WHEN: Today, Monday, July 19, 2021
WHERE: CNBC’s “Squawk Box”
Following is the unofficial transcript of a CNBC exclusive interview with Pershing Square Capital Management CEO Bill Ackman on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Monday, July 19th. Following is a link to video on CNBC.com:
All references must be sourced to CNBC.
ANDREW ROSS SORKIN: Meantime, big headline this morning. We learned that Bill Ackman’s blank check company was dropping a roughly $4 billion deal to buy 10% of Universal Music Group, home to stars like Taylor Swift and Lady Gaga. And in a letter to investors in his SPAC, Ackman said the SPAC’s board unanimously decided not to move forward this after the SEC privately took issue with several elements of the proposed deal that could have potentially blocked it, including whether its structure met NYSC rules. Now Ackman says he still intends to become a long-term Universal shareholder when the company owned by French group Vivendi goes public in September. His SPAC will now look for a new combination target and joining us right now exclusively to talk about that and so much more is Bill Ackman, CEO of Pershing Square Capital Management. Bill, it’s great to see you this morning to be able to talk to you on a morning when this headline emerged and this deal has effectively been called off. I do know that your hedge fund will now step into the place effectively of the SPAC but tell us what happened.
BILL ACKMAN: Sure. So just to rewind. Go back just a few weeks, we announced the transaction and a couple weeks later, before we signed the deal, the SEC came to us and said, we have some concern about whether Remainco, this entity we’re creating, was going to become an investment company. In order to address the SEC’s concern, we changed the structure of the deal to provide that we’re going to contribute the stock that we purchased to a trust. We thought that would address the issue. And then we signed the deal and then we pushed forward with the transaction and then actually, in the last, this week, last few days, the SEC raised I would say a deal killer, which is they, they said that, in their view, the transaction did not meet the New York Stock Exchange SPAC rules and what that meant was I would call it a dagger in the heart of the transaction. It put, you know, Tontine in a very awkward spot, and we love universal, we were excited to bring this deal to Pershing Square Tontine shareholders. Not being able to do the transaction, we offered to take it off the hands of the public company that was actually built into the transaction, the right to assign to an affiliate, and we’ve also assumed in the obligations and expenses is that we put Tontine kind of back in the place where it was as if we hadn’t done the deal. And now we have 18 months to find another transaction and that one’s going to be a merger. You know, this one we structured the way we did really to accommodate the ability to acquire Universal because we’re so excited about the business and we wanted to be owned by our shareholders. SEC didn’t like it and therefore we were going to find, we’re going to do a more conventional merger but we, our intent was to do a merger all along. It was really Vivendi’s sort of issues on their side that caused us to structure the deal this way.
SORKIN: Bill, was this just too complicated? You know I think a lot of us, including myself, struggle to be able to articulate and explain to the public what exactly this was. It was very different in many ways than a traditional SPAC. Clearly, the investors also felt perhaps that this was too complex because they started selling effectively the shares and they fell in price.
ACKMAN: Sure, so what happened was, I think we really have two kinds of investors. When we went public, we got to select all the investors and we picked investors who had a very long-term orientation. They wanted to, you know, they were gonna be partners with us in buying a business we own for the next multiple years in our case, you know, probably a decade or more. And then I would say the Reddit community got excited about Tontine and a lot of shorter term investors came in and said, look I want to bet on a deal being announced the day one pop, lot of those investors are levered, a lot of those investors bought options and we announced the deal that unfortunately it’s very bad if you’re levered or if you own options because when we, the requirement to put the stock in a trust account is very detrimental if you’re a margin holder. It’s also very detrimental if you’re an option holder so you probably had none of those investors came into the IPO but by the time of announcement, about a third of our stock I think was held by people hoping you know that we’re gonna announce a transaction. When the stock doubles, you know, if you will, the first day, there are a lot of investors that have been investing in SPACs that way and I have no, no issue with a short-term investor and we, we didn’t design the transaction to affect short-term investors but we were really focused on creating kind of long-term value. What’s interesting is all of these problems go away by the end of the year. You know the issues that people were concerned about is one might stock that you buy, and I’m gonna get, I’m not gonna get for four months, it’s gonna sit in a trust account. We didn’t like that but that was really something we had to do for regulatory reasons.
SORKIN: But Bill–
ACKMAN: Another issue Universal, just stick with me for one second, but Universal it’s going to be a Dutch listed company, people didn’t love that but we believed, you know, by the time that we distributed the stock to shareholders, it would likely be hopefully the New York Stock Exchange listed company so each of these problems, if you could hold the stock for six months, I think people would do very, very well but unfortunately, I would say a meaningful percentage of our investors needed to hold it for a much shorter period of time and the, you know, it had a negative impact on them and that that I think has driven the stock down.
