A SPAC Risk Exposed?

The $10 dollar redemption backstop has been hailed as the innovation that made SPACs viable again. But, what happens when deals get pushed through despite significant redemptions and other issues?
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This week GX Acquisition (GXGX) / Celarity investors got hit hard by by surprisingly large redemptions. On July 14th, 14M shareholders voted for the GX Acquisition deal to merge with Celarity but 9M decided to redeem in advance of the deal closing. At $10.20 per share, those redemptions equals approximately $93.6 million in cash that will be removed from the Trust Account.

That's around a third of the original ~$290M that was raised during the IPO. The stock dropped over -12.5% on Thursday after it was made public, bringing it to $8.02. 

GXGX stock drops on redemptions

GXGX stock drops on redemptions

Increasing SPAC Redemptions Hit Investors Hard

We've been seeing increasing levels of SPAC redemptions as many SPACs, including those approaching their merger votes, are staying below NAV. Over the past month or so, here are just a few of the SPACs with high redemptions: HEC (63%), CRSA (61%), AACQ (61%), ACAC (53%) and all are done significantly.

The $10 dollar redemption backstop has been hailed as the innovation that made SPACs viable again. And, to a degree it has provided some safety for investors, but what will be increasingly concerning for SPAC investors is the large level of redemptions that are not stopping deals from going through.

When deals go through despite significant redemptions there are huge implications, and likely, losses for investors. In these cases, a significant part of the premise of the investor's decision to buy and hold the SPAC is no longer valid -- i.e. the combined company will have materially less cash to execute on the vision than was believed at the time of deal announcement. 

Take, for instance, the Sandbridge (SBG) / Owlet Baby Care deal. It had an incredible $197.6M in redemptions -- that's around 86% of the original IPO amount. That leaves just ~$15M left in the SPAC's trust for merger consideration with Owlet (before the PIPE). And, amazingly, Owlet waived the minimum cash condition of $140M -- which they were short of by $125M! -- to enable the deal to go through. The stock, unsurprisingly has dropped considerably leaving investors who didn't redeem holding the bag.

SBG / Owlet tumble on redemptions and waiving of minimum cash requirement

SBG / Owlet tumble on redemptions and waiving of minimum cash requirement

Let's take AACQ / Origin Materials as another example. Have a look at their sources and uses detail from the original investor presentation from February:

Source: company investor presentation

Source: company investor presentation

The original terms of the merger called for the company to have a minimum cash balance of $525M in order to close.

The minimum cash balance required to close can vary in importance in SPAC deals. For SPACs that are taking well established companies it is less important. For deals that look more like venture capital -- companies with no product yet and/or no real revenue -- it can mean the difference between investors owning a company that has sufficient cash to actually create a viable, revenue generating company or suddenly owning a cash poor company with no products to sell and no revenue.

For the AACQ/Origin deal many investors will feel especially aggrieved as they experienced the latter and with no transparency from the sponsor.

Despite having initially disclosed a healthy minimum cash requirement that would enable it to build out its two factories and more, they seemingly disregarded it and pushed the deal through regardless. Almost a week after releasing the merger vote results, the company disclosed that a massive 44M shares elected to redeem. The resulting ~$440M reduction from the SPAC's trust account would have resulted in the company not meeting its minimum cash requirement.

In the filing they disclosed that to plug the hole, the sponsors were issued 1.3M new shares (at $10) and Apollo 3.0M. Investors were then able to see, in an updated sources and uses slide buried at the bottom of the 8-k, an updated and significantly different view of cash and financing needs following deal close.

Of particular note, beyond the almost $400M difference in net cash balance, is the requirement for significantly more project financing -- almost $250M. And, worse, according to footnote 5, neither that financing nor the "Local, State, and Federal Government Incentives / Support" have yet been secured.

aacq_origin_updated_sources_and_use

As a result of the redemptions, the scramble to meet the minimum cash requirement, and a company that in a much poorer cash condition than originally anticipated, the stock has tumbled to $7.45 as of Thursday's close.

aacq_orgn_stock

So, Who Wins?

Typically investors will be left holding the bag and the sponsors will still do well (potentially very well). In these cases, effectively every investor (outside of the sponsor) has lost money. And, for those still holding, they stand potentially to lose a lot more.

So, shareholders in these situations are now left with losses and a very high risk, venture-like company that may never make it to viability. Some will say that investors should have known the risks going in -- i.e. in the case of Origin they knew it was a start-up that needed lots of cash. But, that's unfair as the ultimate deal structure, and resulting financial conditions, are vastly different than as originally presented.

Here, it's fair for investors to say that the initial deal was high risk/venture-like, but they trusted the dealmakers to bring sufficient capital to the table. Yet, by not having the necessary financing (and government support) secured, the deal is much higher risk than previously believed.

In the case of Origin, the sponsors definitely won. By getting the deal done they effectively get a promote of ~36%(1) vs the typical 20% (given the redemptions). And, while they took a little haircut by purchasing just enough to meet the minimum cash threshold, it was de minimis relative to their gains. 

Fixing Incentives: Reducing Promote Based on Redemptions?

The AACQ/Origin deal is a great case study that shows how there are still real gaps in alignment between public shareholders and sponsors. When it became common for SPACs to enable redemption at $10 many thought that there was enough alignment to make sure that the deals were good ones and SPACs became a "thing" again -- and in a big way since the fall of 2020!

