By Svea Herbst-Bayliss, Anirban Sen and Mathieu Rosemain
– William Ackman’s Pershing Square Tontine Holdings said on Friday it was in talks to buy 10% of Universal Music Group at a 35 billion euro ($42 billion) valuation, in a departure from the playbook of special purpose acquisition companies (SPACs).
Tontine became the biggest ever SPAC when it raised $4 billion in an initial public offering (IPO) last summer, with Ackman’s hedge fund Pershing Square committing a minimum of an additional $1 billion.
It did so to take a company public. Yet Universal is already in the process of being listed in Amsterdam by its French parent Vivendi SA, and it will not rely on Tontine to go public, as most companies do in their SPAC deals.
Instead, Tontine shareholders will receive Universal shares once the music label’s stock market flotation is completed. Tontine will carry on in search of another deal, with $1.5 billion in capital left to deploy. Tontine investors will also receive warrants in a new blank-check company launched by Ackman that will pursue another, yet-to-be-determined deal.
The unusual deal would cap a worldwide hunt for a suitable target by Ackman, who previously flirted with home rental giant Airbnb and Southeast Asian ride-hailing and food delivery firm Grab Holdings as targets.
Tontine’s shares were trading down more than 14% at $21.51 in afternoon trading on Friday, as investors fretted over whether the SPAC was offering Universal too high a valuation.
The closer Tontine’s shares trade to its $20 IPO price, the higher the chance that SPAC investors will choose to redeem their shares, taking away money that Pershing Square would use to fund the deal. Pershing Square said on Friday it would backstop any potential financing gap with its other funds.
Pershing Square said it would invest $4 billion to buy the Universal stake. Investors in the SPAC will get Universal shares when they are listed, but will not be able to exercise their current warrants. Investors will also get rights to buy shares in a Special Purpose Acquisition Rights Company (SPARC) launched by Pershing Square, to do yet another deal down the line.
The SPARC will have $10.6 billion in capital available to spend on a new target. It will have no deadline to spend the money and will become publicly listed down the line, Ackman said.
Ackman added that he plans to make a full presentation on the deal once it has been finalized in a few weeks.
A frenzy of SPAC listings in the United States has seen over $300 billion raised through the listing of blank-check acquisition vehicles in 2020 and 2021, according to Refinitiv data.
The SPAC listing frenzy has cooled in recent months, with new issuance dropping dramatically and existing blank check vehicles trading down as a higher interest rate environment hurt appetite for riskier investments. The IPOXSPAC index is down 23% from its February peak.
Vivendi, controlled by French billionaire Vincent Bollore, has benefited from growing streaming revenues at the world’s biggest music label, which is behind artists such as Taylor Swift and Lady Gaga.
It has already sold chunks of Universal Music to a consortium led by Chinese giant Tencent, and plans to list Universal in Amsterdam by September as part of a two-step transaction to distribute 60% of the label to existing investors.
Goldman Sachs in April raised its estimate of Universal’s valuation to 44 billion euros, amid a faster shift to music streaming.
With about 2 billion euros of debt for Universal, the implied equity value for the music label is roughly 33 billion euros, along the lines of the valuation given by Vivendi last month, Bernstein said in a note.
“Universal Music Group is one of the greatest businesses in the world,” Ackman said in a statement.
A Vivendi spokesman confirmed on Friday there were no changes to the plans for a Universal IPO by Sept. 27 after the deal with Ackman. The company, which owns 80% of Universal, had already flagged it could sell an additional 10% of the group to an American investor prior to the IPO.
Bringing in Ackman will diminish the stakes held by Vivendi, at the end of the distribution-in-kind, giving Vivendi 10%, Pershing Square 10%, Bollore 16% and the Tencent-led consortium 20%.
Vivendi shareholders are due to vote on the transaction at a June 22 investor meeting.
The Universal IPO plan has raised hackles of activist fund Bluebell, however, which said it penalized minority shareholders as the distribution-in-kind structure was not tax efficient.
Bluebell, which has declined to reveal the size of its stake in Vivendi, has called on France’s markets watchdog to examine disclosures around the deal.