Deep dive in Bill Ackman’s PSTH SPAC. Risks. And, why I am still buying.

The following was a response to questions of risks associated with owning PSTH:

Q: Thanks Michael for the analysis. What are the risks and drawbacks investing in UMG? What are the risks and drawbacks investing in PSTH? They say the first round investors of a SPAC get the big profit. For the investors came later, the value is so diluted, we take the risks, and little reward

A: PSTH is trading at below it’s NAV (net asset value). Worst case scenario if the stock drops drastically one can choose to opt out at the voting stage at the redemption value and recoup your initial investment. This is a price protection that SPAC’s offer. But, I would imagine owning UMG following the spin off would be more beneficial in the long run. Once the spin off happens you will own 1 share of UMG per 1 share of PSTH at about 72% of the NAV which would price UMG at about 15$ per share. Then will still own the PSTH remainder as a SPAC which will seek another SPAC target, let’s call “remainco”, as well as a tradable right to invest in another special acquisition under a SPARC. These added “benefits” are currently mostly a lottery as it is a mystery what the targets of remainco and the SPARC will be. The extra 28% of the NAV is essentially what you pay for these lottery benefits. And, could be worth quite a lot more than 6–7$ if you trust Ackman to land another mature company like UMG. So, the risk is mostly in the vehicle I believe. Should the value of the remainco and SPARC in investors eyes fall the stock could start to trade closer to the UMG value of 15$. Again, because of the redemption option and price protection SPAC’s offer I find it unlikely the value of the remainco and SPARC tag along benefits will degrade the price by much if any. All that being said, of course you could just wait for the spin off and buy UMG directly at whatever price it is trading at later this year.

To swing back to the value question you had. I would say that with this deal you get per 1 share of PSTH: 1 share of UMG at below comp valuation for a company with double the revenue and double both the publishing and recording market share; 1 share of “remainco” at net asset value; and 1 tradable option to invest in a SPARC at NAV. There is no other SPAC in the stock market I know of that is bringing in a fully mature company like UMG which is, in my opinion, a must have in any media, entertainment, and likely streaming investment fund (again they own 1/3rd of all music IP and 10 of the top 10 artists globally) at a valuation below its next inferior competitor Warner Media Group. The downside of UMG being already mature and not a tech company is this is a slow growth stable play I believe over the next 5 years minimum as the power struggle between content creation and streaming distribution companies plays out. UMG is something you park in for many years and hold throughout a lifetime like a Disney. I do not see UMG as an explosive growth stock swing trade. If you don’t trust Ackman to find favorable targets for the remainco and SPARC I still think UMG is worth a purchase when it spins off unless its price inflates far past the NAV which is why I am starting to buy in now. Also, I think the extra perks could be worthwhile.

Now for risks involving UMG. First. I’m seeing concerns regarding Taylor Swift re-recording her masters (hilarious). Dave Chappelle demanded his content pulled from Netflix and the contract renegotiated. And, Kanye West demanding UMG specifically allow for him to purchase his original masters (also hilarious because he now owns GOOD Music and therefore many other artists’ masters). I think it’s a drop in the bucket and other content companies have beaten similar issues. But, if it got out of hand, it could boil over. Likely a future industry problem and not isolated to UMG.

Second. Ackman is correct that the vast majority of independent musicians fail. But artists are starting their own labels now. And, there are still many notable independent musicians. This band of merry men and women and micro labels may actually become sizable competition in the future. And, should UMG decide to increase prices, let’s say. It could lead to them speeding up that possible trend line by emboldening platforms to seek independent and micro label artists. Still for now it seems making the Billboard Top 10 is largely indicative of if you belong to UMG or not. Movie studios small and large shift schedules and talent around Disney’s. And, Disney makes the stars not the other way around. Same I think may be true for UMG as Ackman argues. Although it is true that more people are starting their own labels these days, there is rarely any mega-star that can succeed globally without the involvement of one of the major record labels. Most artists just want to make albums and leave the business side to record labels which makes sense. Even top artists sell their records to labels when they’re at the end of their singing simply because they can just kick back and receive royalties while UMG does all the hard work of creating value (Putting their music on streaming services, Creating Merch, etc). That way the royalties can last even after they pass away. I think I read somewhere that Michael Jackson to this day is one of the top paid artists in the world simply because record labels are constantly looking for ways to make money from his name and his family benefits from that without the headaches of running a record label themselves. Even if they don’t sign a new artist, the archive of music that they own already makes them a key partner of any music streaming service. Still, should there be new innovative methods for independent musicians and micro labels to compete with UMG’s dominance over content management this could hurt the bottom line.

The third and I think greatest risk is of course if music piracy sees a resurgence. Digital concerts could be cam streamed. And, old ways at pirating music if saw a resurgence was and still could be detrimental.

In conclusion, large social movements at reclaiming masters and independent and micro label artists I do not consider much of an issue as you can see in history that movies and television have already shown that these problems are miniscule to mature content companies like UMG. A resurgence of piracy and cam recording is a concern as well as the complex structure of the SPAC deal, but again like movies and television I think there is a lot more profit to be made in the industry regardless. This is something all media companies will never stop fighting. And, I think the likelihood Bill Ackman finds a remainco and SPARC target at at least fair value of remaining NAV is far higher than him over paying for a company with intrinsic value below the remaining NAV value.