A special-purpose acquisition company, or SPAC, sponsored by Bill Ackman’s Pershing Square Capital Management, made its debut on the New York Stock Exchange on Wednesday in the largest-ever blank-check initial public offering.
The offering includes 200 million units at $20 each, raising $4 billion in proceeds. Each unit consists of one common share and one-ninth of a warrant, exercisable at $23. Trading started at $21.10.
SPACs raise money from IPO investors, and then the cash sits in a trust until sponsors agree to a merger with an operating business. When the companies combine, SPAC shares convert to shares in the target, which goes public in the process. The market has seen a flood of SPAC IPOs and deals in 2020, and high-profile players getting involved. SPAC mergers have brought to market some of 2020’s hottest stocks, including Nikola (ticker: NKLA), DraftKings (DKNG), and Virgin Galactic Holdings (SPCE).
Ackman’s SPAC, Pershing Square Tontine Holdings, will initially trade under the ticker PSTH.U. Within a few months, the units will split and shares and warrants can be traded separately, under the symbols PSTH and PSTH.WS, respectively.
The SPAC will have even more cash at its disposal to pursue potential merger targets over the next two years. Pershing Square also has a forward purchase agreement to acquire between $1 billion and $3 billion of additional units at the time of an eventual combination. That means that Ackman, who is CEO of the SPAC, could have as much as $7 billion at his disposal.
Pershing Square Tontine Holdings intends to seek a minority position in a “private, large capitalization, high-quality, growth company,” according to its IPO filings. That includes “mature unicorns,” which are privately owned and possibly venture capital-backed tech companies that have ballooned to large valuations and moved past the peak loss-making stage of their growth. Some have suggested Airbnb and Palantir as possible targets in that mold. Large family-owned businesses are also potential targets. Bloomberg LP has been the most commonly cited name there.
In addition to Pershing Square Tontine Holdings’ massive size, the offering includes several innovations in SPAC terms. By convention, SPAC units tend to IPO at $10 each, and include a common share and a fraction of a warrant exercisable at $11.50—often one-half or as low as one-fifth, depending on the quality of the sponsor.
Ackman’s SPAC includes a “tontine” structure for its warrants, which refers to a type of annuity conceived in the 17th century. Income from the tontine’s pool is shared by all investors, and each individual’s share grows as others pass away. In addition to the 22,222,222 warrants issued at the time of Pershing Square Tontine Holdings’ IPO, another 44,444,444 warrants will be distributed to shareholders who choose to participate in the proposed deal.
At the time of a SPAC’s business combination, common stock can be redeemed for a proportionate share of a SPAC’s trust. That can sometimes leave SPACs without enough cash to complete agreed-upon mergers. By including the tontine terms for its warrants, Pershing Square Tontine Holdings is giving an extra incentive for shareholders to not redeem their shares. It believes that will give it better negotiating power with potential targets, and lead to a better deal.
IPO investors certainly appear interested. The now-$4 billion offering was upsized after first filing at an already record-breaking $3 billion last month.