Intro to PSTH SPAC’s emergence
Legendary, yet controversial investor Bill Ackman debuted the world’s largest SPAC to date. Tontine Holdings (PSTH SPAC) debuted in July 2020, raising a record $4B. But what’s interesting is that Tontine offered 200 million units at $20 each, with an entirely new type of SPAC structure. Breaking the mold, PSTH vowed to take no sponsor promote – a stark contrast to the typical 10-20% from most other teams. In doing so, Pershing Square (Ackman’s Firm) paid $65 M for “special” warrants only redeemable at $24. This represents a ~4.3% premium to the warrants striked at $23 for unit investors. Further, Pershing Square offered a record forward purchase agreement (FPA), indicating that the deal size will ultimately be between $5B and $7B. Even at the lower end at $1B, Pershing Square’s AUM is only ~$11B, indicating that they will be highly aligned with SPAC investors.
PSTH has until July 21 2022 to get a deal done, otherwise holders of common shares get 20$ per share in redemptions. Lastly, PSTH will reward non-redeeming shareholders with additional warrants, and potentially even more through its “tontine” structure.
Pershing Square’s Reputation
In earnest, Ackman’s reputation in making big investments is far from spotless. He almost lost $1B after missing the mark on a Herbalife short, and blew $4B investing in Valeant. However, he has had success with SPAC investing in the past. His first SPAC was actually in 2012 with Burger King. This deal actually returned a whopping (no pun intended) 19% annualized return for its investors. Ackman’s expertise is engineering hospitality / retail driven investments, but specifically those with a high degree of activism and involvement. Examples of his successes in choosing winners in this niche include Chipotle, Hilton, Wendy’s, and Starbucks. For example in Wendy’s, Ackman pressured management to spin-off Tim Hortons and make operational improvements. Additionally, famous investor Seth Klarman (of Baupost) disclosed a $400M investment in PSTH backing Ackman’s venture. You can read more about Pershing Square and PSTH on their investor letter, where they provide a lot of context.
Ackman was quoted in late 2020 stating “In terms of timing, what we said at the time of the IPO is we said it would take us, we thought about six months to identify a target that we would be in a position to hopefully announce a deal by sometime in Q1, and then close the transaction in the ordinary course thereafter.” Given some of the recent hiccups with Bloomberg, Stripe, and Airbnb this may push a deal later on into 2021. Not only that, but Kevin O Leary (of Shark Tank fame) also expressed his support.
Target Industries / Sectors for PSTH
Ackman leaves a few hints on PSTH targets – particularly “mature unicorns” like Stripe, Bloomberg, Airbnb, etc. However, those targets have slowly whittled down, and SPAC investors are currently wondering what PSTH will settle for. It may be likely that PSTH won’t grossly overpay for a technology asset, unlike other SPACs. In fact, Ackman seems to have no experience in technology investing altogether! Instead, PSTH will likely shy away from “unicorns” and “tech” to where Ackman truly shines – retail and restaurants. This is clearly a playbook he could repeat to create significant value for PSTH investors.
- Simple, Predictable, and free-cash-flow-generative
- Formidable barriers to entry
- Limited exposure to extrinsic factors that we cannot control
- Strong balance sheet
- Minimal capital markets dependency
- Large capitalization
- Attractive valuation
- Exceptional management and governance
- Subway – The largest fast-food franchisor in the world with over 24,000 locations. Franchises cost only ~$15k compared to ~$45k for McDonalds but demand twice the 4% gross sales royalty of McDonalds. Subway is reportedly valued at over $12.3B, making it a prime target for PSTH.
- Chik fil A – The valuation was last ballparked at somewhere around $4.5B in 2012, but is likely worth well over $10B today. This family-run, yet controversial chicken chain could be enhanced with Pershing Square’s domain knowledge. Although unlikely, PSTH would be a prime bidder for this asset, which could spur a rapid increase in new locations.
- Staples – In a last-ditch effort, PSTH may acquire a sub-quality retail asset like Staples to avoid the SPAC deadline. Sycamore acquired staples for around $6.9B in 2017, so this target may be pushing the envelope.
Deal Flow / Pipeline Analysis
Although Ackman in several interviews claims he is “speaking to multiple” parties, he is a little arrogant and self-righteous. In fact, most SPAC teams bring significant deal-flow to the table in terms of their private equity pipelines. Further, some investment-bank led SPACs like GSAH (Goldman Sachs) have led to great sourcing as well in targets like data-center play Vertiv (VRT). On the contrary, Pershing Square is a hedge fund that aims for concentrated public investments. This may leaving investors asking whether the quality of the deals on the table will be “good enough”.
But, its worth conceding that there are only ~50 targets in Ackman’s universe, and he can likely reach all of them due to the sheer size of PSTH versus competing private equity firms. It’s worth keeping in mind though that Pershing Square probably won’t get a deal done in short-order. Namely, the intense level of diligence the firm employs and the significance to Ackman’s reputation will likely take a lot of time before an offer is released publicly. This may lead investors into looking whether the PSTH options present an opportunity, since selling puts at trust may be opportunistic.
Ability to Create Value Post-Deal
In this core area for SPAC investors, is where Pershing Square truly shines. Due to the high level of alignment with investors – and limits on selling stock/warrants – Pershing Square will make whatever they acquire a core focus for the firm. As discussed previously, Ackman playbook is to wrap his head around a restaurant / retail asset and begin heavy engagements with management to boost sales. To show a case study, we will dive into his extensive involvement with restaurant brand Tim Hortons below.
Timeline of Ackman’s extensive involvement with Tim Hortons
- 2005 – Ackman pressures Wendy’s management to spin-off the then growing Tim Hortons chain to immediately create value for shareholders. We dug up his old communications to the Wendy’s management team here. Wendy’s soon relents and spins-off the Tim Hortons brand in September of 2006.
- 2013 – Ackman’s diligence pays off, with the stock doubling up to $60 from the $36 implied value he proposed to Wendy’s.
- 2014 – Burger King purchases the Tim Hortons chain for $11B from public markets. At the time Ackman owned 11% of Burger King from a SPAC transaction done with 3G Capital back in 2012. In doing so, Buffett and 3G leveraged up the transaction to over 7x EBITDA and lowered the tax rate from 39% to 27.5%.
This example showcases how Ackman uses financial engineering and concentration to create turnaround opportunities for Pershing Square. He repeated a similar playbook for Chipotle after the company came under scrutiny for several food safety outbreaks.
Summary of our Findings on PSTH
In summary, PSTH represents a very shareholder friendly SPAC with a decent team revolving around Bill Ackman. However, our conclusions show that Ackman is unlikely to overpay for a technology asset like Robinhood. Instead, he may opt for a strong restaurant brand with room for a turnaround like Subway. Retail investors looking for another tech “pump” may be not as interested as the institutions like Baupost. That being said, there’s no telling just yet. Ackman said he would be interested in moving into the FinTech space in recent interviews due to the lucrative nature of these businesses.