by Travis Johnson, Stock Gumshoe | July 16, 2021 5:27 pm
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Source URL: https://www.stockgumshoe.com/2021/07/friday-file-buying-a-beaten-down-spac-lock-boxing-a-changed-story/
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In hindsight, I fear we will be thinking “what were we smoking before the crash” , it will all be available at PE6/1 as that is history. Now more zombie money may postpone the pop some more but it will pop. Better to lose 10% ( non existent inflation??) than a 40 – 70% haircut. The Fed need to engineer a disaster from which they can “rescue” us. . . . .
Maybe so, but there was great logic to similar thoughts in 2016 and 2018-19, and that opportunity cost of lost gains really wears on you after a while. It’s hard to guess at what the next popular narrative might be, or when it might take hold.
Good to have you back!
Really missed your Friday musings. Great to have you back! I have a question. With your lock box holdings, are your purchasing the $5000 at once or in stages? So, when you say you bought more DFH shares, did you go over $5000? Thanks!
Sorry for the confusion, which comes because some of the lock box holdings are also in my regular portfolio.
The Lock Box is $5,000 per position, all bought at once and essentially ignored for five years.
That addition to my DFH position was in the regular portfolio, where I can trade around a bit, take profits or use stop losses, and where I tend to build positions gradually. DFH is also in the Lockbox, but that position will be unchanged until 2026.
LOL, for some reason, I thought you were going somewhere exotic, like Rio or the Bahamas. I don’t know why. since it’s a bad time to travel. Also, I wasn’t thinking about the kids 🙂
Next time!
Hi Travis.
Been trying to decide on the recent IPO ,CXM…Any thoughts ?
Haven’t looked at the financials — from Bloomberg it looks like ~20-30% revenue growth, unprofitable but not horribly so, valuation of something like 13-16x sales. In line with a lot of other companies on that valuation front, but I don’t know what the actual business potential is or what “secret sauce” they might have compared to competitors who also try to streamline social media customer service for companies.
Thanks Travis
Can’t remember ever writing about a new stock and having the story change so dramatically before the next market open — PSTH has cancelled its deal to buy a piece of UMG, mostly because the SEC didn’t like it. PSH will buy a large stake in UMG instead, and PSTH will be a regular SPAC again, on the hunt for a big deal.
That may well be a short-term positive, since a lot of investors (not me) disliked the UMG deal. I’m still OK holding PSTH here, since the premium paid to the eventual $20 redemption option is very small. We’ll see how it goes — certainly Ackman is facing serious reputational pressure to get a good deal done, but that doesn’t guarantee he will do so.
PSHZF – Pershing Square Holdings is really taking a dive today (-5%)…any thoughts about adding to a position? It’s already priced at a discount to NAV, so is this an opportunity or catching a falling knife?
I think we posted at about the same time, but here’s my detail on PSH from my comment earlier this morning:
As of the end of June, Pershing Square Holdings specifically had about $11.8 billion in assets under management, and $2.1 billion of that was borrowed — so the asset value for shareholders in the fund was around $9.7 billion, or $48.50 per share. If the full assessed value of the PSTH relationship were erased, which won’t happen immediately but could happen if they fail to find a deal in the next 18 months, that would be about 7.7% of the assets in PSH disappearing. That would bring the NAV per share down by about $3.75 to $44.75 (or if we take account for the first two weeks in July, during which the NAV fell to $48.23, down to about $44.50). The share price of PSH on Monday morning was $34.35, so the worst case scenario for PSH as a result of the breakdown in the UMG deal for PSTH, assuming that PSH buying UMG is neutral, would mean that the current price for PSH is still a 23% discount to the “PSTH is worth nothing to PSH” assumption. That’s a pretty easy buy, and PSH/PSHZF remains one of my largest fund holdings… but it is, of course, a concentrated and risky fund (if nothing else changes, this deal to buy part of UMG will mean that they’re adding a ninth fairly large position to the fund, and obviously a ~$10 billion fund that holds only about 10 positions is very concentrated).
