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SPAC deal to buy 10% of Universal Music is off, however the major will not be “left at the altar”

By | Published on Tuesday 20 July 2021

Universal Music

The deal to sell 10% of the Universal Music Group to the Bill Ackman-led special purpose acquisition company Pershing Square Tontine Holdings Ltd is off. However, an Ackman-led hedge fund plans to buy a stake of the music major instead.

Current Universal Music owner Vivendi is spinning off its music business, which will become a standalone entity on the Dutch stock exchange later this year. At that point, 60% of the shares in the Universal Music Group will be distributed to Vivendi’s current shareholders. A Tencent-led consortium already owns 20%. Which leaves Vivendi itself with 20% too.

Earlier this year Vivendi announced that it planned to sell half of that remaining 20% before the stock market listing to a US investor. That was then confirmed to be PSTH, the special purpose acquisition company founded by activist investor and hedge fund manager Ackman.

The deal seemed slightly unusual from the off. Special purpose acquisition companies – aka SPACs or blank cheque companies – are businesses with no current operations that raise money on a stock exchange with the intent of then buying another business. A SPAC would usually buy another business outright, basically turning a privately-owned company into a publicly-owned company through something of a back-door stock market listing.

It was unusual, therefore, for PSTH – listed on the New York Stock Exchange – to buy just 10% of Universal Music as it listed on the Dutch Stock Exchange. PSTH then announced that it planned to distribute the UMG shares it was buying to its own shareholders, before seeking to buy another company outright with the $1.5 billion it would still have in the bank, ie a more conventional SPAC deal.

The change of plan seems to have been prompted by US regulator the Securities And Exchange Commission declaring, “hey guys, that Universal deal, that’s, erm, slightly unusual”. Though Ackman also concedes that some of PSTH’s shareholders were a bit perplexed about the arrangement too. Either way, the Universal share acquisition will now be undertaken by the separate if similarly named hedge fund Ackman leads, Pershing Square.

In a letter to those shareholders, Ackman said yesterday: “Our decision to seek an alternative [acquisition] was driven by issues raised by the SEC with several elements of the proposed transaction – in particular, whether the structure of our [UMG deal] qualified under the New York Stock Exchange rules. We and our counsel had multiple discussions with the SEC attempting to change its position on the issues that it had identified”.

“Ultimately”, he went on, “our board concluded that it was in the best interest of shareholders to assign the UMG stock purchase agreement to Pershing Square – which is specifically permitted under the terms of the agreement with Vivendi – as it did not believe PSTH would be able to consummate the transaction in light of the SEC’s position. Management and the board believe that greater shareholder value can be created by working expeditiously to identify a new merger partner [for PSTH]”.

Elsewhere in his letter, Ackman wrote: “Our share price has fallen by 18% since the [UMG] transaction was announced. While we believe our shareholders recognise UMG’s extraordinary attributes, including its attractive growth characteristics, business quality, and superb management team, we underestimated the reaction that some of our shareholders would have to the transaction’s complexity and structure”.

He then concluded: “None of us anticipated this outcome. Yet, despite the inability of PSTH to consummate the UMG transaction, our counterparty was not left at the altar. Pershing Square will be fulfilling PSTH’s commitment to Vivendi. Pershing Square intends to be a long-term UMG shareholder, and will endeavour to work with UMG management to help create value for all stakeholders”.

For its part, Vivendi confirmed yesterday: “PSTH has informed Vivendi that it intends to assign its rights and obligations to acquire 10% of the share capital of Universal Music Group under the agreements announced on 20 Jun 2021 to investment funds with significant economic interests or management positions held by Mr William Ackman. Vivendi has decided to approve such request”.

“The equity interest eventually acquired in UMG will now be comprised between 5 and 10%”, it then added. “If it were less than 10%, Vivendi still intends to sell the shortfall to other investors before the distribution of 60% of the share capital of UMG to the shareholders of Vivendi scheduled to occur on 21 Sep 2021”.