Explainer: How Bill Ackman's SPARC differs from a SPAC

Pershing Square Holdings

02/10/2023 22:15

By Svea Herbst-Bayliss
       NEW YORK, Oct 2 (Reuters) - Bill Ackman's new investment
vehicle, Pershing Square SPARC Holdings Ltd, marks a departure
from special purpose acquisition companies (SPACs), which have
lost favor on Wall Street as deals soured.
    Ackman disclosed last week that SPARC received approval from
the U.S. Securities and Exchange Commission (SEC) to raise a
minimum of $1.5 billion from investors for the acquisition of a
private company. 
    SPARC, which stands for special purpose acquisition rights
company, is similar to a SPAC in that it will act as a shell to
combine with and list another company in New York, infusing it
with capital in the process.
    Here's how a SPARC differs from a SPAC:
    
    DEAL VISIBILITY
    One of the biggest differences is a SPARC doesn't require
up-front money from investors like a SPAC does.
    A SPAC raises capital from investors in an initial public
offering (IPO) by only disclosing the general characteristics of
a company it may seek to buy, rather than naming the specific
target. SPAC investors are then given the option to vote down an
acquisition or redeem their shares once a deal has been
announced.
    SPARC will only ask for money from investors once it has
clinched and disclosed a deal to buy a company. It has
distributed "acquisition rights" for free to investors in
Ackman's previous investment vehicle, who will be given the
option to invest once SPARC has a deal.
    Ackman's previous investment vehicle was a SPAC called 
Pershing Square Tontine Holdings, which raised $4 billion in an
IPO in 2020 and went on to ink a deal for a 2.9% stake in
Universal Music Group at a 35 billion euro ($37 billion)
valuation the following year. 
    Tontine abandoned the deal after the SEC questioned its
unconventional structure, which also attracted shareholder
lawsuits. Ackman returned the money last year.
    
    MORE TIME
    SPARC gets up to 10 years to complete a deal, compared with
most SPACs that face a deadline of between two and three years.
    
    CAPITAL FLEXIBILITY
    Unlike a SPAC, the amount of money SPARC seeks from
investors will vary based on the size of the deal it pursues. It
will be a minimum of $1.5 billion, and Ackman's hedge fund
Pershing Square has pledged to put in between $250 million and
$3.5 billion as an anchor investor.
    
    MORE OF THE DEAL FOR INVESTORS
    SPARC will not offer IPO warrants, which are used by SPACs
as a way to top up the capital raised in an IPO. This means that
SPARC investors will not be diluted by such warrants and will
get to keep more of the company.
    
    FEWER WARRANTS FOR ACKMAN
    Ackman and his team will take a maximum 4.95% stake in the
combined company in the form of warrants, as opposed to the
maximum 5.95% their SPAC afforded them.
    
    NO UNDERWRITING EXPENSE
    SPARC will save on the underwriting fee typically paid by
SPACs in an IPO — equivalent on average to 5.5% of the capital
raised — because it will not need investment banks to distribute
the acquisition rights.

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Ackman's SPARC is seeking new deals with private companies   
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 (Reporting by Svea Herbst-Bayliss in Rhode Island; Editing by
Lisa Shumaker)
 ((svea.herbst@thomsonreuters.com; +617 233 2138; Reuters
Messaging: svea.herbst.thomsonreuters.com@reuters.net))