So yes, I still think Pershing Square Holdings is a good buy at this stiff discount to NAV. At $34-35 or so, you’re buying a slightly levered portfolio of mostly consumer-related stocks at a 27% discount to the most recent NAV of $48.23. Even if you write off the $3 or so of PSTH value represented in that NAV, which I think is too conservative, then you’re still at a 23% discount to NAV. That doesn’t guarantee it will work, of course, if Lowes, Hilton, Restaurant Brands, Chipotle, Howard Hughes and the other holdings lose value that NAV could obviously fall, the management fees are high and the risk of a concentrated portfolio is high, but I think it’s a buy with a 20%+ discount and the possibility of a good PSTH deal down the road, and would consider shaving off some of my position if the shares get closer to fair value (say, a 5-10% discount).
Thanks Travis….excellent analysis and thoughtful as always….I’m keeping my PSHZF for now, and seeing about re-entering a position in PSTH…of course the risk is to “do a deal” but Bill Ackman is a pretty smart guy, so who knows..I did add a little SCHD today on the dip, and it did recover a bit at the end of the day.
Trade Note:
As cryptocurrency prices tumbled today, my position in Galaxy Digital (GLXY.TO, BRPHF) hit a stop loss (roughly a 50% decline) in the Real Money Portfolio and I sold that position. It remains in the $100K Lock Box portfolio, of course, since that portfolio is not subject to adjustment.
This is not a great reconsideration or reassessment of Mike Novogratz’s company, just a risk reduction move — stocks that can rise 1,000% in a year can obviously fall 90% in a year as well, and there’s a limit to how much loss I’m willing to stomach in young companies that are based on a highly speculative asset.
I continue to have some cryptocurrency exposure, both directly and indirectly, and the reason I put some Galaxy Digital in the Lock Box portfolio was that I saw them as a likely winner if bitcoin and ethereum really manage to become institutionally important investments, and I still think there’s a decent chance of that happening over the next five years… but everything in the history of this new asset class and technology serves to remind us that it’s not likely to be an easy ride, and that institutions might slow their adoption at times when the momentum and excitement fade. No idea whether this is just a dip or the start of something more dramatic, that all depends on where cryptocurrency prices go from here, but I’ll let that position patiently wait out the excitement in my Lock Box while I protect the rest of the portfolio a little bit with this stop loss sale. There have been no major announcements by the company, their assets under management were roughly flat for June after that big surge earlier this year, I still like the potential of their plan to get a NY listing, which is typicalliy a positive catalyst, and I still like the BitGo acquisition.
And since the new company I added to the Real Money Portfolio, Pershing Square Tontine Holdings (PSTH), announced surprise news this morning, I should follow up on that a little bit to update my thinking:
It took me four weeks and a big drop in the share price to begin to get comfortable with that UMG investment by PSTH, and then boom! The story changes. The news of the UMG deal falling apart hit this morning, thanks largely to the fact that Pershing Square was unable to satisfy the SEC’s concerns about the unusual and complex nature of the deal and the impact on shareholders. It’s easy in retrospect to say that Pershing should have known this could happen, and that they’ve been hurt by Bill Ackman’s hubris again, but I’m not particularly worried. Clearly they saw some risk in the deal not going through, since they backstopped it with their regular fund and other Pershing Square funds will instead be meeting the obligation to buy that 10% stake in UMG (probably with a partner or two, but they have access to leverage so could perhaps do it themselves in a pinch), and I expect that to work out pretty well for me as well, as a Pershing Square Holdings shareholder. I think UMG is a great long-term position to add to that portfolio, even if it’s probably a little too big for PSH to swallow by itself (Pershing has roughly $13 billion in assets if you ignore PSTH, mostly in the publicly traded PSH closed-end hedge fund, so a $4 billion position would be a big bite), but we’ll see how that goes.
This is clearly some “egg on the face” for Ackman, something he’s familiar with, but that will also provide some extra incentive to double down on finding a new acquisition target for PSTH. If they don’t, I’ll get to redeem at $20 near the end of 2022 and will have lost about 60 cents per share, 3% in that (almost) worst case scenario. If they do find a good deal or reignite investor interest, perhaps there will be substantial gains, we’ll see.
The challenge is now back to what it was a few months ago: PSTH is trying to make a major acquisition, using at least $4 billion, to buy a minority stake in a large and attractive company… and they’re trying to do that at a time when there are hundreds of smaller SPACs also trying to make deals, so the competition for anything approaching a “popular” or high-growth private company is likely to be a little crazy, and that means the risk of the SPAC incentive structure is working against us to some degree (sponsors are incentivized to make any deal, even a bad deal, because they get nothing otherwise… that’s much less of an issue with PSTH than it is with most SPACs, since their structure is more rational and shareholder-friendly, but it’s still an issue). Here’s what Ackman said about that in his letter to PSTH shareholders on Monday:
“While we are disappointed with this outcome, we continue to believe that the unique scale and favorable structure of PSTH will enable us to find a transaction that meets our standards for business quality, durable growth, and a fair price. We are highly economically and reputationally motivated to consummate a successful transaction. We will, however, only complete a deal that meets our high standards.”
