Wall Street billionaire Bill Ackman’s trust offers exposure to North America’s best businesses and is buying a stake in Universal Music

Despite its status as a FTSE 100 company, investors may still be unfamiliar with Pershing Square Holdings (PSH). Yet the trust provides access to the stock picking acumen of Wall Street hedge fund manager Bill Ackman and this article seeks to remedy any ignorance of the vehicle.

The trust was rewarded with promotion into the blue chip ranks in December 2020 after strong returns drove a meteoric share price rise.

We’re surprised that given a track record of returns well in excess of its S&P 500 benchmark, not to mention a five year share price total return of 147%, the best in the Association of Investment Companies’ (AIC) Hedge Funds sector, the trust trades at a wide discount to NAV (net asset value), 25.6% at last count.

Billionaire Ackman has been in the headlines lately since his US-listed SPAC, Pershing Square Tontine, pulled out of its proposed acquisition of a minority stake in Vivendi’s Universal Music Group (UMG).

Ackman cited issues raised by the US Securities and Exchange Commission (SEC) as the reason this (fiendishly complicated) transaction didn’t proceed. Instead, Tontine’s Universal Music share purchase agreements will be assigned to the aforementioned trust, which will become a long-term shareholder once Universal Music lists on Euronext Amsterdam in September.

Pershing Square Holdings investing directly into Universal Music side-steps the complexity of the doomed original deal and provides the trust’s shareholders with greater exposure to Universal, the music corporation stars including Lady Gaga and Taylor Swift call home.

‘None of us anticipated this outcome,’ said Ackman in his recent statement (19 July). ‘Yet, despite the inability of Pershing Square Tontine to consummate the Universal Music Group transaction, our counterparty was not left at the altar. Pershing Square will be fulfilling Pershing Square Tontine’s commitment to Vivendi. Pershing Square intends to be a long-term Universal Music Group shareholder, and will endeavour to work with Universal Music Group management to help create value for all stakeholders.’

PERSHING SQUARE UNDER THE SPOTLIGHT

Pershing Square is an investment trust that makes concentrated investments in large cap North American companies with the goal of preserving capital and generating superior long-term absolute returns.

Actively managed by Ackman’s Pershing Square Capital Management, this is a portfolio of ‘long’ investments in high-quality companies with wide economic ‘moats’ that generate predictable, recurring cash flow with limited downside and have higher earnings growth than the S&P 500, although the trust will occasionally go short and take bets a share price will fall.

Ackman puts money to work in companies with ‘formidable barriers to entry and a compelling value proposition’ and which usually boast opportunities for improvement; common traits are high returns on capital, long-term growth trajectories, and unique and irreplaceable brands or other assets. And there is heavy emphasis on firms with strong balance sheets and exceptional management teams. As an activist, Pershing often works directly with company management to unlock value.

Investors should be aware that the portfolio is super-concentrated, running between eight to 12 core positions and with Ackman typically generating one to three new ideas per year.

Pershing Square’s unwavering focus on the best businesses Ackman can find has served shareholders exceptionally well during the pandemic. As he explained in Pershing Square Holdings’ annual report, 2020 proved an excellent year for the portfolio’s companies.

‘The well capitalized (capitalised), high-quality, durable growth companies that represent nearly all of our holdings comfortably weathered the Covid-19 storm. Each has executed initiatives that have and will likely lead to greater market share, improved long-term profitability, and the acceleration of shareholder value creation.’

Pershing Square’s priority is always to protect its investors, including pension funds and private investors, from losing money, and last year, canny investor Ackman made $2.6 billion on a bet designed to protect Pershing Square from falling stock markets triggered by the pandemic.

PHILOSOPHY AND PROCESS

In the annual report, Ackman also provided some insights into his philosophy and process. ‘We have always believed that the common stocks of even the best businesses can trade at almost any price for brief periods.

‘And it is this volatility - often driven by a disappointing short-term event, missed expectations, macro factors, political events, shareholder frustration with management and/or governance, that has enabled us to acquire large minority stakes in great businesses at bargain prices,’ he explained.

‘In light of the nature of our strategy, and our long-term track record for effectuating corporate change, we have often been able to obtain influence over our portfolio holdings that is similar to that of a control shareholder, but without the need to pay a control premium.

‘This aspect of our strategy has given us the best of both worlds, that is, the ability to own great businesses as an important and influential shareholder, and the occasional opportunity to purchase them at bargain prices in the stock market.’

PASSING MUSTER WITH THE MASTER

At of 30 June 2021, Pershing Square Holdings had 10 long positions and zero short positions. The biggest positions included US home improvement Lowe’s.

Agilent Technologies, an analytical measurement and testing company Ackman believes has strong future growth potential and a significant margin expansion opportunity, not to mention fast casual restaurant star Chipotle Mexican Grill and Restaurant Brands, which generates royalties from the Burger King, Tim Hortons and Popeyes brands.

Other top 10 holdings included hotels giant Hilton, real estate developer Howard Hughes Corp, Domino’s Pizza and the Tontine SPAC.

Pershing Square Holdings has traded at a persistently wide NAV discount in recent years, which the board has sought to address by obtaining a premium listing on the London Stock Exchange, buying back shares and initiating a quarterly dividend, while Ackman and other ‘affiliates’ of the Investment Manager have also increased their personal stakes via open market purchases in recent years.

Shares believes this discount could narrow as awareness of the trust builds and investors grow ever more enthused by the deal to buy up to 10% of Universal Music through the listed hedge fund.

As things stand, UK investment trust investors can play the music boom through royalties trusts Hipgnosis Songs Fund (SONG) and rival Round Hill Music Royalty (RMH). Once Pershing Square purchases the stake in Universal, one of the world’s big three record companies alongside Sony Music and Warner Music, investors will have a vehicle with which to tap into the music streaming boom.

Jefferies believes that fundamentally, the price Pershing Square is paying for Universal Music is attractive because, after it lists on Euronext Amsterdam, the music corporation ‘should trade at a significant premium to its listed peer Warner Music Group. Why? Because UMG has greater scale, a better growth profile, wider margins, a superior roster of artists, best in class management and better corporate governance.

‘Pershing Square is buying the UMG stake at an implied equity value of €33 billion but if you factor in the considerations above the fair value for UMG could be in the region of €46 billion. That’s circa 39% higher than the price being paid for the equity.’

Elsewhere, Numis Securities pointed out that Universal Music will ‘clearly be a large position’ for the trust. ‘At 30 June the listed fund had $1.4 billion of cash, and therefore should be able to reach the 5% holding relatively comfortably, however it will be interesting to see whether the manager trims exposure to other holdings or potentially looks to raise further debt to fund the acquisition,’ said the brokerage.

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