Yesterday, eyes grew wide all over SPAC Land when Bill Ackman finally filed his expected SPAC IPO, Pershing Square Tontine Holdings, Ltd., (PSTH.U). Previously, it was rumored that the Pershing Square SPAC would come in at around $1.5 billion.  However, the actual filing doubled that number, and then some, if you factor in the committed $1 billion Forward Purchase Agreement.

And with such an enormous pile of cash at their disposal, what will Mr. Ackman & Co. be hunting? There are a couple of different types of “monsters” they might be chasing, but it seems likely they’ve cleared out a space on the trophy wall for a bagged “Mature Unicorn”, per the prospectus.

However, the sponsor, Pershing Square TH Sponsor, LLC, is an affiliate of the flagship Pershing Square Capital Management, L.P, run by the notorious investment manager Bill Ackman. A propensity to make news headlines can be expected with Mr. Ackman, and it is clear from the name of his landmark SPAC that he is encouraging a long-term investment horizon with “deadly” seriousness. The name “Tontine” could very well be an ode to a historically significant insurance policy that originated hundreds of years ago and came to prominence in the early 1900’s in the United States. In this investment vehicle, investors pay into a common pool of money and receive their proportionate share of returns. As members of the group die, they are not replaced with new investors. The proceeds are then divided among fewer members, so survivors quite literally profit from the deaths of the other investors. The comparison between the SPAC and the tontine is interesting as investors that cannot stick around in either vehicle to the end, is one man’s gain, based on another man’s loss. We’ll come back to the “tontine” concept shortly when we discuss the contingent “distributable” warrants.

Nevertheless, this SPAC is driven by dislocations resulting from COVID-19 and will be focused on four intersecting principal areas of investment. These areas are: high quality companies desiring an IPO but do not want the risk and expense associated with the IPO process, “Mature Unicorns” that need liquidity or want to go public with less risk than a traditional IPO, large highly levered private equity portfolio companies that need an equity infusion due to COVID-19, and large private family-owned companies that need an equity infusion due to COVID-19.

A quick look at Unicorn acquisition targets shows there are numerous name-brand companies the SPAC could acquire that fit the given criteria. Airbnb already raised $1 billion this year at an $18 billion valuation and was planning to go public prior to COVID-19. Robinhood raised a $280 million Series F at a $8.3 billion valuation in May of this year and has seen their business boom since the start of the pandemic. Palantir raised $500 million in June of this year at a $14-$15 billion valuation and plans to go public in 2020.  So there are certainly some interesting companies within their size range.

However, let’s discuss this SPAC’s structure.  There’s a lot to unpack here, so in the interest of brevity, we’ll hit on the most salient points.  First up, you’ll notice this SPAC is a $20.00 unit, not the standard $10.00 unit we’re used to seeing, but a larger unit price makes sense for a SPAC of this size in order to create a more manageable share count.  Especially when you consider there could be an additional $3.0 billion in forward purchase units, on top of the $3.0 billion public units added to the current number of shares outstanding. But with an increase in unit price, naturally the warrant triggers double as well.  For cash and cashless exercise, the trigger is now $36.00, whereas in $10.00 units the standard is $18.00.  For the warrant redemption for shares feature that we usually see at $10.00, it’s now registers $20.00 to match the $20.00 unit.  And finally, the Crescent Term, which we’re used to seeing at $9.20, is now $18.40 for Tontine.

As for the forward purchases, there are two.  The first is a committed forward purchase of $1.0 billion by Pershing Square.  The commitment is key because as we’ve discussed previously, it’s far easier to negotiate with a target company when they know they have at least $1.0 billion cash, regardless of redemption amounts.  So while the prospectus reads as “…we expect to have a minimum of up to approximately $4,000,000,000 in equity capital“, it’s quickly followed by “subject to redemptions“. The second forward purchase is a little squishier. It says the forward purchasers may “elect to purchase up to an additional aggregate of $2,000,000,000 of units.” Which sounds great, but no one is going to hold their feet to the fire if they decide they don’t want to make any additional purchases.  They’re not obligated.

Nonetheless, that is potentially an additional $3.0 billion in forward purchases on top of the $3.0 in public proceeds.  That buys this SPAC a lot of unicorn bullets.

