William Ackman SPAC Nears $40 Billion Universal Music Deal; Carson Block interview; Wirecard's reluctant whistleblower tells his story; Biden Expands Blacklist of Chinese Companies Banned From U.S. Investment; The Mystery of the $113 Million Deli; In Vegas this weekend

By Whitney Tilson

Friday, June 4, 2021

1) I have no idea why shares of Bill Ackman’s SPAC, Pershing Square Tontine Holdings (PSTH), are down on this news: William Ackman SPAC Nears $40 Billion Universal Music Deal. Must be “buy the rumor, sell the news” foolishness…

My colleagues and I love the recorded music business – more than 70% of it is controlled by Universal Music, Warner Music, and Sony Music. We particularly like Universal, which is why we recommended its owner, Vivendi (VIV.PA), to Empire Stock Investor subscribers 13 month ago – and it’s up 50% since then.

Here’s an excerpt from our report:

Universal is Vivendi’s crown jewel, as the world’s biggest intellectual property holder in music. Whether you listen to Drake on Spotify (SPOT), Luke Bryan on Apple (AAPL) Music, The Who on SiriusXM (SIRI), or Billie Eilish on YouTube… you are consuming Universal’s product.

The music industry has been riding a double-digit secular tailwind tied to the growth of music streaming services, whose revenues have quadrupled in the last five years.

Last year, industry revenues grew 13% to $11.1 billion, marking the fourth straight year of double-digit growth. Streaming revenue grew 20% to $8.8 billion and accounted for 80% of the industry’s total.

The big winner among the major labels was Universal, which added more revenue ($729 million) than Warner Music and Sony Music combined.

These results were only possible because music is now a much better product for both consumers and producers.

Disruption kills most companies and industries. But in this rare exception, the music recording industry actually benefited from it and is now better positioned than ever.

Music publishers provide the raw material that fuels subscription services, that in turn produce more predictable revenues and higher profits for the music publishers.

In many ways, this is like what software companies experienced with the business model shift to Software-as-a- Service (“SaaS”).

When Adobe (ADBE) and Microsoft (MSFT) went from selling perpetual licenses to monthly subscriptions, their revenues initially suffered. It took time to reach the inflection point where monthly fees surpassed legacy lump-sum purchases. And the benefits of SaaS only became apparent to investors after that transition took place.

For music, this transition took much longer because it wasn’t planned. But now, the streaming business model is gaining momentum.

2) I enjoyed this interview Bloomberg columnist Barry Ritholtz did with my friend Carson Block of Muddy Waters Research, who has exposed numerous Chinese frauds.

3) Speaking of exposing fraud, the Financial Times reveals the brave whistleblower (and his mother!) who first came to them with the story of what was going on at Wirecard: Wirecard’s reluctant whistleblower tells his story: ‘They tried to destroy me’. Excerpt:

In October 2018 Gill had just been forced out of Wirecard, after senior executives stonewalled an internal investigation into fraud allegations. His mother’s efforts to contact the Financial Times set in motion a chain of events that exposed the German company as a house of cards, forced reform of the country’s humiliated institutions and shattered the reputation of audit firm EY.

When she arranged a first meeting with the FT at Changi Airport, however, Gill remembers simply thinking: “Oh my god, what have you done now?”

Gill agreed to reveal his identity ahead of a Sky documentary centered on the Wirecard whistleblowers, but he still struggles with the label. “I don’t like the term whistleblower, honestly. I think it has some stigma, or negative connotations attached to it. It implies you are going against the company which is feeding you, it involves a breach of trust”…

Gill was shocked. “Any normal company, especially a listed company, would have suspended these people even if it was just for show.” As the months progressed, his job became untenable.

In September he was presented with a choice: to resign with a positive reference or be fired. Gill lacked the strength or resources to fight, and felt out of options.

“If the company for three months is showing a tendency to discredit and destroy, then the only way to protect yourself is to do what I did: take some incriminating data just as a shield.”

Even then, Wirecard might have repaired the situation, as he was willing to start a new job elsewhere and forget about the whole affair. Instead, Gill said, “They tried to destroy me, manfully, professionally, emotionally.”

He suspected he was being followed. Neighbors reported strange men taking an interest in his apartment. Bad references put paid to job prospects. Some job interviews felt like traps to lure him into breaking his non-disclosure agreements, with an excessive focus on the reasons he left Wirecard.