We’ll see how it goes. The ideal scenario for PSTH in the near term would be a real downdraft in the market that puts a damper on IPO enthusiasm and makes a SPAC deal with PSTH and its $4 billion cash pile more appealing for a large private company. Pershing Square Holdings will likely see a small drop in its NAV as a result of the sponsor warrants falling in value as this deal is scuttled (the publicly traded warrants fell by about 20% over the past month, which might be some indicator of the drop in value for PSH), but it won’t be dramatic — the recorded value for the PSTH relationship on the books of PSH was a pretty steep $750 million earlier this year, and that will probably be lower now in the eyes of investors, whether or not PSH writes down the asset at all, but PSH didn’t boost the NAV per share dramatically because of the announced deal, either, so there’s no real recent boost to give up. I’d guess that carrying value might drop by half from where it was in February, but if the deal fails entirely and PSTH has to return capital to shareholders that entire value could disappear, so that’s is certainly a risk.
As of the end of June, Pershing Square Holdings specifically had about $11.8 billion in assets under management, and $2.1 billion of that was borrowed — so the asset value for shareholders in the fund was around $9.7 billion, or $48.50 per share. If the full assessed value of the PSTH relationship were erased, which won’t happen immediately but could happen if they fail to find a deal in the next 18 months, that would be about 7.7% of the assets in PSH disappearing. That would bring the NAV per share down by about $3.75 to $44.75 (or if we take account for the first two weeks in July, during which the NAV fell to $48.23, down to about $44.50). The share price of PSH on Monday morning was $34.35, so the worst case scenario for PSH as a result of the breakdown in the UMG deal for PSTH, assuming that PSH buying UMG is neutral, would mean that the current price for PSH is still a 23% discount to the “PSTH is worth nothing to PSH” assumption. That’s a pretty easy buy, and PSH/PSHZF remains one of my largest fund holdings… but it is, of course, a concentrated and risky fund (if nothing else changes, this deal to buy part of UMG will mean that they’re adding a ninth fairly large position to the fund, and obviously a ~$10 billion fund that holds only about 10 positions is very concentrated).
So… I’m disappointed by the UMG deal falling apart, I thought it was interesting and a relatively attractive deal for the big PSTH fund, but this makes the regular Pershing Square Holdings fund marginally more interesting as it drops in value as a result, and PSTH is back to being a “SPAC on the hunt” and represents a reasonable “low downside, uncertain upside” investment over the next year and a half. I can’t act on any of this, since I wrote about it on Friday and am still embargoed for a couple more days… but I probably wouldn’t change my position anyway.
I’m still trying to wrap my head around: I watched someone buy a $20 put on PSTH. So what does he get? If the redemption value is $20, or now he can sell ’em for $20. Both are optional…
I guess i figured it out! The put’s expiration comes much earlier than the redemption date. So THERE’S his advantage.
Puts seems foolish to me in the near term, unless he just bought the puts cheap and is speculating that a bad deal will get done and the price will fall after the deal is consummated — options follow the SPAC even after it changes names and merges with whatever company they choose, and many of them do fall in price after the deal is completed. The current expiration date for the SPAC is a redemption date if we make it that far, but there’s also a redemption event whenever a deal is made, which could happen next month for all we know, so the timing is certainly not set in stone.
There was a letter to shareholders on 7-19-21 that this deal was getting too much trouble from the SEC so the deal won’t go through. There were 3 separate parts to the deal which is why SEC would not budge on their decision. A 10% stake in UMG was just one part of the deal. William Ackmann coined the deal as a “SPARC”, Special Purpose Acquisition RIGHTS Company. However, the Pershing Square Capital Management Hedge Fund, made the deal with UMG for what I believe will be the same 10% stake in the company from the original Pershing Tontine Holdings SPAC deal. For now, Pershing Tontine Holdings will be searching for a new partner for their SPAC & has been given 18 months to do so. William Ackmann has a $4 billion Trust to use for it!