Additionally, these forward purchases of units at $20.00 are different than the public units in that the forward purchase units are comprised of one share and 1/3 of a warrant.  As opposed to the public units at $20.00 which gives you one share plus 1/9th of warrant.  But…the public has the ability to receive a contingent right to receive an additional 2/9ths of a warrant, as long as they don’t redeem their shares at the combination vote.  So assuming no shareholders redeem, you would have your 1/9 redeemable warrant and also receive a contingent “distributable” 2/9ths warrant.  And if you add those together, it’s equivalent to a 1/3 warrant.  BUT….this is where the “tontine” comes in again…

These contingent distributable warrants are essentially just one big pool of warrants, like a tontine.  If a shareholder elects to redeem, their contingent warrants aren’t cancelled.  The stay in the pool.  Basically, it just means there’s a bigger pool available for the remaining shareholders who didn’t redeem.  So by way of example, as provided by the prospectus:

“…if no public stockholders elect to redeem their shares of Class A common stock in connection with our initial business combination, for every nine shares of Class A common stock held by a public stockholder and not redeemed, such holder would receive two distributable Tontine redeemable warrants (2/9ths). If half of the shares of Class A common stock issued in this offering are redeemed, for every nine shares of Class A common stock held by a public stockholder and not redeemed, such holder would receive four distributable Tontine redeemable warrants (4/9ths)”.

So like the tontine insurance vehicle of the early 1900s, as redeemers “die off”, the remaining survivors enjoy the spoils.

Additionally, PSTH has applied some innovation to the promote too. Whereas, most SPAC sponsors purchase 20% of the total shares outstanding for a nominal price, PSTH will be purchasing a Sponsor Warrant (Bill Ackman) and the Directors can purchase a Directors Warrant, with both having a ten year life.  These Sponsor and Directors Warrants are only exercisable when the share price reaches $24.00.  This means that if the PTSH team were to acquire a company, and the share price never reaches $24.00 during the 10 years post-combination close (meaning, it’s not a good deal), they do not receive any “promote” shares. Zero. This is different than your typical SPAC where the sponsors receive promote “founder shares” for the bargain basement price of just $25,000, and even if the share price tumbles well below the $10.00 initial unit price, they still make out okay.  However, as for how many shares the Sponsors or Directors will be receiving is indeterminate as of yet since it’s predicated on the size of the combined company.  However, it does say that the warrants, “will be exercisable, in whole or in part, for that number of shares constituting 5.95% of the common shares of the post-combination entity on a fully diluted basis (including all common stock issuable upon the conversion or exercise of outstanding securities, whether or not convertible or exercisable at such time).

Lastly, it should be noted that while we do not know the price at which the Sponsor and Directors will be purchasing these warrants, they Use of Proceeds table does show an “estimated” $45 million purchase, as a placeholder. However, at a minimum, they will need to purchase $30.353 million just to cover underwriting fees and offering expenses and keep the trust whole at $20.00.

Speaking of underwriting fees, there is a whole schedule structured on a step-up basis, but it maxes out at $30 million for the upfront portion with any excess flowing to the deferred commission. However, the deferred commission is capped too at $56,250,000.  But those are still very nice SPAC fees.

All told, having a deal this size get filed, along with a new and different structure, created quite a bit of chatter today. In general, I really enjoy reading anything new and innovative in a prospectus, but I’m sort of hung up on this contingent distributable “tontine” warrant. On the one hand, it theoretically sounds great if you’re a SPAC trying to protect cash in trust.  On the other hand, for investors it’s a bit of game theory again and if PTSH presents a bad deal (it could happen!) it becomes a real Sophie’s Choice of deciding whether to sacrifice your share or get your contingent warrant.  But layered in with that decision is you now need to guess what everyone else is going to do to figure out which path is more economically meaningful.  But if interest rates remain close to zero for the foreseeable future, and the redemption value of the share remains close to $20.00 at the time of combination, the equation become less complicated.

However, the general rule of thumb for SPACs is, if you have to economically incentivize investors to stay in a deal, it’s a bad deal. So, does Bill Ackman really need to incentivize investors to stay in his deals? By that I mean, the optics aren’t great.  If you’re a celebrated investor, and you can command top notch terms because everyone expects you to bring back a winner, why put in a feature that assumes the deal will not be strong enough to get investors to want to own the share on their own?  Instead, this feature is telling investors they might need to be incentivized right from the get-go.  It doesn’t seem to be coming from a position of strength or confidence and that’s what doesn’t seem to jibe for a sponsor of Bill Ackman’s caliber. However, Mr. Ackman has been to a few wild rodeos throughout his career, so perhaps this is just a case of expect the best, prepare for the worst.

Either way, a $3.0 billion dollar SPAC is pretty exciting, no matter how you look at it.

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