Bill Ackman wants to liquidate his PSPC. Hello SPARC.

This is the latest chapter in a convoluted saga that has seen Ackman pivot on several occasions before. The end goal of merging with a “mature unicorn” remains elusive.

As part of its latest plans, Ackman’s SPAC, called

Pershing Square Tontine Holdings

(ticker: PSTH), would liquidate its $ 4 billion shareholder trust at $ 20 per share. They would also receive a mandate related to a new entity, called Pershing Square SPARC Holdings, short for Special Purpose Acquisition Right Company, a term coined by Ackman.

The holders of Pershing Tontine Holdings (PSTH.WT) warrants would also get warrants – essentially call options – for the shares of the new company. SPARC would look for an operating company to merge and go public with in the process, while SPAC would cease to exist and its “tontine” mandate structure would also disappear.

This is not very comforting for investors who bought shares of Pershing Square Tontine after its initial public offering in July 2020, when PSPC sold $ 20 of units consisting of one common share and ” a ninth warrant, exercisable at $ 23 after the merger of PSPC. The shares peaked at around $ 33 in February and had consistently traded in the mid to high range of $ 20 until recently.

SPAC stock fell below its confidence-per-share value for the first time on Thursday, closing at $ 19.99. Investors who paid more than $ 20 per share will lose.

Pershing Square Tontine Holdings stock fell 0.9% on Friday morning to $ 19.80. The value of Pershing Square Tontine warrants fell, trading over 65% in morning trading to around $ 1.

Ackman’s change in strategy follows a recent lawsuit against Pershing Square Tontine, claiming that an SPAC is in fact an investment company and should be subject to applicable regulations.

“Although the lawsuit is brought on behalf of a purported shareholder of PSTH, this individual is simply an unintentional accessory to enable the academics and the plaintiff law firms with which they have partnered, to bring the lawsuit,” he said. Ackman wrote in a letter to shareholders published late Thursday night. “The two law professors who concocted the legal theory behind the lawsuit conceded to the press that their motivation in taking the lawsuit was to ‘reform’ the entire PSPC industry.”

Ackman wrote that the uncertainty surrounding the lawsuit would scare off potential merger candidates and therefore he might not be able to strike a deal before its July 2022 deadline. Ackman paraphrased

Berkshire Hathaway‘s

(BRK.A and BRK.B) Warren Buffett in a tweet thread Thursday night: “If you find yourself in a leaking boat, it is often better to change boats than to fix the leaks to complete the mission.” “

(“If you find yourself in a chronically leaking boat, the energy spent on changing vessels will likely be more productive than the energy spent fixing the leaks,” Buffett wrote in his 1985 letter to shareholders. )

This is not the first leak that Pershing Square Tontine has gushed. In June, PSPC’s largest IPO product agreed to a complex deal that would have created three public vehicles, with two hoping for more deals in the future. SPAC has agreed to buy 10% of the Amsterdam-listed shares of Universal Music Group from the French media conglomerate

Vivendi

(VIVHY), and distribute them to shareholders along with a SPARC subscription warrant. However, this would not have used up all of Pershing Square Tontine’s trust money, and the company would have continued to seek another deal.

Regulators disagreed with this last part: SPACs tend to merge with a single company and then disappear, and not live on transaction after transaction. Ackman canceled this proposed transaction in mid-July and hedge fund Pershing Square bought Universal shares instead.

Now the SPARC idea of ​​the original deal is back. These plans have yet to be approved by regulators at the Securities and Exchange Commission and require a rule change at the New York Stock Exchange, a process that could still take months. If approved, the Pershing Square SPARC will have 200 million SPARC warrants — exercisable at $ 20 at the time of the merger — and an additional 22.22 million warrants, exercisable at $ 23 within five years after the merger of SPARC. SPARC’s capital structure will be approximately the same as Pershing Square Tontine, just minus the money for a transaction already held in a trust.

A SPARC is more of a blank IOU than a blank check. Each SPARC warrant represents a right to invest $ 20 in a possible transaction that the hedge fund manager negotiates, with no expiry date. This differs from a PSPC, in which the money is raised up front in an initial public offering, with the backers then seeking a merger typically within the next two years. PSPC shareholders can vote on a potential transaction and have a redemption option that allows them to elect to receive a pro rata share of the PSPC trust in cash, rather than participate in its merger.

In a SPARC, these two decisions are essentially one and the same. Holders of warrants who support or oppose a possible deal proposed by Ackman will vote with their dollars. And they don’t have to bear the opportunity cost of locking their $ 20 a share in a SPAC trust for years while Ackman seeks a deal, he argues. SPARC offers more of an opt-in choice, rather than an opt-out of PSPC.

“The main advantage of SPARC is that it wouldn’t withhold investor money while we search for a target…” Ackman wrote. “SPARC Warrants will also remove the two-year ‘shot timer’ for a sponsor to complete a transaction. This reduces the time pressure the sponsor faces, prompting SPAC sponsors to complete transactions before the time runs out. “

It is an innovative but untested structure. Over the past few months, Ackman has proven to investors that he can imagine serious feats of financial engineering, albeit at times too creative for regulators. So far, however, finding a leading company to merge with its entities has been more of a challenge. This will be doubly true for its SPARC, which may require another significant commitment from Pershing Square funds to ensure there is enough money to close a deal even if the SPARC holders do not participate.

“We have your six,” Ackman signed his letter to shareholders Thursday night, in military language to “We have your back.” So far, investors at Pershing Square Tontine might not feel this.

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