Until his mother approached the FT, Gill had not known what to do with the material he had.

“If Wirecard’s modus operandi is to create fake documents, then you know there is nothing stopping them creating something about you as well,” he said. “If you go to the police and say, ‘This company is trying to destroy me,’ it sounds like a very fanciful tale.”

One lesson he learnt was that employees who spot potential misconduct, then realise their employer is not properly investigating, have few good options.

4) This is good to see (it’s one of the few areas these days in which there’s agreement from both sides of the political aisle): Biden Expands Blacklist of Chinese Companies Banned From U.S. Investment. Excerpt:

President Biden expanded a prohibition on Americans investing in Chinese companies with purported links to China’s military, adding more businesses to a blacklist that has angered Beijing and caused consternation among investors.

An executive order Mr. Biden signed Thursday brings to 59 the total number of Chinese companies banned from receiving American investment and shows how his administration is continuing some of the hard-line China policies left by former President Donald Trump.

Many of the newly targeted companies are subsidiaries and affiliates of major state-owned companies and other businesses named on the earlier blacklist. They include a clutch of companies tied to the state-owned aerospace giant Aviation Industry Corporation of China and two financing affiliates of telecommunications gear-maker Huawei Technologies.

The new order prevents Americans from investing in those companies, with a 60-day grace period, until Aug. 2, before sanctions begin and a one-year period for Americans already invested in the firms – either directly or via mutual and index or other funds – to divest themselves.

5) I’ve long advocated for the U.S. Securities and Exchange Commission (“SEC”) to ban all Chinese companies from listing on U.S. exchanges due to widespread fraud over the past decade, which continues to this day.

For example, remember the New Jersey sandwich shop, Hometown International (HWIN), that Greenlight Capital’s David Einhorn wrote about in April? This in-depth story in this weekend’s New York Times Magazine reveals ties to Hong Kong and Macao, both of which are controlled by China: The Mystery of the $113 Million Deli. Excerpt:

The most notorious run of shell-company reverse mergers occurred between 2006 and 2012. At the time, the Chinese economy was growing rapidly. Americans wanted in, and China was happy to accept the flood of dollars. Not all Chinese firms could list directly on U.S. exchanges, though, so they went public via reverse mergers instead. Brokerage houses in the U.S. started to push these stocks on their clients, making a killing in transaction fees along the way.

But as the 2017 documentary The China Hustle recounted, many of these supposedly fast-growing firms were frauds. In one scene in the movie, the American investor Carson Block visits what is supposedly a high-volume paper mill and finds what looks like a garbage dump. In another, the investor Dan David puts a surveillance team on a huge fertilizer firm and learns that it employs a single truck driver.

One advantage of a shell company can be the ability to choose where it’s located – to choose the state whose corporate law you want to “rent.” You rent the law, usually, in one of two places. Delaware is the blue-chip state, easy on business; a majority of Fortune 500 companies are incorporated there. In a much-cited Harvard Business School paper from 2013, researchers found a correlation between reverse mergers in Delaware and clean SEC filings…

Coker described an OTC [over the counter] company that might make a good vehicle for a reverse merger. Maso, which was frequently approached by Asian and European firms looking to go public in the American market, agreed. The firm put $2.5 million into Hometown, giving itself a stake in whatever merged entity ultimately resulted from the deal. A Macao-based firm, Global Equity Limited, followed with an investment of about $2 million, which they acquired from Peter Coker Jr., who, according to an SEC filing, had acquired his shares from Lindenmuth and Morina for $3,000.

According to a person familiar with the deal, here is what was supposed to happen next. Once Maso selected a target company that wanted to merge with Hometown, the parties would work out a “merger ratio” – the precise combination of shares and stock options that each party would wind up owning in the new business. In determining the ratio, Hometown’s absurd market capitalization would become irrelevant. One securities lawyer told me that a private company that used the public shell company’s share price as the sole metric for estimating its value before the merger would have to be “so naïve.”

6) As you read this, my wife and I are on a flight to Las Vegas for a friend’s 65th birthday bash this weekend.

We were planning to go hiking tomorrow in Red Rock Canyon National Conservation Area, where I climbed with a guide for 12 days in October (see pics here and here), until we looked at the forecast – it’s supposed to hit 106 degrees – so, if you’re in town, look for us by the pool at the Wynn!

Best regards,


Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

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