Shares in Pershing Square Holdings (PSH ) dropped over 4% today after activist fund manager Bill Ackman was forced to tear up plans for Tontine, his special purpose acquisition company (Spac), to buy a $4bn stake in Universal Music Group (UMG) after opposition from both investors and the US stock market regulator.
Pershing Square Holdings, a London-listed feeder fund for Ackman’s Cayman Islands hedge fund, slid 4.2% or 110p to £24.90 as it emerged the US-focused master fund to which it is linked could end up with 20%-40% invested in UMG shares when the company spins off from French media group Vivendi and floats on Amsterdam’s Euronext in September.
That would make UMG the biggest holding in PSH, ahead of key stakes in retailer Lowe’s, which accounts for nearly 21% of net assets, and Agilent Technologies and Chipotle Mexican Grill, which represent 16% and 15% respectively.
Under a complex deal announced last month, PSH was originally set to have a smaller exposure to UMG through its stake of about 15% in the Tontine vehicle Ackmann created last year.
Shares in Pershing Square Tontine have tumbled about 18% since the announcement on 4 June with investors surprised at the target and the structure of the deal.
The US Securities Exchange Commission was not keen either, questioning whether the transaction complied with New York Stock Exchange rules.
As a result, the share purchase agreement has been amended with Pershing Square buying a stake of 5-10% in UMG, rather than the original 10% the Tontine would have acquired. It is looking for a new target.
‘While we believe our shareholders recognise UMG’s extraordinary attributes including its attractive growth characteristics, business quality, and superb management team, we underestimated the reaction that some of our shareholders would have to the transaction’s complexity and structure,’ Ackman (pictured) said in a statement.
‘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,’ he added.
Analysts at Numis Securities said Pershing Square Tontine’s purchase price of UMG had valued the equity at €32.9bn or $38.8bn, 5-10% of which is $1.9-3.9bn, equivalent to around 20-40% of net assets, or c.16-33% of the fund’s gross assets including debt.
‘At the lower end UMG would be amongst the largest holdings in Pershing Square. We would expect further details from the manager in due course however it will clearly be a large position. At 30 June the listed fund had $1.4bn of cash, and therefore should be able to reach the 5% holding relatively comfortably, however it will be interesting to see whether the manager trims exposure to other holdings or potentially looks to raise further debt to fund the acquisition,’ said Numis’ Priyesh Parmar.
Today’s fall pushes PSH into negative territory for the year so far. This follows a blistering 2020 when it returned 80% to shareholders, with Ackman protecting investors from the coronavirus crash with a bold bond derivatives trade and benefiting from the subsequent vaccine rally. That leaves shareholders with a total return of 157% over five years ahead of the S&P 500’s 111%.
Despite the strong performance, the shares languish 24% below their net asset value. This is more than double the discount on rival Third Point (TPOU ), which has come under attack from activists led by Asset Value Investors, whose AVI Global (AGT ) trust also has a stake in PSH.
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