Pershing Square Holdings Ltd. Releases 2021 Semiannual Financial Statements
LONDON–(BUSINESS WIRE)–Regulatory News:
Pershing Square Holdings, Ltd. (LN:PSH) (LN:PSHD) (NA:PSH) (the “Company”) today released its Semiannual Financial Statements which includes the Investment Manager’s Report to Shareholders. The report is now available on PSH’s website, https://www.pershingsquareholdings.com/company-reports/financial-statements/.
About Pershing Square Holdings, Ltd.
Pershing Square Holdings, Ltd. (LN:PSH) (LN:PSHD) (NA:PSH) is an investment holding company structured as a closed-ended fund.
This is a disclosure according to Article 17 of the EU Market Abuse Regulation (Regulation 596/2014/EU).
The document will shortly be available for inspection on the National Storage Mechanism website: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
Pershing Square Holdings, Ltd. Unaudited Condensed Interim Financial Statements
June 30, 2021
Pershing Square Holdings, Ltd.
2021 Unaudited Condensed Interim Financial Statements
Table of Contents
Company Overview……………………… 1
Company Performance………………….. 2
Chairman’s Statement………………….. 3
Investment Manager’s Report………….. 6
Directors’ Report……………………….. 19
Independent Review Report………….. 21
Condensed Interim Statement of Financial Position……………………….. 22
Condensed Interim Statement of Comprehensive Income……………….. 23
Condensed Interim Statement of Changes in Net Assets Attributable to Management Shareholders…………………………….. 24
Condensed Interim Statement of Changes in Equity………………………. 25
Condensed Interim Statement of Cash Flows……………………………………… 26
Notes to Condensed Interim Financial Statements……………………………… 27
Endnotes and Disclaimers…………….. 45
Pershing Square Holdings, Ltd. (“PSH”, or the “Company”) (LN:PSH) (LN:PSHD) (NA:PSH) is an investment holding company structured as a closed-ended fund that makes concentrated investments in publicly traded, principally North American-domiciled, companies. PSH’s objective is to maximize its long-term compound annual rate of growth in intrinsic value per share.
PSH has appointed Pershing Square Capital Management, L.P. (“PSCM,” the “Investment Manager” or “Pershing Square”), as its investment manager. The Investment Manager has responsibility, subject to the overall supervision of the Board of Directors, for the investment of PSH’s assets and liabilities in accordance with the investment policy of PSH set forth in the 2020 Annual Report (the “Investment Policy”).
PSCM, a Delaware limited partnership, was founded by William A. Ackman on January 1, 2004. PSH was incorporated with limited liability under the laws of the Bailiwick of Guernsey on February 2, 2012. It commenced operations on December 31, 2012 as a registered open-ended investment scheme, and on October 2, 2014 converted into a registered closed-ended investment scheme. Public Shares of PSH commenced trading on Euronext Amsterdam N.V. on October 13, 2014. On May 2, 2017, PSH’s Public Shares were admitted to the Official List of the UK Listing Authority and commenced trading on the Premium Segment of the Main Market of the London Stock Exchange (“LSE”). On December 21, 2020 the Company was admitted into the FTSE 100 index, which is comprised of the 100 largest companies listed on the LSE by market capitalization.
Pershing Square Holdings, Ltd. and Pershing Square, L.P. (“PSLP”) NAV Performance vs. the S&P 500
PSLP Net Return(1,2)
Six-month period ended June 30, 2021
Year-to-date through August 17, 2021
January 1, 2004 – August 17, 2021(1,2,3)
Cumulative (Since Inception)
Compound Annual Return
December 31, 2012–August 17, 2021(1,3,4)
Cumulative (Since PSH Inception)
Compound Annual Return
* NAV return an investor would have earned if it invested in PSLP at its January 1, 2004 inception and converted to PSH at its launch on December 31, 2012. Also see endnote 1 on page 45. Past performance is not a guarantee of future results. All investments involve risk, including the loss of principal. Please see accompanying endnotes and important disclaimers on pages 45–47.
