Bill Ackman may end up liquidating his special purpose acquisition company, but his hedge fund firm just had its best day ever: a $1.6 billion haul.
Ackman’s Pershing Square Capital made that windfall Tuesday, when its $4 billion stake in Universal Music ahead of its initial public offering paid off after shares rose 40 percent on the opening.
Pershing Square's hedge funds put $2.9 billion into the deal, and Ackman was able to raise another $1.1 billion in a new co-investment vehicle for the rest of the 10 percent stake, making Universal the biggest position for his firm.
His biggest fund, Pershing Square Holdings, made an estimated 9 percentage points (gross) on the gain. That will more than make up for the losses it is carrying on Ackman’s SPAC, Pershing Square Tontine Holdings, based on the value of the warrants it holds. (As of August 17, Tontine was Pershing Square’s biggest loser for the year, accounting for 6.4 percentage points of losses and dragging down the fund’s overall performance, according to its semi-annual financial statement.)
Now Pershing Square Holdings, which was up 7.7 percent net for the year as of Sept. 14, has taken off: It is up an estimated 18 percent (gross) for the year.
Ackman, who has a 25 percent stake in Pershing Square Holdings, and collects incentive fees as well, made an estimated $600 million on the day.
He declined to comment. But the huge windfall for his hedge fund isn’t what he had in mind when he began talking with Universal parent Vivendi, the French conglomerate, last November. At the time, the plan was for Tontine to invest in the company.
The deal was complicated and unusual for a SPAC because it wouldn’t have ended in a merger, and the SPAC would have had money left over.
After Vivendi announced a deal had been struck with Tontine to take a 10 percent stake in Universal ahead of a spinoff of 60 percent of the company, Tontine’s stock sank. Within weeks the U.S. Securities and Exchange Commission said it would not approve the SPAC’s plans, and the Tontine board abandoned the proposal.
“It was a dagger in the heart,” Ackman told CNBC the day of that announcement.
At the time, Ackman said his hedge fund firm would make the investment to keep his commitment to Vivendi. To do so, he sold Pershing Square’s stake in Agilent to raise cash, then went out and launched another vehicle to raise the rest of the money required.
Had the SEC let the deal go through, however, Tontine shareholders would have been rewarded handsomely. The complicated structure would have had Tontine invest $14.50 of the $20 per share of the SPAC in Universal, so the 40 percent gain would have amounted to about $6 per share, on top of the remaining $5.50 cash shell.
That alone would have put Tontine’s value per share at $26. The structure also would have included warrants on a new security, called a SPARC, for special purpose acquisition rights corporation. It’s almost impossible to value those — the SEC has yet to approve the new security — but they could have been worth a few bucks on their own.
Instead, within weeks of the SEC’s action, Tontine fell below its net-asset value of $20, and Ackman said he might liquidate the fund and give investors their money back along with warrants on the SPARC if the SEC will approve it. The SPARC is different from a SPAC because investors won’t have to put in money upfront, as they do in a SPAC. The New York Stock Exchange has submitted the rule change to the SEC, which is reviewing it.
The whole process has left many retail investors disgruntled — as well as poorer. But some see the Universal IPO as vindication of Ackman’s deal-making prowess.
“I still think the price action of [Universal] shows that Bill is a deal maker and I still think he will find a deal that we like for PSTH,” an investor who goes by the Twitter handle of Mattress_King wrote Institutional Investor in a direct message.
“I also want to comment that the new SPARC structure could be a game changer — extremely optimistic about that,” he added.