Why Ackman’s PSTH SPAC Is Falling on Universal Merger News

Pershing Square Tontine Holdings (PSTH), the SPAC sponsored by Bill Ackman, was sharply lower in pre-market on June 4. The blank-check company is reportedly in talks to merge with Universal Music. Why is PSTH stock falling on the merger news and should you buy the dip?

There has been a violent sell-off in SPACs since investors have shied away from speculative names. A lot of SPACs have fallen below the IPO price, which puts the merger in doubt. However, in a welcome break, we’ve seen a spike in some SPACs after the merger was completed. SoFi stock rallied after the merger with Social Capital Hedosophia Holdings was completed.

Markets’ response to merger news has been very nuanced. When the SPAC bubble was at its peak, these blank-check companies used to rally on any merger rumor. Churchill Capital IV (CCIV) surged almost 550 percent from the IPO price on its rumored merger with Lucid Motors.

Lately, markets have critically analyzed the merger details rather than blindly sending the stock north on merger news. Looking at the PSTH-Universal Music merger, the Wall Street Journal reported that the Ackman-sponsored SPAC is in talks to acquire the world’s largest music company for an equity value of $40 billion. The deal will value Universal at an EV (enterprise value) of $42 billion, which also takes the debt into account.

One of the reasons SPACs fall after the merger news is because the markets think that the transaction is overvalued. Also, there could be a massive dilution with a PIPE (private investment in public equity), which we saw in the CCIV-Lucid Motors merger. Even though the CCIV sponsors priced the PIPE at a premium of 50 percent over the IPO price, it was a significant discount to the stock price.

Talking of PSTH-Universal Music merger news, Universal reported revenues of 7.4 billion euros (nearly $9 billion) in 2020. This would mean a 2020 EV-to-sales multiple of 4.6x. Warner Music Group (WMG) is valued at an LTM EV-to-sales multiple of 4.45x. Incidentally, WMG stock was up in pre-market on June 4.

In 2020, Universal Music was valued at $36.4 billion when Chinese company Tencent doubled its stake to 20 percent. While the PSTH-Universal Music merger values the company at a premium over the private market valuation, it's only a slight premium.

In many other listings over the last year, including Roblox and Snowflake, the companies were valued at a massive premium over their most recent private market valuation.

Universal Music isn't comparable to these companies that saw a rerating amid the spike in tech and growth names. Even Universal Music has benefited from the increase in streaming revenues.

In its filings, PSTH had made it clear that it's looking for a mature company. The criteria were at odds with most other SPACs which are hunting for growth names, almost all of which are loss-making. I think that Universal Music is a good merger target for PSTH even though the markets don’t seem to think so right now.

Usually, when the merger is announced, companies take up to six months to complete it. There are regulatory clearances and also the merger needs to be approved by the SPAC shareholders. If PSTH stock trades above $20, which is the IPO price, shareholders shouldn’t have much fuss in approving the merger.