The ﬁrst half of 2021 continued to be a challenging time for the world as economies, companies, and individuals have had to adapt to the changes imposed on us by the global pandemic. I am pleased to report that during this time, PSH’s portfolio companies made substantial progress, and we expect this positive performance to continue as economies recover, vaccines are more widely distributed, and we learn to live with the risk of COVID-19.
The Investment Manager believes that there may continue to be short term volatility in the markets, and that there is likely to be an increase in interest rates to address rising inﬂation due to actions taken by the U.S. Federal Reserve, the trillions of dollars of stimulus from the U.S. Government, and the unleashing of pent-up global demand. PSH’s current portfolio comprises nine companies that are well positioned for long term growth, and one asymmetric macro-economic hedge which will beneﬁt PSH if there is an increase in interest rates. The Investment Manager believes that our portfolio is well structured to generate long-term returns and to protect our investors from the potential risks of inﬂation.
I am also pleased to report that PSH has recently made a signiﬁcant new investment in Universal Music Group (“UMG”). The merits of this investment are set out in more detail in the Investment Manager’s Report, but I would like to add that the PSH Board believes that UMG is a high-quality business which is extremely well placed to beneﬁt from the structural changes that have taken place in the music industry, and we endorse the view of the Investment Manager that this investment is likely to be a long-term strategic holding for PSH.
The Investment Manager initially intended for PSH to invest in UMG via Pershing Square Tontine Holdings (“PSTH”). In my previous letters, I have discussed how the Investment Manager initiated a new position for PSH by launching PSTH, a special purpose acquisition company, or SPAC. PSTH raised $4 billion in its IPO on the New York Stock Exchange, and PSH, Pershing Square, L.P. and Pershing Square International, Ltd. (collectively, the “Pershing Square Funds”) committed to contributing $1 billion with the option to increase their investment to $3 billion (the “Forward Purchase Agreements”). A unique feature of PSTH is that the Pershing Square Funds (and not the Investment Manager) own the SPAC sponsor.
On June 20, 2021, PSTH announced that it entered into a deﬁnitive agreement with Vivendi S.E. pursuant to which PSTH would acquire approximately 10% of the outstanding Ordinary Shares of UMG for approximately $4 billion. As part of this transaction, PSH would have an investment of approximately $1 billion in UMG. However, on July 19, 2021, the Board of PSTH determined not to proceed with the announced transaction because of issues raised by the Securities and Exchange Commission regarding the structure of the proposed transaction. The Investment Manager has discussed this in more detail in a letter available at www.pstontine.com and in these ﬁnancial statements. As a result, PSH and the other Pershing Square Funds and Pershing affiliates were assigned the share purchase agreement.
On August 10, 2021, the Pershing Square Funds, through a Pershing affiliate, acquired 128,555,017 Ordinary Shares of UMG for $2.8 billion, representing 7.1% of the company. PSH’s share of the cash consideration was approximately $2.5 billion. PSH and the other Pershing Square Funds and Pershing affiliates have the right (and intend to exercise the right) to acquire an additional 2.9% of UMG’s Ordinary Shares at the same price per share by September 9, 2021. PSTH will seek another company for its initial business combination, and PSH and the other Pershing Square Funds will continue to hold investments in PSTH through the Forward Purchase Agreements and their ownership of the SPAC sponsor.
These accounts are dated June 30, 2021, at which time we believed that PSH would invest in UMG via PSTH. The Forward Purchase Agreements and PSH’s share of the SPAC sponsor (comprising $332 million of Level 3 assets out of PSH’s total market value of investments of $10,615 million or 3.1%) were valued based on the structure of that transaction. We have detailed the valuation mechanics utilized in respect of our PSTH investment as of June 30 in Notes 5 and 6 of these ﬁnancial statements. I note that our NAV post July 19th reﬂects the valuation impact of the revised transaction comprised of an investment in UMG and the original commitment to PSTH.
