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Tuesday, June 15, 2021

Ackman’s SPAC Deal to End All SPACs

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Hedge-fund billionaire

William Ackman

launched the biggest-ever special-purpose acquisition company last year. Now his message is that SPACs have had their day.

On Friday, French media conglomerate

Vivendi

VIVHY -0.03%

and Pershing Square Tontine Holdings, Mr. Ackman’s $4 billion SPAC, confirmed a report in The Wall Street Journal that the two parties are in talks. The SPAC would take a 10% stake in Universal Music Group, Vivendi’s crown jewel.

This isn’t your usual SPAC deal. In February, Vivendi said it would spin out UMG later this year in the Netherlands. That is still happening. Rather than merging with its target as other SPACs have, Pershing Square Tontine wants to give its shareholders access to the planned listing at a set enterprise value of €35 billion, or roughly $42 billion.

On the Vivendi side the news isn’t surprising. The company gave a detailed update on UMG last month, including that it was in talks with an “American investor” over a 10% stake. If those talks came to nothing, the alternative was to sell those shares via an initial public offering. Vivendi will still distribute 60% of UMG to its own shareholders and keep 10% for itself. Chinese tech giant Tencent bought the remaining 20% last year.

The deal value is within expectations. Tencent bought in at an enterprise value of €30 billion, and the recorded music business has thrived during the pandemic. The new valuation would put UMG at a higher multiple of revenues but a lower multiple of earnings than its smaller, less profitable peer

Warner Music,

which went public last year. Vivendi shares, which jumped almost 20% after the company said it would spin off UMG, fell less than 1% Friday.

For Pershing Square Tontine investors there is more to digest. For one, Mr. Ackman’s departure from the usual route of a merger with a startup cements worries that the recent boom in SPAC listings has left too much money chasing too few quality targets all at once. SPACs typically have two years to complete a deal before returning funds to shareholders.

Moreover, the UMG deal won’t be the end of Pershing Square Tontine, which will enjoy an afterlife as a time-unlimited acquisition vehicle with $2.9 billion in fire power. Roughly half of that money is what is left after it buys 10% of UMG and distributes it to its own shareholders. The rest will come from “forward-purchase” agreements with other funds in the Pershing Square empire—similar to the “private investment in public equity” or PIPE money institutional investors contribute in a typical SPAC deal. Such agreements also fund part of the UMG deal.

Importantly, Pershing Square Tontine’s second life won’t be subject to the usual SPAC deadlines for spending its cash. The UMG deal qualifies as the “initial business combination” that stops the clock ticking.

As if that weren’t enough, Mr. Ackman is also creating a completely new kind of acquisition company with up to $10.6 billion in firepower, most of it from the sale of “special-purpose acquisition rights,” or SPARs. It is like a SPAC, except that investors have the right to buy in rather than providing the money upfront. It is also free from the usual time pressures: The rights last an extendible five-year term. Pershing Square Tontine shareholders will get these transferable rights as part of the Universal deal.

The hedge-fund manager explains at The Future of Everything Festival why Pershing Square took a stake in the pizza maker, which has been buoyed by pandemic dining trends. (Video from 5/11/21)

All told, Pershing Square Tontine shareholders get shares in Universal and a stake in an extended-life acquisition vehicle—together theoretically worth the SPAC’s $20-a-share IPO value—as well as the right to be part of a bigger venture. Investors have understandably struggled to get their head around this. On Friday, the stock opened at about $22, down 10%, following much volatility in post- and premarket trading.

Guessing Mr. Ackman’s big target has been one of Wall Street’s favorite games in recent months. If the result seems a bit underwhelming, at least it comes with the prospect of even bigger deals to come. Just don’t call them SPACs.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

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