With No Merger Target, Pershing Square Tontine Holdings Is a Massive SPAC Gamble

Pershing Square Tontine Holdings Ltd (NYSE:PSTH) is now typical of larger speculative special purpose acquisition companies (SPACs) that have risen solely on speculative fever. This is indicative of a frothy market, at least in regards to PSTH stock.

This is because it’s at a 45% premium to its inherent $20 redemption price in less than two years.

PSTH stock still has not chosen a target investment. The company has only two hurdles to overcome according to pages 6 and 7 of its latest 10-Q report. These hurdles limit the choices that Pershing Square Totine Holdings (PSTH) can make.

Two Hurdles for PSTH Stock

First, the target company that PSTH invests in has to have more than $5 billion in tangible net assets.

This is because, as I explained in my previous article on PSTH stock, certain Pershing Square related entities have the right to put at least $5 billion in the target company. This includes $4 billion alone that is sitting in the coffers of PSTH stock.

The second condition, which relates to the first one, is that the target company will have to own more than 50% of the voting securities of the combined company. Otherwise, the combined company would be a subsidiary investment of PSTH stock. This would make PSTH an investment company or mutual fund, and it would have to register as such with the SEC.

But the truth is that is highly unlikely that the $5 billion that Pershing Square can buy more than 20% or 30% of a company. This is from a practical standpoint.

For example, no company that needs $5 billion or so is likely to sell itself at a $10 billion total valuation. It is much more likely to have close to a have a $40 $5o billion post-money valuation. Moreover, it is also likely that a good deal of that money is likely to be paid out to the owners rather than stay in the company.

Looking for an Elephant

As a result, for all intents and purposes, Pershing Square is looking for an “elephant” as a giant company is typically known. And that brings up a third problem. Elephants tend to only sell for high valuations.

As a result, PSTH stock is likely to be in a situation where it has to pay up for the valuation of an elephant. The only exception to that is where there might be a problem with the company. It is losing market share or else needs a lot of capex spending to rebuild its market share, etc.

In that case, PSTH stock gets a bargain, but there is essentially a turnaround situation.

So there are two losing scenarios. In the first, Pershing Square pays up for a small sliver, say 20% or so, of a large company. A good portion of the money will go to the prior owners. Or else the money stays in the company and has to spend a huge amount on capex. This is a turnaround situation that is risky.

PSTH stock owners should not be paying up to 46% more for their shares at $29.20 (i.e, $29.20 divided by $20 minus 1 is 46%).

What to Do With PSTH Stock

As I said in my previous article, it is a much better bargain for investors to buy London-listed Pershing Square Holdings (OTCMKTS:PSHZF). This stock trades at a significant discount to the closed-end fund net asset value (NAV).

This article in Investors Chronicle (which I consider the Barron’s of the UK) is very informative about Bill Ackman’s closed-end fund. It was up significantly in 2020 but is still at a discount to its NAV.

That is much better than paying up for an Ackman-related SPAC that has not announced a target and is at a huge premium to its NAV.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.