For the ﬁrst half of 2021 and year-to-date through August 17, 2021, the Company’s NAV per share, including dividends, increased by 7.3% and 5.8%,i respectively, and the Company’s share price increased by 4.7% and 2.0%,ii respectively, compared with the S&P 500 which returned 15.2% and 19.5% over the same period.iii Our strategy is to generate long term capital returns, so we view short-term results in the context of the signiﬁcant growth in our NAV and share price over the past three years and the strong continued underlying performance of our portfolio companies. All of PSH’s portfolio companies have positively contributed to the Company’s performance to date except Fannie Mae and Freddie Mac, and PSTH, which are discussed further in the Investment Manager’s Report.
In addition to the developments discussed above regarding UMG, PSH disclosed that it exited its position in Starbucks and initiated a position in Domino’s Pizza during the ﬁrst half of 2021, and exited its position in Agilent Technologies after the end of the ﬁrst half. The PSH Board was pleased to see that the Investment Manager continued to refresh the portfolio when market volatility created opportunities to reinvest in high quality companies at attractive prices.
DISCOUNT TO NAV
The Board pays close attention to the discount to NAV at which PSH’s Public Shares currently trade. The discount as of August 17, 2021, of 25.9% has not materially changed from 24.7% as of March 23, 2021, when I last wrote to you.iv The Board holds the view that PSH shares are undervalued at current levels and believes that continued positive NAV performance, increased awareness of PSH, and the associated incremental demand for PSH shares should narrow the discount over time.
CORPORATE GOVERNANCE / BOARD
At our Annual General Meeting on April 28, 2021, shareholders elected three new directors, Tope Lawani, Rupert Morley and Tracy Palandjian, to join the PSH Board. We now have seven non-executive directors, six of whom are independent of the Investment Manager. The current Board is the most diverse we have had since the inception of PSH by any metric, including race and gender diversity. As Chairman of the Board, I believe that a more diverse Board will be a more effective Board. Our diversity allows us to make better decisions for our shareholders and to provide more informed advice to our Investment Manager by drawing on a wider range of perspectives, knowledge and experience. I am grateful for the meaningful contributions made by all of our directors.
On August 17, 2021 a lawsuit was ﬁled against PSTH, its sponsor and directors, as well as the Company and other affiliated entities, claiming, among other things, that PSTH has been operating in the US as an illegal investment company. We believe that this lawsuit is without merit, but while it is unresolved it could impact the ability of PSTH to enter into a business combination. The letter from the Investment Manager provides additional information about PSTH as well as a new proposed SPAC structure whereby investors receive long dated transferable warrants which will give them the right to invest in a future de-SPAC transaction, but they do not need to contribute capital at the time of the initial SPAC IPO. This structure will need to be approved by the SEC so there is no assurance that it will be implemented.
I look forward to reporting to you again in our 2021 Annual Report.
/s/ Anne Farlow
Chairman of the Board August 24, 2021
Investment Manager’s Report
LETTER TO SHAREHOLDERS
To the Shareholders of Pershing Square Holdings, Ltd.:
Pershing Square Holdings generated solid performance during the ﬁrst half of 2021 and year-to-date, as our NAV total return per share increased 7.3% and 5.8% respectively, compared with the S&P’s half-year and year-to-date total return of 15.2% and 19.5%.5 While we compare our performance with the S&P 500 on a regular basis, we do not expect to outperform the index during every measuring period. Rather, we believe that over the long-term, PSH will continue to outperform our benchmark.
Investors who invested in Pershing Square, L.P. at its inception on January 1, 2004, and transferred their investment to PSH at its inception on December 31, 2012, have grown their equity investment at a 16.7% compounded annual return as of August 17, 2021, compared with a 10.4% return had one invested in the S&P 500 over the same period. With the magic of compounding, our 16.7% compound annual NAV return translates into a cumulative total NAV return since inception of 1,412% versus 471% for the S&P 500 over the same period.6 Our discount to NAV, however, remains wide, which has reduced shareholder returns for those who purchased shares at a smaller or no discount to NAV.