SORKIN: Bill, what was the mistake though here because clearly, the, the SEC was preparing to block the deal or to make it very difficult for you to close on time. Did you get bad advice from your lawyers? Did you try to press ahead despite the bad advice? How do you think about that?
ACKMAN: We have great lawyers, I mean, Joe Shenker, Scott Miller, Sullivan & Cromwell, Steve Fraidin, Greg Patti at Cadwalader, we have Steve Bigler one of the best Delaware lawyers. We have great lawyers but we don’t just rely on lawyers, we read the law ourselves and in this case, if you look at the New York Stock Exchange rules, there’s a rule called, I think it’s 10206 which the SPAC requirements. What’s interesting is in January, early February I called the New York Stock Exchange and I told them about the transaction. I didn’t tell them the company but I talked to them about the structure, I’ve described it, it’s really their rules. These are not SEC rules on SPACs and the New York Stock Exchange I would say up until Thursday, was extremely supportive of this transaction. They understood the structure. They liked our SPARC structure, which was this warrant that were going to issue to our shareholders. They were excited about, the only disappointment they had is that Universal wouldn’t be initially listed on the exchange so we had the support of the exchange. Our lawyers, you know, gave us, you know, for the first week when we realized we had to do this as a stock purchase transaction, they reviewed the rules they were quite comfortable. And if you read the rules yourself, the rules give a number of, you know, SPACs don’t have to do mergers, they can do asset purchases, according to the rules they can do stock purchases and we’re not the first SPAC to buy a minority interest in a private company and distribute to shareholders. There are other, you know, examples and that gave us confidence. Now we’re a super high profile, profile firm. It’s a very large SPAC. I would say the SEC is really, really carefully scrutinizing every SPAC transaction, I think they should. Although, I would argue what’s interesting here is the reason why they should scrutinize SPAC transactions is many SPACs are merging with zero revenue companies at crazy valuations, sponsors putting up, you know, numbers saying here’s what EBITDA is going to be in five years, and a lot of retail investors pile in, the stock pops and then people get hurt and I think that’s motivated Chairman Gensler to focus on SPACs. In our deal, we’re buying one of the greatest companies in the world. It has almost no debt. It’s got, it’s enormously profitable its margins are growing, it’s got a great long term trajectory, we’re taking no founder stock, no compensation and even the warrants we bought that we paid $65 million for, we’re tearing up in this transaction so we’re literally investing $1.6 billion. Our shareholders are investing $4 billion, we’re all buying the same, we’re all getting the same common stock and there is no dilution to our shareholders. All the reasons why I think the SEC should be focused on SPACs don’t apply here. And so I find it a bit striking that the SEC stopped this deal and when I view again it’s, It’s not great, the negative aspects are the trust which goes away in four months, a long time for many investors, forever for a short term investor, but that was actually driven by something the SEC was focused on which was, you know again, in that case of the investment company.
SORKIN: Now that the transaction isn’t happening as a, as a SPAC, just to put a fine point on it, Pershing Square, the hedge fund, is effectively stepping into those shoes so you will now become an even larger owner of Universal Music Group. How are Tontine shareholders who were happy about this deal supposed to think about that?
