Demise of largest SPAC in history comes amid market and regulatory headwinds

The end of William “Bill” Ackman’s $4 billion special purpose acquisition company (SPAC) will mark the biggest rally in the asset class’s history, as the kind of once-major deal faces a increased regulatory scrutiny by the US Securities and Exchange Commission as bear market conditions.

Ackman’s recent decision to redeem all outstanding shares of Class A common stock in blank check company Pershing Square Tontine Holdings Ltd. on July 26 comes after the billionaire hedge fund manager and founder of Pershing Square Capital Management LP said in a letter to shareholders could not find a suitable or executable transaction for the SPAC.

As an IPO during the 2020 go-go year for SPACs, Ackman’s Pershing Square Tontine Holdings ran into a two-year deadline facing many SPACs. Blank check companies, or SPACs, typically have 24 months to buy a company or must pay back the money they raised to shareholders.

“Combined with the enhanced regulatory and political scrutiny of SPACs, particularly compared to conventional IPOs [initial public offerings]SPACs that embraced the opportunity to raise capital early on have faced mounting obstacles and shrinking time,” said Morris DeFeo, a partner at Herrick Feinstein LLP and chairman of the law firm’s corporate department.

also read: SPAC Crackdown: SEC Proposes New Rules Eliminating Advantages Over Traditional IPOs.

As of July 20, there were 590 SPACs still looking for a merger partner, according to Jay Ritter, a finance professor at the University of Florida who follows the new issue market.

As the accumulation of deals continued and broader stock indices moved lower bear market territory by 2022, far fewer SPACs have been made public. Seventy SPACs debuted in 2022, up from 377 in the prior year period, according to Ritter data.

This summer has gotten even worse for SPACs, as none of the 70 SPAC IPOs of 2022 will take place in July.

Speaking of regulatory pressures on both current and proposed SEC rulesHerrick Feinstein’s DeFeo said the SPAC market faces challenges for potential buyers.

“Current and proposed SEC regulations targeting SPACs… continue to place increased pressure on SPACs and their advisers to be diligent and assess potential acquisition targets more thoroughly and cautiously,” DeFeo said. .

Watch: The SPAC explosion is about to turn into a liquidation frenzy, and that may be for the best

In a letter to shareholders on the liquidation of Pershing Square Tontine Holdings, Bill Ackman said he faced SEC concerns over SPAC’s $4 billion acquisition of a 10% stake in Universal Music Group BV UNVGY,
-0.96%

UMG,
-1.05%
by Vivendi SE VIV,
-0.20%,
What Announced on June 20, 2021.

“Unfortunately, Vivendi’s structural and legal requirements dictated a transaction structure that was somewhat unconventional for SPACs and ultimately one that could not be consummated due to concerns raised by the SEC,” Ackman said in his letter.

Instead, Ackman’s hedge fund Pershing Square Capital ended up buying a 10% stake in Universal Music for around $4 billion through two acquisitions in 2021.

Market forces against SPACs include the poor performance of SPAC shares amid the stock’s sharp decline in 2022, as well as high SPAC redemption rates that reduce available capital for newly merged companies, he said. Ackman.

also read: At least 3 SPACs take IPOs in latest sign that popular pandemic route to public markets is running out of steam.

Looking ahead, Ackman said he is working on Pershing Square SPARC Holdings Ltd., which he described as a privately-funded buyout entity that would issue long-term, publicly traded guarantees called special purpose acquisition rights, or SPARs. The SPARs would offer the opportunity to purchase common shares once Pershing Square SPARC merges with a private company.

Pershing Square ranks as the largest SPAC in history with $4 billion raised, followed by Churchill Capital Corp. IV CCVI of $1.8 billion,
+0.05%,
Foley Trasimene Acquisition Corp. II (now Paysafe Ltd. PSFE,
-0.97%
) and three SPACs of $1.2 billion each: KKR Acquisition Holdings I KAHC,
+0.10%,
Austerlitz Acquisition Corp. II ASZ,

and Churchill Capital Corp. VII CVII,
+0.05%,
according to data from finance professor Ritter. All of these offerings debuted between July 2020 and March 2021.

SPAC merger deals have generally not been exposed to underwriter liability, Herrick Feinstein’s DeFeo said. The SEC will try to change that by saying that bankers should look at the two transactions, both the public offering and the SPAC, as a single deal.

This will require bankers and other participants to take a deeper dive in terms of due diligence and valuation, and will therefore require more time, resources and expense, he said.

While these and other changes may increase the regulatory backlog for SPACs, the deal type will likely remain part of the overall deal universe, he said.

“I don’t think the SPAC genie is completely locked up in its bottle,” DeFeo said. “However, it makes sense for investment bankers to pause and look at their exposure and reevaluate deals and decide how they want to allocate resources.”

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