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June 29, 2020
Welcome to the SPAC Research weekly newsletter.

Pershing Square Tontine Holdings
Bill Ackman's Pershing Square Capital Management filed an S-1 last week to raise the largest SPAC IPO ever - Pershing Square Tontine Holdings, Ltd (PSTH). Ackman is no stranger to SPACs - he previously teamed up with Martin Franklin to raise £900m in 2011 for a vehicle listed in London called Justice Holdings Limited. That SPAC acquired 29% of Burger King Worldwide from Brazilian private equity firm 3G Capital for approximately $1.4bn in 2012. But the new vehicle, which will raise $3bn, is worth a closer look because it contains a number of innovations that may change the way issuers look at SPACs going forward.

To start with, the IPO will put $20 in trust for each share of common stock sold in the offering. Related IPO terms are adjusted accordingly, with warrants struck at $23, a Crescent Term at $18.40, and a warrant redemption feature at $36.

The SPAC also includes a record forward purchase agreement, where Pershing Square affiliates will buy between $1bn and $3bn worth of units at deal closing, depending on the needs of the individual transaction. But the biggest changes come in the form of warrants.


Tontine Warrants
Each unit sold in the IPO comes with 1/3 warrant coverage. But only 1/3 of that amount (or 1/9 warrant per IPO unit) is detachable for separate trading. The remaining 2/9 warrant coverage will remain attached to the shares of PSTH common stock until the SPAC closes a business combination.

With $20 per share in trust and excluding over-allotment, the SPAC will have 150mm shares outstanding, meaning that approximately 16.7mm warrants will trade separately and 33.3mm warrants will effectively be a due-bill attached to PSTH common stock. Fans of financial arcana may be familiar with an instrument called a tontine, a pooled vehicle that effectively awards dividends to participants who outlive their co-investors. The 33.3mm "distributable tontine" warrants will be awarded pro rata to public shareholders who don't redeem for cash at deal closing. To clarify: if no public shares redeem for cash, then each share gets 2/9 distributable tontine warrants. If half of all public shares redeem for cash, then each remaining share gets 4/9 distributable tontine warrants.

We've heard sponsors ruminate about including a mechanism like this for years. Anybody who's ever sponsored a SPAC has asked themselves "How can we provide additional incentive for shareholders to stick around past our business combination?" The tontine warrant concept is appealing to fundamental investors and sponsors, even as it limits the upside for "yield" investors seeking to flip SPAC IPO units and monetize a risk-free yield from warrants.

Innovation is driven by market leaders and it is no surprise that it took someone of Ackman's caliber to introduce this innovation to the SPAC market. The SPAC's bankers would not have filed their S-1 without confidence in their ability to sell the entire book on current terms. And while Ackman has had his share of market ups and downs, he has significant investor credibility and will likely attract strong demand for SPAC shares in a moment when top-tier issuers are already a hot commodity. The book for this IPO may have proportionally fewer SPAC arbs and more fundamental investors than most other SPAC IPOs.

The tontine warrants will likely create a fascinating trading dynamic in PSTH common stock. Participants know that each share comes with at least 2/9 tontine warrants, so the share price should reflect that receivable. Meanwhile, the implied value of the tontine warrants will be set by activity in PSTH/W, the detachable warrants, a security that will only have a float of 16.7mm. It's a clever mechanism that will likely support the trading price of PSTH common stock and may reduce the number of public redemptions overall.


No Promote
PSTH's other new twist is the elimination of the sponsor promote. In its place, the sponsor will pay an estimated $45mm for a sponsor warrant that's exercisable for 5.95% of the fully diluted share count of the post-combination entity.

Many sponsors have previously included an anti-dilution mechanism to peg their ownership percentage to a minimum of 20% of the capital they bring to a transaction. But we can only think of one instance where the anti-dilution mechanism wasn't waived in connection with deal closing.

The sponsor warrant creates an incentive for Ackman to go hunting for the largest unicorn possible to maximize the number of shares that his warrant controls. Of course, SPAC sponsors are used to the market asking them to sacrifice some of their promote, and it seems reasonable that PSTH's pool of acquisition targets will be well-advised and will request some concession from that 5.95% number. But the way this warrant is structured will likely make it easier for Ackman to control a larger stake in the combined company at closing. After all, it's easier to hold on to shares you already have than it is to ask for more to be issued at deal closing.

