Ackman unveiled plans to buy a 10% stake in Universal Music Group, which its owner Vivendi SA was already planning to spin off into a public company.

Shareholders of his SPAC, Pershing Square Tontine Holdings Ltd, would receive Universal shares once the music label's stock market flotation was completed and would not get a vote on it. Tontine would carry on in search of another deal, with $1.5 billion in capital left to deploy. Tontine investors would also receive warrants in a new blank-check company launched by Ackman that would pursue another, yet-to-be-determined deal.
 

Ackman's financial engineering proved too much for Tontine investors and U.S. regulators. Tontine shares dropped 18% in the weeks after the deal was announced. The U.S. Securities and Exchange Commission pushed back on the deal by arguing it would not comply with New York Stock Exchange rules, Ackman said.

By Monday, Ackman changed direction on the SPAC as criticism about his moves mounted.

He will now replace Tontine in the deal with his hedge fund vehicles and will seek co-investments from other outside investors to pull off a transaction he made over a handshake with French businessman Vincent Bollore last month. Sources familiar with his thinking said he expects the investments in the new co-investment vehicle to be oversubscribed.

But three long-standing Pershing Square investors said they were skeptical pension funds, family offices and sovereign wealth funds would step up. They spoke on condition of anonymity because of agreements they have signed with Pershing Square.

When Ackman offered his previous co-investment vehicles to investors in companies such as Automatic Data Processing Inc and Air Products and Chemicals, the allure was the potential pop in the stock once Ackman's position became public. This will not be the case now as the deal valuing Universal Music Group at $35 billion is already known, and, some of Ackman's critics argue, overpriced.

 William Ackman, founder and CEO of hedge fund Pershing Square Capital Management, speaks during the Sohn Investment Conference in New York, May 4, 2015. REUTERS/Brendan McDermid/File Photo/File Photo

"He's pulled a switcheroo by announcing an investment in a company instead of a merger to take a company public any many investors didn't like it," said Erik Gordon, a professor of law and business at the University of Michigan said about the Universal Music deal.

Ackman declined to comment.

Ackman is obligated to invest $2 billion and can invest as much as $4 billion in Universal Music Group, which has the rights to artists ranging from Taylor Swift to Drake. Potential investors have not yet seen terms for what would be Pershing Square's seventh co-investment vehicle.

REBUILDING RETURNS

The last few years set records at New York-based Pershing Square Capital Management, with Ackman posting returns of 70.2% return in 2020 and a 58.1% return in 2019. The successes followed double-digit losses in 2015 and 2016 and smaller declines in 2017 and 2018. Turning his back on stumbles in Valeant and Herbalife, Ackman adopted a back-to-basics theme by ending investor visits that were eating into his time and hunkering down in the office to do research.

Two years ago, Ackman told clients his hedge fund would transform itself into a holding company that owns stakes in public companies and offers a helping hand to struggling management teams to resurrect once-strong returns.

This year Pershing Square Holdings has returned 6.5% while the Standard & Poor's 500 Index has gained roughly 15%.
 

"Some investors will stay loyal to Ackman, of course, because they have seen him goof up before and then buckle down and win again," University of Michigan's Gordon said.

(Reporting by Svea Herbst-Bayliss; Editing by Lincoln Feast.)

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