ACKMAN: Well, if you’re a Tontine shareholder and you wanted this deal, you should call the SEC and complain I guess I would say that would be my first call. I guess the good news for the smaller investor is that Universal is going to become a public company at the end of September. Vivendi is going to basically call the spin off or a dividend or distribution, they’re going to distribute 60% of the stock to the public, you’ll have a chance to buy the shares there. We do, we did have a lot of very supportive shareholders who like the structure of the transaction, liked that we were taking no warrants, liked that there was a second bite of the apple where we had a smaller entity called Remainco. And again for our investors’ trouble, we gave them a gift if you will, this SPARC warrant, which again, I hear the, I hear you on complexity, but complexity is okay if you’re getting something for free and actually SPARC is quite an interesting entity. I do believe at some point, you know, once we get this entity approved, it’s a much, you know, what we’ve tried to do is move from SPAC 1.0 to SPAC 2.0. Tontine was SPAC 2.0, no founders’ stock, no compensation, great alignment, purchase of a warrant, but it had two problems. One is opportunity cost of capital like every other SPAC and put up money you got to wait. The other problem is pressure on the sponsor if you will to do a deal. And we’ve solved those problems with its entity called SPARC, which is a SPAC we don’t put up your money into we’ve found a deal, signed a deal, and actually had the SEC approved registration statements so I think they were trying to move to the bar on SPAC technology. It’s unfortunate the SEC chose to shut down this this transaction, you’ll have to, you’ll have to ask them. But I do think the good news I think everyone can win here, you know, Vivendi I think is quite happy. They’ve actually approached us early on as the complexities emerged and said Bill would you just buy the stock in Pershing Square directly as opposed through PSTH but you know, I’m a fiduciary for PSTH we’ve been working on the deal for PSTH, and we were excited to deliver it to our shareholders, and you know I moved heaven and earth to make that happen until literally the government’s sort of put their foot down and said, no, at which point we had to go to, I wanted to put Tontine back to where it started. So there were, you know, we lost a little bit of time unfortunately lost a year, but we have plenty of time to do something going forward and we’re gonna do a very, very straightforward merger. Our shareholders going to get the benefit of all the warrants that were issued here which I think is a nice positive for them. We’ll get the benefit of the warrants that we paid for and we’ll do something interesting and I would say there are a number of companies that we started a dialogue with you know a year ago that weren’t ready to go public, you know, now it’s a year later. There are some family owned businesses where, you know, the family was not ready, you know, year’s a long time and founders where family owners get older they make different decisions about state planning, etc. And we’ve got a big capital gains tax potential change here, some changes in estate planning, all of these, I would say endure the benefit of the largest SPAC in the world and I think we’re going to find something interesting to do. I can’t guarantee that. I can guarantee we’re going to work hard and we’re gonna only do something if it makes a lot of sense for our shareholders.
JOE KERNEN: Hey Bill, philosophically, how tough is it to, to beat the S&P at this point when the S&P does so well, and you know in the past, you know, we all know general growth. You’ve had some of the greatest trades in history. But then I remember you know, Penney, or take your pick, if you do 51% and you’re right, you’re like a genius in this business I think. But someone’s writing in it’s like what’s with why Universal Music? Why some legacy dinosaur? Why not I don’t know crypto, DEFY, cannabis, you know, cloud company or something like that.
ACKMAN: Sure.
KERNEN: Why stick with, you know, trying to do such a complicated deal for this old music company and, and how hard is it. Have you been beating the S&P for the past three or four years?
ACKMAN: Yeah, no, we’ve been crushing the S&P and I’m pleased to say and we have over a very long period of time, you know, probably a 1,000 basis point margin so we’ve done well. But your perception of Universal Music is going to change once you really understand the business. You’re describing kind of mom and dad’s Universal Music.
KERNEN: The boomer. The boomer viewers. I know. I still listen to The Beatles’ channel.
ACKMAN: What is your, what’s, what’s, what’s changed about Universal, okay, is streaming, is Spotify, is Apple Music, is Google music. The content that is being distributed and all of those modern sexy technologies is content, a third of which is owned by Universal. 40% of the US market and it’s not just the historical content just The Beatles, not just YouTube, not just Sting. It’s, you know, 10 out of top 10 artists, you know Drake, Taylor Swift, make your list are Universal artists. You have a company that has incredible historic content and a company that is where every great artist wants to, you know, aspiring artist wants to, you know, partner and, and have Universal, you know, help them, you know, break as a successful artist and so owning, I can’t think of a business in a content space, I mean Netflix is amazing, but they have to spend billions and billions of dollars to create content that is not so valuable, you know, the day after you watch it where music content is really forever so it’s amazing business–
KERNEN: No one has talked me into these things. You talked me into the Hong Kong dollar. You know what I mean that pay was supposed to drop off there, just so long ago. You’re so compelling whenever you’re explaining everything that I don’t I just never know when to but it’s difficult, obviously.
ACKMAN: I would say actually go look at our batting average. I would say our, our batting we’ve had some very high-profile failures.
KERNEN: No, right.
ACKMAN: But you can kind of count them on one, maybe one and a half hands and obviously our batting average has been probably 90 plus percent has been very, very high. We’ve had very, very few things, and so as a result, we tried to pick things very carefully, but I would say the probability that Universal is going to be a very successful investment over the next 5 or 10 years is really, really high and that’s my view.
SORKIN: Hey Bill. We’re all trying to make sense of–
ACKMAN: And by the way, COVID or no COVID, the business is going to do well, you know.
SORKIN: Well, that’s why I wanted to ask you about COVID because we’re all trying to make sense of some of the market action that we saw on Friday and this morning as well. Especially now is there’s increased concerns about the Delta variant and what that may mean for the quote unquote return to work and everything else that comes after. We’ve had lots of conversations on the air with you about your call about COVID and what it meant. Now, close to 18 months ago and I’m curious how you’re thinking about the markets today.