The sponsor warrant has an exercise price of $24 and so will only be in the money if PSTH common stock trades up 20% from its initial cash in trust value. But the warrant has a 10-year life, so Ackman will have plenty of time to realize its full value.

In general, many of the best SPAC deals are struck when sponsors are willing to make concessions like subjecting some of their promote to an earnout. But this SPAC is already beautifully aligned. Pershing Square's sponsor investment will only pay out if the rest of shareholders are at least 20% in the money.

It will be fascinating to watch this SPAC and its eventual business combination. And we'll be looking for more sponsors to incorporate whatever pieces of this new structure work for them in future SPAC issuance.



Woodruff Sawyer SPAC Webinar
SPAC Research is proud to sponsor the upcoming Woodruff Sawyer SPAC Mid-Year Update Webinar! The 90-minute webinar will take place on Tuesday, June 30 at 1pm ET. Part I will focus on SPAC IPOs. Part II will cover the latest developments in SPAC business combinations. You can register for the webinar here.


News From the Past Week

IPOs and S-1's
  • Pershing Square Tontine Holdings, Ltd. (PSTH) filed to raise $3bn to acquire a private high-quality growth company. PSTH is led by Bill Ackman of Pershing Square Capital Management, and sports a forward purchase agreement of between $1bn and $3bn to support its eventual transaction. The deal has a number of new twists for a SPAC IPO. Units include 1/9 of a warrant, with at least another 2/9 of a warrant being distributed at deal closing to shareholders who do not redeem for cash. The sponsor isn't taking any promote and instead will spend approximately 1.5% of IPO proceeds to buy a warrant entitling it to 5.95% of the shares outstanding after initial business combination. Underwriting fees for the deal are 1% up front and 1.875% on the back end, depending on the level of redemptions. Citigroup, Jefferies and UBS are joint book-runners, with seven diversity firms participating as co- or lead managers.
  • Fusion Acquisition Corp. (FUSE) raised $305mm in an upsized IPO for an acquisition in fintech or wealth/asset management. Fusion is led by John James, the founder of BetaSmartz, a B2B investment SaaS platform. The team also includes Non-Executive Chairman Jim Ross, whose role as chairman of the global SPDR ETF business at State Street Global Advisors earned him the nickname the "Godfather of ETFs." Cantor Fitzgerald is sole book-runner.
  • Kensington Capital Acquisition Corp. (KCAC) raised $200mm for an acquisition in the automotive sector in North America. KCAC is led by CEO Justin Mirro and President Robert Remenar, who together bring decades of experience in automotive investment banking and operations. UBS and Stifel are joint book-runners.
  • GS Acquisition Holdings Corp II (GSAH) filed an amended S-1 dropping its warrant coverage from 1/3 to 1/4 per unit in advance of a likely IPO pricing this week.
  • Artius Acquisition Inc. (AACQ) filed to raise $525mm to acquire a technology-enabled business. Artius is chaired by Charles Drucker, former vice chairman of Fidelity National Information Services (NYSE: FIS) and former CEO of Worldpay, a leading global payments company. CEO Boon Sim is managing partner of Artius Capital Partners and a former advisory senior director of Temasek, Singapore's sovereign wealth fund. Credit Suisse and Goldman Sachs are joint book-runners.
  • HPX Corp. (HPX.U) filed to raise $200mm for an acquisition in Brazilian consumer goods and restaurants. HPX is co-chaired by Bernardo Hees, former CEO of Kraft Heinz (NASDAQ: KHC) and partner at 3G Capital, the Brazilian private equity firm that teamed up with Berkshire Hathaway to arrange the mega-merger between Kraft and Heinz in 2015. Hees also served as CEO of Burger King Worldwide during the hamburger chain's public market listing via Justice Holdings (formerly LSE: JUSH), Bill Ackman's first SPAC, in 2012. Credit Suisse is sole book-runner.
