The dangers of holding warrants in ad hoc acquisition companies have been illustrated by the recent drop in the price of warrants issued by Bill Ackman’s
Pershing Square Tontine Holdings.
The warrants (ticker: PSTH / WS) were trading at $ 1.42 on Wednesday, compared to nearly $ 3 on August 19.
The sale came following Ackman’s announcement that it was prepared to liquidate Pershing Square Tontine Holdings (PSTH) due to a shareholder lawsuit. He’s also looking to find an acquisition target through a separate vehicle, Pershing Square SPARC Holdings, a special-purpose acquisition rights company he plans to create, pending approval from Securities and Exchange Commission and the New York Stock Exchange.
Warrants on Wednesday came out of a record low closing Tuesday, gaining 68 cents, or 92%, after Ackman’s positive comments on the warrants in an Aug. 24 letter to holders of the warrants.
(PSHZF), an approximately $ 10 billion closed-end foreign equity fund managed by Ackman that trades on the Pink Sheets. The letter was published after the market closed on Tuesday.
Pershing Square Tontine warrants, like those issued by hundreds of other PSPCs, are long-term call options that are equivalent to leveraged bets on stocks. Pershing Square Tontine’s warrants, exercisable at $ 23 per share, expire in four years and traded as high as $ 17.80 in February, when Pershing Square Tontine shares peaked at $ 34.
With the massive sell-off in the SPAC market over the past few months, the entire SPAC warrants industry has been hit hard. Nearly 300 PSPC warrants are trading for under $ 1, according to a Twitter post on Wednesday morning through the SPAC warrants account.
According to Julian Klymochko, CEO of Accelerate Financial Technologies, a Canadian company that manages a group of investment vehicles, out of nearly 400 SAVS that have not found a target, all but two are selling below their net asset value, normally $ 10 per share. including exchange traded funds that invest in SPACs.
Ackman’s SPAC has fallen slightly since the announcement of the potential liquidation. Pershing Square Tontine Holdings was trading at $ 19.74 on Wednesday, down 4 cents during the session and down 24 cents since August 19.
SPAC is supported because it has $ 20 per share in cash on its balance sheet, and it would return that money to investors if Ackman decided to pursue a goal through the new SPARC. In any event, the $ 20 should be returned in July 2022 to investors if PSPC does not find an acquisition target based on PSPC’s initial terms when it IPO in July 2020.
Warrants, like others issued by SPACs, carry a premium, with Pershing Square warrants exercisable at $ 23 per share.
Ackman’s plan is to offer Pershing Square common shareholders new transferable SPARC warrants that will give them the option to purchase SPARC common stock at $ 20 if Ackman finds a target for that vehicle. Current warrants would get new SPARC warrants with a 15% premium, or $ 23 per share, maturing five years after SPARC made an agreement to buy a company.
Warrants are now trading at such a low price because their value depends on Ackman’s ability to gain SPARC approval and then find a target. If he doesn’t get the green light for SPARC and can’t find a target for Pershing Square Tontine, the warrants would likely be worthless.
When Pershing Square Tontine was established in July 2020, it issued 200 million units consisting of one common share and one ninth warrant. The units then separated into common stock and 22.2 million warrants. This is a typical PSPC structure, with warrants representing a bonus for first time buyers of units. They are generally hit with a 15% premium over common stocks.
In a letter dated August 24 to the holders of Pershing Square Holdings, Ackman said he remained determined to find a deal for Pershing Square Tontine.
“Our plan to return money to shareholders once SPARC is approved does not in any way mean that we are moving away from PSTH and giving up on making a deal,” he wrote. He also expressed optimism that the necessary SEC and NYSE approvals for SPARC will be obtained “within a reasonable period of time, that is, in months, not years.”
Ackman wrote that assuming the new SPARC gets the necessary approvals, the new SPARC warrants that will go to current holders of Pershing Square Tontine warrants are more attractive, on better terms, than the existing structure.
“Since the $ 23 SPARC Warrants can only be exercised when SPARC completes its IBC (Initial Business Combination), there is no risk that they will expire until the end of the period for which SPARC must find an agreement. , which would be many years away. In comparison, PSTH’s existing DR (Redeemable Distributable) warrants lose their value if we do not sign a letter of intent for an agreement within 11 months, and close within six months. Since the $ 23 SPARC warrants have a much longer term than our existing warrants and therefore have a higher probability of going into effect in an IBC (initial business combination), they should be significantly longer. more valuable than our current DR warrants, which have a much shorter term remaining before an IBC is completed to extend their life.
Klymoshko favors shares of Pershing Square Tontine Holdings, says Barron in an email: “PSTH common stocks are a better risk / reward ratio” compared to what he considers speculative warrants.
With Ackman’s SPAC at a discount to net asset value, it offers an annual return of approximately 1.7% until its July 2022 liquidation date, and investors are expected to obtain the SPARC mandate which could be worth at less $ 1 each if the structure is approved.
The existing warrants are more speculative, but if Ackman can get SPARC approval, they could at least hold their current value and eventually appreciate, as investors are betting he will find what has been an elusive deal.
Write to Andrew Bary at [email protected]