ACKMAN: Sure, I think it’s again it’s a short term versus intermediate term thing. It was, I would say the Delta variant is certainly a negative if you’re unvaccinated today. And if you were unvaccinated today, it’s a very high percentage, I would say that, think of the Delta variant is a, is an injection of the virus or like a vaccine for everyone who’s not getting a vaccine and I think that’s what’s going to happen, right, right, and it’s going to crowd out all the other variants and that’s actually a good thing. So, if you look at the UK, 99% of the infections and cases are Delta cases. Today it’s something I don’t know it’s 55% whatever the number is in the US or the percentage, it’s going to go to something approaching 100 because the Delta variant has a, an R-naught, if you will have something like eight, it’s close to measles meaning it’s unbelievably infectious. You walk by someone in a mall and they breathe and you breathe in and you get it and so the result of that is, you know, unfortunately if you’re older, if you’ve got diabetes, obesity, some of these comorbidities, it’s a very very threatening thing and that’s why it’s very very dangerous. If I, on the positive side, you know, as long as you survive the Delta variant, I think it really increases the chances we get to herd immunity a lot faster. So I think you’re going to see a very large number of people get infected, particularly in places and states where the vaccination rate is low, and that’s going to catch them up in terms of people who, who have antibodies and it’s going to crowd the hospitals. Although the good news is you’ve got a very infectious variant, that is, appears to be not as deadly as some of the others like the South African variant so if this had been a deadly variant, a more deadly variant and a more infectious one, I would say we’d be in a different place but I think the hope is it gets people the antibodies they didn’t get from being vaccinated and that makes them less exposed to the extent that–
SORKIN: How does this though do you think change behavior over the next several months and therefore change the economic outlook to the degree that, that it may or may not, we’re looking obviously at airlines, anything related with travel. I don’t know if you think it’s gonna have an impact on the restaurant business, I know you own several of those. What’s, what’s your take in terms of how that directly impacts it in the short and longer term?
ACKMAN: I hope what it does is it motivates anyone who doesn’t have a vaccine to get a vaccine. I don’t think it’s going to change behavior to a great extent. I think people are done. I am with, you know, being in a cave, right, you’re hiding from the rest of the world. They want to go out, they’re gonna have fun, they’re gonna go to restaurants, you’re gonna see a massive in my view economic boom, you know, on the margin they will be some people who are afraid and some people who are afraid of getting a vaccine and therefore afraid of going out. But I don’t think, I think we’re gonna have an extremely strong economy come the fall. I think people are gonna return to work in September. And I think companies are gonna insist on vaccines and I think it’s a good thing and, you know, I have, you know, even some people in my own company that I would say probably three people who haven’t gotten the vaccine, and in one case, you know, sort of a philosophical objection or maybe religious one and, you know, my question is, you take antibiotics, you take other drugs, if you take an antibiotic for, you know, some other kind of infection why won’t you have a vaccine. And would you rather that other people are concerned about the risk. And, you know, the risk is, in my view, a lot greater that you get COVID than if you look at the side effects from getting. I’m a fan of the Pfizer and Moderna vaccines.
SORKIN: Right. So, what’s going to be the, the Bill Ackman policy at the office? What’s, what’s gonna be the policy so for those three people–
ACKMAN: Yeah, so I’m doing my best to convince everyone who hasn’t gotten a vaccine with by being convincing and then we’ll by the time we everyone comes back to work, we’ll decide what we’re going to do about our vaccine policy.
SORKIN: Also, I want to ask you just more broadly—
ACKMAN: 93%, yeah.
SORKIN: I wanted to ask you about inflation and both the inflation that we are seeing maybe some of the supply chain issues that are creating some of this. The big question is this, is this the new normal or is it transitory?
