Ackman’s Withdrawal From SPAC-For-Universal Deal May Be SPAC Mood Killer

A deal for Universal Music, yes, but not through the much ballyhooed SPAC route.

Hedge fund titan Bill Ackman, as has been widely reported, has abandoned his plans to take a stake in Universal Music Group via special purpose acquisition company (SPAC).

And the stumbling block was likely due to: rules and regulations.

More on that in a minute, but it’s worth noting that Ackman has decided to use a more traditional conduit — his investment firm, Pershing Square Holdings (a hedge fund) — to invest in Universal, taking as much as a 10 percent stake. The hedge fund should not be confused with the SPAC, Pershing Square Tontine Holdings Ltd.

In a nod to how quickly sentiment might turn on those special purpose acquisition companies, the shares in Ackman’s SPAC are down about 24 percent year to date.

Ackman said in a letter to shareholders on Monday (July 19), “Our decision to seek an alternative initial business combination (IBC) was driven by issues raised by the SEC with several elements of the proposed transaction — in particular, whether the structure of our IBC qualified under the NYSE rules.” In other words, it seems that Ackman and company were not able to convince the Securities and Exchange Commission (SEC) that the deal passed muster.

The letter also stated that the SPAC will seek a new merger partner and has 18 months to do so.

“In light of our recent experience, our next business combination will be structured as a conventional SPAC merger,” Ackman stated. The deal with Universal would not in fact have been structured as a traditional SPAC transaction — instead Pershing Square Tontine Holdings would have become a holder of a listing by Universal in the Netherlands.

Ackman said in the Monday letter that his SPAC’s share price had dropped about 18 percent in the wake of the June SPAC-for-Universal announcement. Ackman said in the letter that drop may be tied in part to “the transaction’s complexity and structure,” adding, “We also underestimated the transaction’s potential impact on investors who are unable to hold foreign securities, who margin their shares, or who own call options on our stock.”

Some of this is inside-baseball, germane to Wall Street. As Ackman told CNBC, the SEC had been concerned that the tie-up between the SPAC and Universal would result in a new investment enterprise.

“In order to address the SEC’s concern, we changed the structure of the deal to provide that we were going to contribute the stock that we purchased to a trust — we thought that would address the issue,” Ackman told CNBC.  “Then we signed the deal, and then we pushed forward with the transaction, and then actually this week, in the last few days, the SEC raised, I would say, a ‘deal killer,’ which is they said that in their view, the transaction didn’t meet the New York Stock Exchange SPAC rules.”

The key takeaway, we contend, might be less about this particular deal than the fact that the SEC, in general, is and will be drawing a tighter bead on SPAC dealmaking. As reported in this space earlier in the year, the commission launched a probe into the wave of startups going public via SPACs, and had asked a number of banks about the deals, fees and how the investments are being managed.

Beyond, that, it’s been a key hallmark of SPACs that the forward-looking statements that the combinations make — especially for, let’s say, a quickly growing firm that has yet to post profits — may garner more interest from the SEC. Read “more interest” as a proxy statement for “tighter control.” Limiting some of the hyper-growth projections posited by SPAC targets would in turn rein in some of the valuations that might be assigned to those listings (resulting in, of course, lower share prices). With SPACs flying less high than they once had been, with the target companies a bit more muted in their prospects, it’s possible the whole sector faces rougher headwinds.