Our year-to-date results have been driven by the positive performance of our core portfolio holdings as their strong operating results have contributed to their stock price increases. Mark-to-market losses on Pershing Square Tontine Holdings, Ltd., and on Fannie Mae and Freddie Mac, due to an adverse ruling at the U.S. Supreme Court, offset some of these gains. In the Portfolio Update which follows this letter, we discuss Fannie and Freddie and our other portfolio companies.
Our stock price remains substantially undervalued as it trades at a large discount to NAV, particularly as NAV reﬂects our cost basis for UMG, which we believe represents a meaningful discount to its eventual public trading value. We believe that UMG’s listing should be a catalyst for shareholders to recognize additional hidden value in our company.
Universal Music Group (“UMG”)
The most signiﬁcant investment of the year is PSH and affiliates’ recent acquisition of 7.1% of Universal Music Group from Vivendi. UMG was PSTH’s initial business combination target, but regulatory hurdles prevented the transaction from being consummated. As a result, the board of PSTH exercised its right to assign the contract to the Pershing Square Funds. We accepted the assignment, committing to purchase a minimum of 5% and up to a maximum of 10% of UMG by mid-September, an option which we intend to exercise with the help of a new co-investment vehicle, Pershing Square VII.
PSH and affiliates have agreed to pay PSTH’s transaction costs in connection with the UMG transaction, totaling approximately $25 million, and assume an indemnity that PSTH had previously entered into with Vivendi. With the purchase of the initial 7.1% stake, PSH and affiliates have now completed the assumption of the indemnity and the transaction costs, which positions PSTH to immediately pursue a new business combination.
The Vivendi indemnity was designed to protect it from potential liabilities in connection with the distribution of UMG shares to PSTH shareholders, and PSTH’s redemption tender offer. Since the UMG share distribution will now not take place, and the redemption tender offer has been withdrawn, we do not believe that there is any potential liability to Vivendi or to PSH and affiliates in assuming this indemnity obligation.
I would encourage those who did not have an opportunity to attend our UMG webcast on June 23, 2021, to review our PowerPoint presentation on the company, which can be found at www.PSTontine.com. UMG management is having a Capital Markets Day on August 25th if you would like to learn more.
With the transformation of the music industry from the physical sale of recordings and downloads to streaming, the music business has been transformed from a business in decline to a rapidly growing industry where all participants beneﬁt from the global growth in music streaming subscribers. Spotify and some of the largest tech companies in the world – including Apple, Google, and Amazon, as well as hundreds of other streaming companies, a.k.a., digital service providers or DSPs – are aggressively competing to grow their streaming subscriber bases. Their large and growing base of subscribers and the streaming royalties they generate are beneﬁting all participants in the music ecosystem including artists and songwriters, record labels, publishers, and the DSPs themselves.
The transition of software from a boxed product to a downloaded one, to software in the cloud, or so-called Software as a Service (“SaaS”), is an apt analogy for the music’s industry transformation from CDs to downloads to streaming, which enables you to listen to 60 million songs on your smart phone, smart speaker, watch or other device.
This new economic model for the record labels and publishers can now be best thought of as owning a royalty on the global growth of music streaming. Streaming is faster-growing, more predictable, minimally capital intensive, and more proﬁtable than the physical or download recorded music business. Music has also become an essential complement to social media as apps like Tiktok, Facebook, Snap, and others who have added music to increase user engagement. Music is also essential to exercise apps and products like Peloton. While these apps in many cases have only recently begun paying royalties for music, these apps will become large sources of revenues for music companies over time.
The music industry’s transformation had been largely invisible to Wall Street until Warner Music Group (“WMG”), the number three player after UMG and Sony, began trading publicly on the NASDAQ last year. We believe that investors have just begun to appreciate the change in industry dynamics, and as a result, have not yet given proper recognition to the value of WMG or UMG, which is currently a subsidiary of Vivendi SE, a French media conglomerate.