Could you comment on one of your other spac holdings – Yellowstone. I have not seperated the warrants – should I – but have not seen any big news here. Your thoughts
There is no news on the Yellowstone SPAC, no rumors or talk from the managers at all that I’ve heard. Separating the warrants is worth doing anytime as long as the broker doesn’t charge you much for that task, there’s no downside to it that I’m aware of and there is upside in the flexibility.
YSAC Still makes sense to me as a no-downside, possible upside deal with managers I trust, the trust account for potential redemption was at $10.20 per share last I saw, and the expiration is in six months or so (January 25, 2022), which means that even if you hold to redemption from here and don’t have any interest in whatever deal they make (or they fail to make a deal, which is very possible), you should get about a 1% return in six months. Not guaranteed like a bank account is guaranteed, of course, but I’m not particularly worried about them having surprise liabilities that eat into the trust account.
If they don’t make a deal and have to return the cash to shareholders in January, the warrants would expire worthless — just a reminder, that’s true of all SPACs. And the risk of failure or risk that they’ll make a bad deal will increase as we get closer to January, since the impending deadline will give potential sellers some leverage over YSAC. I do trust the managers at Boston Omaha, but I also know that the incentive is to get a deal done, any deal, or the sponsor gets nothing… and even if you’re trying to be disciplined and make a good deal, incentives matter.
@Travis Any idea why INTZ has been tanking so hard? Is it still a viable long term play?
Intrusion (INTZ), for anyone else who hasn’t followed the story, is the old cybersecurity company that has been trying to turn its legacy products into a SaaS service for network intrusion detection and prevention, and the reason for the latest nosedive was the disappointing uptake of that service from customers, with the pre-announcement today that Q2 revenue would be only about $2 million, (which means that the revenue has stopped falling from the erosion of their legacy business, but it has also not seen any meaningful uptick yet from new SHIELD customers), and, perhaps more importantly, that this disappointment won’t turn around quickly (if at all) — Intrusion believes they’ll need additional capital or a strategic shift of some sort before they can achieve profitability… and, in the same press release, they also announced the surprisingly immediate departure of CEO Jack Blount, no reasons given.
Intrusion was always a “will they be able to sign customers” story when it comes to their Intrusion SHIELD product (non-experts like me need to rely not on our objective perception of the product’s quality, since we’re not likely to know, but on whether or not customers are buying it), and the commentary they shared early this year about the number of “seats” they expected to sell led investors to get quite excited about the potential, particularly because of the Kimberly-Clark deal for 50,000 seats (which, if they sold them at full price and rolled it out quickly, could mean about $12 million a year in SaaS revenue) — I assume the reason for the departure of the CEO is at least partly that the optimistic commentary about their sales pipeline now looks like it might have been wildly irresponsible.
They won’t announce their full quarterly results for a few more weeks, but the shorts have certainly been right about this one so far — signing customers for this product is much tougher than the company implied it would be… and without rapid uptake in that SHIELD business, the company is not particularly appealing. I stopped out of my shares following the initial short attack back in May, mostly just because I didn’t have a high level of confidence about whether it would work or not, and I need some confidence if I’m going to ignore a stop loss signal, so I haven’t been watching closely over the past couple months — but it doesn’t look good, and I’d guess it will probably take some real salesmanship and a new strategy, with a lot more transparency, to get investors excited at this point.
Thanks Travis.
Travis, I see you sold the position Social Leverage Acquisition (SLAC). I am still holding it but what’s your stand on it?
I did sell, though really only because I had better uses for the cash.
I consider pre-deal SPACs below the redemption price (roughly $10) to be a fine parking spot for excess cash, with some potential upside and no real downside. I think Social Leverage is well-connected and has a decent chance of finding a good acquisition target, but that gets harder as the wave of SPACs comes under pressure to make deals, and as it has become a seller’s market for growth companies. Until they announce a deal there’s nothing to really evaluate. Good managers, no real downside to waiting it out, but I wanted the cash for other things.
I was holding it as “cash with maybe some potential benefit,” but came up with a better use for the cash. I didnt’ sell for any fundamental reason, I like Howard Lindzon and his connections and still think they might find something interesting, and there’s minimal risk given the price below the trust fund value, but whatever happens in the future depends on whoever they make a deal with. I’ve seen no updates and heard no rumors on that.