  • D8 Holdings Corp. (DEH) filed to raise $250mm for an acquisition in the consumer sector. D8 is led by David Chu, the founder and CEO of Nautica from 1983 until its acquisition by VF Corporation (NYSE: VFC) in 2003. Chu has since served in roles for luggage brand Tumi, silverware manufacturer Georg Jensen A/S, and in partnership with golfer Jack Nicklaus' consumer brand. UBS is sole book-runner.
  • dMY Technology Group, Inc. II (DMYD) filed to raise $200mm for an acquisition in mobile apps and related AI or machine learning companies. dMY2 is led by the same team as dMY1, which raised $230mm in February 2020 with a similar sector focus. CEO Niccolo de Masi is the chairman and former CEO of Glu Mobile (NASDAQ: GLUU), a freemium mobile gaming company. Chairman Harry You, who served as the EVP of EMC Corporation (formerly NYSE: EMC), was a co-founder of GTY Technology Holdings (NASDAQ: GTYH), which raised $552mm in November 2016 and merged six SaaS businesses to form GTY GovTech, a cloud-based service provider to state and local governments, in February 2019. UBS is sole book-runner.
  • Malacca Straits Acquisition Co. (MLAC) filed to raise $125mm to acquire a Southeast Asian business conglomerate. MLAC is led by Kenneth Ng, the founder of Ark Pacific Capital Management, a private equity fund manager investing in Asia Pacific with a focus on Greater China. BTIG is sole book-runner.
  • Brilliant Acquisition Corp. (BRLI) raised $40mm for an acquisition in the Asia-Pacific region. BRLI is led by Dr. Peng Jiang, a VP at Ning Sheng Enterprise Co., which is an integrated investment management and financial services company headquartered in Shanghai. EarlyBirdCapital is sole book-runner.
Deal Announcements, LOIs and Rumors
  • B. Riley Principal Merger Corp. II (BMRG) announced the company has executed an LOI for a deal to acquire Eos Energy Storage LLC, a provider of long-duration, low-cost, safe, and environmentally friendly energy storage. The transaction contemplates a pre-money valuation for Eos of approximately $290mm. Assuming no redemptions, the deal would provide Eos with approximately $225mm of additional new equity financing, including $50mm of proceeds from a fully backstopped PIPE by B. Riley Financial. There is no assurance that a definitive agreement will be entered into.
  • Crescent Acquisition Corp (CRSA) announced a deal to acquire Mark Wahlberg-backed F45 Training Holdings, one of the fastest-growing fitness franchisors in the world with more than 1,900 franchises sold in over 50 countries. The combined company will have an enterprise value of $845mm and selling stockholders will receive up to $204mm in cash consideration. The deal carries a $225mm minimum cash condition and includes $50mm of committed financing from CRSA's forward purchase agreement at IPO.
  • Bloomberg reported that Graf Industrial Corp. (GRAF) is rumored to be in talks to merge with Ford-backed Velodyne Lidar Inc., a maker of sensors used in self-driving vehicles, according to people familiar with the matter. GRAF also filed for a two-month extension until 9/30/2020 with no monthly contribution to trust. It's unclear if GRAF is still in talks with PureCycle Technologies.

Meetings and Approvals

  • Act II Global Acquisition Corp. (ACTT) closed its acquisition of Whole Earth Brands, Inc. on 6/25/2020. Ordinary shares and warrants commenced trading on Thursday 6/25/2020 under the symbols “FREE” and “FREEW.”

  • Leo Holdings Corp. (LHC) will hold a meeting 7/14/2020 to approve its transaction with Digital Media Solutions.

Charter Extensions

  • ANDA filed for an extension through 10/31/2020 with no sponsor contribution
  • LACQ adjourned its extension meeting until 6/26/2020
  • JFK extended through 9/30/2020 with an approximately $0.10 contribution
Upcoming Meetings and Deadlines
  • 6/29/2020 ARYA Immatics Biotechnologies approval meeting
  • 6/30/2020 GPAQ HOF Village approval meeting
  • 7/2/2020 HCCH extension meeting (7/2/2020 liquidation deadline)
  • 7/9/2020 KBLM extension meeting (7/9/2020 liquidation deadline)
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