It is within this context that we found the opportunity to purchase a large stake in UMG to be extremely attractive. UMG is the number one company in the industry by market share with a 32% global market share in recorded music. UMG has a world-class management team led by Sir Lucian Grainge who has spent his entire career in the business. Under Vivendi’s ownership and Lucian’s leadership, UMG has increased its strong market position by investing to build a global presence in 180 markets around the world. As a result, it is well-positioned to participate in the global growth of music streaming, which will be increasingly driven by demand from the emerging markets.
UMG’s management strength and long-term investment strategy are reﬂected in its industry-leading ﬁnancial performance which include accelerating double-digit revenue growth (up 26% in Q2 2021), and its 21% compounded operating income (“EBITA”) growth, about twice that of WMG, over the last four calendar years, which accelerated in the ﬁrst half of 2021 to 34%.
UMG will become a public company by the end of the third quarter when Vivendi distributes 60% of the stock to its shareholders in a highly anticipated distribution. UMG will have a nearly net-debt-free balance sheet when it becomes a public company. Unlike WMG which is controlled by Access Industries with super-voting stock, UMG shareholders will have one vote per share and an independent board, no longer controlled by Vivendi.
We believe that the price that we are paying for UMG of about 21 times calendar year 2021 operating income (EBITA), or less than 19 times our estimate of 2022 operating income (EBITA), is a highly attractive price for a business of this quality and long-term growth potential.
UMG will be the largest investment in our portfolio by a substantial margin. We size investments based on our estimate of the probability of our suffering a permanent loss of capital compared to the opportunity for potential gain. At the price we are paying for UMG, we believe the risk of permanent loss is minimal, and the opportunity for long-term gain to be both highly probable and unusually large compared to other opportunities. In other words, we believe that UMG has the potential to be one of our most successful long-term investments.
Pershing Square Tontine Holdings, Ltd. (“PSTH”)
Our largest negative contributor for the ﬁrst half and year to date is a mark-to-market loss of 4.7% and 6.4% of gross assets, respectively, due to the decline in PSTH’s share price.7 While we do not currently own publicly traded shares in PSTH, we are required to mark to market the PSTH Sponsor Warrants and our Forward Purchase Agreements (“FPAs”), which are considered derivatives, in this case a commitment to invest a minimum of $1 billion, and an option to invest an additional $2 billion in PSTH’s initial business combination (“IBC”).
The market value of SPACs in general and PSTH, in particular, declined since the beginning of the year, which along with PSTH’s failure to consummate the Universal Music Group transaction likely contributed to PSTH’s stock price declining to a level approximating its $20 per share cash in trust. On Friday last week, PSTH’s share price declined to slightly below NAV for the ﬁrst time.
Nearly all pre-merger SPACs have traded at discounts to NAV since earlier this year. We believe this is due to many poor outcomes for investors in conventional SPACs after they have completed their merger transactions. The poor incentives of conventional SPACs – enormous compensation for a SPAC sponsor for just getting a transaction done regardless of the outcome for shareholders, combined with limited Sponsor “skin in the game” – are the principal problems.
By comparison, PSTH’s sponsor, which is wholly owned by the Pershing Square Funds, owns no founder stock, is not entitled to receive compensation of any kind, and has a lot of skin in the game. By virtue of our Forward Purchase Agreements, we will have the largest investment of any of our shareholders in PSTH’s target company of $1 billion or more.
Our only additional incentive beyond our large FPA commitment is our ownership of Sponsor Warrants, for which the Pershing Square Funds paid $65 million, their fair value at the time of PSTH’s IPO as determined with the assistance of a nationally recognized valuation ﬁrm. Unlike our shareholders, who have the right to receive a return of the $20 per-share cash in trust if we don’t get a deal done, our warrants become worthless in that event.
Ed Gascoigne-Pees / Julia Tilley +44 (0)20 3781 8339, email@example.com
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