Throw Bill Ackman's name into the Special-Purpose Acquisition Company (SPAC) game. While Ackman is seeking to build a twist into this, it tells me the SPAC frenzy may not yet be near its peak. It may also become a less traveled, but popular alternative road to an initial public offering. Don't get me wrong, SPACs aren't new, but we're seeing a creeping number of companies use direct listings rather than the traditional process of using large brokerage houses to come to market. The irony with a SPAC is it still comes public with a broker-dealer(s) placing shares. These offerings range from the high eight-figures to Ackman's intended ten-figure raise of $3 billion.
It's a pretty good bet it'll happen. Pershing Square, L.P. has already agreed to purchase $1 billion of units. In the end, the SPAC has more than $6 billion. Plus, the terms of the deal are slightly different than what's currently on the market. Many SPACs hit the market as units that consist of one share plus a warrant or a fraction of a warrant to buy additional shares at $11.50. The stronger offerings seem to be around 1/3rd of a warrant. Ackman's SPAC will hit the offering at $20 with 1/9th of a warrant to buy additional shares at $23. Holders are then rewarded with another 2/9th warrants if they buy into the eventual merger deal rather than bailing.
The SPAC will be called the Pershing Square Tontine Holding aimed at taking a minority position in a private, large-cap, high-quality growth company. It's possible the company will be included in the S&P 500 and/or one time known as a unicorn. With Ackman involved, I start thinking about a big name that could use the involvement of an activist, but this approach is different than finding a private name and bringing it public. That doesn't mean they can't or won't do a private name, but if you've got $3 billion, $5 billion, or even $10 billion (post-PIPE and offering), you can snag a huge private company. I'd say nothing under $50 billion is off the table since the name being acquired will likely get a large ownership stake in percentage terms.
This comes across more like a concentrated closed-end fund meets activist hedge fund. That being said, it isn't necessarily a bad thing. The question we'll need answered is: will taking a stake in an already traded large company offer a premium return?
The answer: it depends.
There are plenty of large companies that could use an extra $3 billion to $7 billion in cash. It could prove to be a catalyst to a huge turn or recovery. It could also act as little more than a secondary offering.
I believe the play here may be to get in early on the share or unit side and look to ride the anticipation wave higher scaling out of some of the position as you go. That being said, I almost feel as SPACs like without declared acquisition targets are a more attractive risk-reward as in the risk is higher, but the upside is as well. Those would include ones like Jaws Acquisition (JWS.U), Social Capital Hedosophia II (IPOB) , and Social Capital Hedosophia III (IPOC) .
I've begun to slowly accumulate those for the longer-term view to go along with Arya Sciences (ARYA) and Forum Merger II (FMCI) . There are plenty of other SPACs out there to trade, but seeing both Sternlicht and Ackman now hitting the space with big offerings, I think some of our focus needs to shift away from the buy and flip into buy and hold.