ACKMAN: I’m in more of closer to the new normal with respect to many sources of inflation so one I think inflation is understated. You know, there’s very, very significant kind of, talk about home equivalent rent or ownership equivalent rents and those are really understated. If you look at what’s going on in the housing market, we have a housing boom, you know, talk to a home builder, you know, there’s everything’s being assigned allocation. You have to, you know, have a friend who knows the CEO in order to buy a home. It’s, you’re seeing housing prices go way up I think the way the data is collected for, you know, the kind of CPI or other inflation numbers really understate what’s going on in housing and that’s, you know, approaching a third of inflation. There’s housing inflation, there’s real wage inflation, you know, one of the big issues and I think this is not a transitory thing at all which is recruiting let, you know, trying to get people to come work at a hotel, work in a restaurant, I think it’s harder now because of some of the stimulus I think it’ll be a little bit easier come September but a lot of people made sort of life choices and various things. I think you’re going to have to pay people to come to work and I think that’s actually a big positive, it’s probably a long-term positive for the economy. So you’ve had $5 trillion in stimulus, you have an increase in wages, you have a lot of savings, you have the stimulus of a lot of people being vaccinated around the same time, all these things lead to massive, massive economic growth and demand, and we still have an extremely accommodative Federal Reserve. So I think rates are going up, I think rates are going up, short rates I think are gonna have to go up a lot faster than people think, you know, and I think today’s move is I would borrow as much as you can at a long-term fixed rate on the basis of today’s rates. But I would say, come the turn of the year I’d be surprised if we’re anything close I think we’re going to meaningfully higher yields as people realize the economy is going to make a very big recovery and hopefully Delta variant in a way, vaccinated, if you will expose a lot of people, hopefully they survive the exposure and we get to something closer to herd immunity and we get more people inspired to get a vaccine and you could see a really, really strong 2022.
SORKIN: To the, to the extent that there’s a pullback today and there has been on Friday, does that mean that you’re a buyer in this market? Especially some of us, you’ve been making the big play that the world’s gonna come back.
ACKMAN: So we’re about to spend $4 billion on Universal Music Group stocks and we’re very, very excited about that. We’re not like a buyer of the market sort of in general. You know, markets in general I’m not as good as assessing. I have to look at every company one at a time to tell you whether it’s cheap or expensive but we like the businesses we own. We’re not, we’re excited about the companies we own, we’re excited about our view of where the economy’s headed we try to own businesses that are very insulated from the economy. What I can tell you is people are gonna be listening to more music for more devices in more places in more countries, six months from now, a year from now, three years from now, 10 years from now, and owning a royalty on people listening to music is a really great place to be and having one of the best management teams in the industry so I’m sad, if you will, for Tontine. They didn’t get the chance and we’ve done a good job I think telling the story. The company’s going to come public third week in September people will have an opportunity to buy the stock there. It’s actually better for them to buy their stock there as long as you can get it at a good price because it will be liquid, it won’t be locked up. And we’re gonna focus so we deliver for our Tontine shareholders a very, very attractive, regular way merger. And so in a way we have to thank the SEC and I just want to say one thing I’m not being any way critical of the SEC. I want to be really clear. We have the best capital markets in the world. We have the envy of the world and capital markets and that’s because we have the best regular, the best investor protections in the world, it’s really important to keep that. I respect the SEC’s judgment on this. At the end of the day, perhaps everyone ends up being happier, Vivendi’s happier, maybe our investors are happier. The short-term investors are happier and hopefully the longer-term investors in Tontine team we can deliver for and if they want to buy Universal, they buy it in a couple months. And so, thank you to the SEC, we ended up in this outcome which I would say if you asked me a week ago, I would say there’s not a chance this would happen.
SORKIN: You’ve got 18 months now to buy another company, one of the arguments you made by the way around getting a second bite of the apple, I think, was that a smaller company would be easier to digest, there would be a bigger pool. Two or three of the big companies being speculated about Airbnb has already gone public, a lot of people talked about Stripe, Michael Bloomberg’s company. How hard do you think it’s gonna be to find the right company over the next 18 months?
ACKMAN: So, the good news is we have what I call a running start. We talked to a lot of people before we settled on Universal and then we stopped talking to people. But a lot of those people we can easily re-engage on those conversations I would say quickly and we’ve gotten a pretty good advertisement about this entity and it’s, you know, look, I think the other thing is really important to us here is that we’re going to close and I said even if for some reason something happens we don’t expect and Tontine doesn’t close, we’re going to close and I think having a reputation of getting deals done and having an ability to work and, you know, address people’s sometimes complicated situations is something that we can bring to the table. We have a one of a kind entity, we do have the ability to shrink it, if you will, we can always pay a dividend to people pre-transaction if we came to a view that the entity was too large for a particular deal and there are things we can do to address the size issue, I think size is going to be an asset for us. We need one transaction. We’re super focused. It’s our highest priority and I expect we’ll get something done. I can’t guarantee it. I can’t promise it, but we have all the right incentives and we’re very long term from our reputation point of view. We got a lot of people excited about our Tontine Holdings and I want to deliver for them.
SORKIN: Bill Ackman, we appreciate you joining us on this day when the news broke and be with us exclusively this morning. Hope to see you very soon and follow the progress both of Universal Music and the rest of Pershing Square.
ACKMAN: Thanks so much, Andrew. Appreciate it.
SORKIN: Thanks, Bill.
