Had a long conversation with @ShortSightedCap last night and the day before about the upcoming SPACkman from @BillAckman

Expect a thread from Shortsighted later (Think he nails what Bill's target is)

Let's talk about the proposed structure of SPACkman

Thoughts welcome 1/n

In trying to "evolve" the SPAC and go big, Ackman has destroyed what actually makes a SPAC a compelling investment & structure. So let's talk about how a SPAC can be "something for everyone" 2/n

Cash alternative with free optionality - won't lose money, just opportunity cost of equity v risk free but warrant free so if a deal, returns can get supercharged.

Rates are zero, so if earning zero on cash, would rather get a free option than own a CD w/ no optionality 3/n

Can be structured as fixed income instrument (sell warrant, create a $9-9.25 cost basis, collect at least $10-10.20 in 2 years with free upside optionality if deal done)

It's a 4-6.5% annual return which CRUSHES what u can get in investment grade bonds with 2 year duration 4/n

Can be structured as a free call option (sell the common, keep the warrant, free option on a deal occurring)

(SPACkman doesn't have a full share warrant, 1/2, or even 1/4 at IPO, it's 1/9 share warrant at IPO, additional 2/9 share if you vote to approve the future deal)

5/n

But what is so critical to the structure is the option component. A SPAC w/$2-3Bn float is inherently a lower volatility option than a $300MM float SPAC if it does the same deal.

NKLA is not a $70 stock now, if the float was bigger on the original SPAC & PIPE smaller 6/n

If there is $1Bn of retail demand for a good story that is valuation agnostic (if we debated $NKLA valuation can we even agree on what metric to use?), bigger pop if its going into a $200MM SPAC v a $400MM SPAC because the float is smaller (remember PIPE shares are locked up) 7/n

So unless you believe Bill can deliver an elephant transaction no one else can at a cheap valuation, why would you be in SPACkman versus another SPAC, the option value is LOWER in how Ackman has structured this proposed SPAC (small warrants - 1/9 share up front, big float) 8/n

What I would suggest Bill should be doing is a $500MM SPAC, full share warrant, with a $2Bn commitment from PSH so the "PIPE is spoken for", and requesting not a 20% promote but a 30% promote because he has created a higher volatility option (smaller SPAC, small float) 9/n

But he actually would have synthetically made it a $2.5Bn SPAC with his commitment to the PIPE, so net net he is getting only a 8% promote on the true SPAC size (v the 6% promote in his proposed structure, albeit SPACkman promote is warrants not "free shares") 10/n

This alternative is a structure that would probably trade well above trust value because sponsor incentives so strong with a strong option value. SPAC investors of all strategies would beg to get into it 11/n

But Bill is different, an innovator! He doesn't want SPAC investors in this deal he wants "long term" investors (or at least that is the whisper). In effect he wants LO money, but here is the problem - until there a deal is announced SPAC is just another form of cash! 12/n

For LO, cash = lag. To give Bill a 2 yr risk free rate loan is genius if you think market going lower and want cash allocation, but what happens if S&P 500 +20% next 12 months? It just doesn't make business/mandate sense to be in this SPAC if your benchmark is S&P 500! 13/n

Smart move for a large cap LO fund manager, would tell Bill I'm there for $500MM PIPE investment when he has a deal, but not there on the SPAC IPO.

Or I can buy SPACkman post-deal announcement, vote for the deal, get the extra 2/9 share warrant but no opportunity cost 14/n

In order for that not be the rational path, either need to be clear no capacity in future PIPE (PSH has spoken for all of it), and that deal will be so good if I buy open market, I'm buying $12+ (sorry, $24 for SPACkman!) and not $10.50ish because it will pop. But will it? 15/n

Can Bill can play in Warren's sandbox & deliver an elephant at attractive valuation that public markets will lust for?

But we are talking about a $10Bn+ company that needs a liquidity event, cash sale to Berkshire just as good as IPO

So why need to be in SPACkman at IPO?
16/n

So who is logical holder of SPACkman if it's structure is not attractive on a relative basis to institutional SPAC investors and creates mandate risk for equity funds?

The answer is retail, and retail does NOT understand how SPAC's work.

17/n

Retail will not going to be happy if this is dead money for 18-23 months before a deal and market is going up.

2 yrs is a long time in this business!

Remember Bill's reputation turned in less than 18 months (great 2019, legendary 1H20) and NOW he is the comeback kid. 18/n

So for this SPAC to further elevate Bill's reputation, I think he needs to come with a deal within 6 months of the SPAC IPO so the dead money factor doesn't become an issue. 19/n

Bill is more accomplished than I am, and he is a logical SPAC sponsor, but in trying to make the SPAC "better" I think he has actually created a less attractive structure for his "partners" & taken away a lot of what makes SPAC's attractive 20/n

And this is important because SPAC's are the logical ECM future if zero interest rates the next 5-10 yrs

Let a smart savvy investor negotiate the deal price on an IPO, why should an IPO syndicate set the price on IPOs, let investors do it directly? 21/n

And assuming announced deal is 2-3x size of SPAC, the sponsor promote is arguably less dilutive then the "IPO discount" from a traditional IPO process 22/n

So writing this because Bill is someone who should always have a live SPAC, and while I think he is trying to innovate the structure, he should take a step back and ask why he wants to reduce the option value that makes it attractive for his fellow SPAC shareholders 23/n

Best I can come up with he wants the PIPE for PSH (commitment of capital if he finds a deal but not locked up for 2 years, so zero opportunity cost - a free option), and lock up every other institution (normally get a look at the PIPE) in the SPAC.

24/n

Is the aura & brand of Ackman that strong right now?

Because if it is not at all time highs, when investors model out this structure the right question is "why would I buy SPACkman instead of any other SPAC?" 25/25