However, even during "peak SPAC" SPAC detractors have rightly said that there can still be misalignment between incentives, and sponsors remain in a position of guaranteed returns when deals happen. One thing that would help close this gap, more deals that feature promote reductions in line with shareholder redemptions. 

Some sponsors seem to be ahead of the curve here. As examples, Foley Trasimene have put it place terms to either purchase redeemed shares and Far Peak Acquisition Corp has an agreement to forfeit a portion of their promote if a certain number of shares redeem. But, as it stands, the vast majority of SPAC sponsors are not required to lower their economics in the event of high redemptions. 

What is clear, is that in instances like AACQ/Origin or SBG where a majority of  shareholders redeem in a clear vote of no confidence in the deal, sponsors should not make the same amount of money as deals that have little or now redemptions.

SPAC Deal: Altimar II (ATMR) Picks Fathom 

In a deal valued at $1.5b, Altimar II (ATMR) reached a deal to bring Fathom public. Fathom is a "on-demand digital manufacturing platform." The deal has an $80m PIPE.  You can see the full deck here.

July SPAC Deal Votes

FGNA - FG New America Acquisition Corp --> OppFi is set to vote today. With FGNA trading at $10.38, don't expect much in the way of shareholder redemptions. Next week will be very busy with 9 deals coming up for vote.

Jul 19 | $ 10.23 | ANDA - Andina Acquisition Corp. III --> Stryve Foods, LLC
Jul 20 | $ 14.62 | GHVI - Gores Holdings VI Inc --> Matterport, Inc.
Jul 20 | $ 13.88 | PSAC - Property Solutions Acquisition Corp --> Faraday Future
Jul 20 | $ 9.97 | ACND - Ascendant Digital Acquisition Corp --> Beacon Street Group
Jul 20 | $ 9.98 | TWND - Tailwind Acquisition Corp --> QOMPLX, Inc.
Jul 20 | $ 9.97 | RAAC - Revolution Acceleration Acquisition Corp --> Berkshire Grey
Jul 21 | $ 12.43 | THCB - Tuscan Holdings Corp. --> Microvast, Inc.
Jul 21 | $ 9.98 | VCVC - 10X Capital Venture Acquisition Corp --> REE Automotive Ltd.
Jul 21 | $ 12.30 | CMLF - CM Life Sciences Inc --> Sema4
Jul 22 | $ 25.91 | CCIV - Churchill Capital Corp IV --> Lucid Motors
Jul 27 | $ 9.96 | ROCC - Roth CH Acquisition II Co. --> Reservoir Holdings, Inc.
Jul 27 | $ 9.97 | CAP - Capitol Investment Corp V --> States Title Holding, Inc.
Jul 28 | $ 9.99 | NEBC - Nebula Caravel Acquisition Corporation --> Rover
Jul 29 | $ 9.98 | DGNR - Dragoneer Growth Opportunities Corp --> CCC Information Services Inc.
Jul 29 | $ 9.97 | RTPZ - Reinvent Technology Partners Z --> Hippo Enterprises Inc.

Thursday's Price Action

Biggest Gainers

2.50% ~ $ 10.25 | LSAQ - LIFE SCI ACQ II (Announced)
1.52% ~ $ 10.00 | RTPY - Reinvent Technology Partners Y (Announced)
1.50% ~ $ 10.18 | ZT - Zimmer Energy Transition Acquisition Corp. (Pre-Deal)
1.16% ~ $ 17.37 | RICE - Rice Acquisition Corp. (Announced)
1.12% ~ $ 11.33 | TDAC - Trident Acquisitions Corp (Announced)
.92% ~ $ 9.87 | NGC - Northern Genesis Acquisition Corp. III (Pre-Deal)
.90% ~ $ 10.10 | CPAR - Catalyst Partners Acquisition Corp. (Pre-Deal)
.82% ~ $ 9.79 | PTIC - PropTech Investment Corporation II (Pre-Deal)
.82% ~ $ 9.88 | TMPM - Turmeric Acquisition Corp (Pre-Deal)
.71% ~ $ 9.90 | OMEG - Omega Alpha SPAC (Pre-Deal)
.71% ~ $ 9.97 | ISAA - Iron Spark I Inc. (Pre-Deal)
.62% ~ $ 9.75 | FVIV - Fortress Value Acquisition Corp. IV (Pre-Deal)
.61% ~ $ 9.90 | HPX - HPX Corp (Pre-Deal)
.60% ~ $ 10.04 | BWAC - Better World Acquisition Corp. (Pre-Deal)
.51% ~ $ 9.76 | FSRX - FinServ Acquisition Corp. II (Pre-Deal)
.51% ~ $ 9.85 | ORIA - Orion Biotech Opportunities Corp. (Pre-Deal)
.51% ~ $ 9.89 | HERA - FTAC Hera Acquisition Corp (Pre-Deal)
.51% ~ $ 9.90 | VTIQ - VectoIQ Acquisition Corp. II (Pre-Deal)

Biggest Losers

-12.54% ~ $ 8.02 | GXGX - GX Acquisition Corp (Announced)
-9.82% ~ $ 9.00 | RAAC - Revolution Acceleration Acquisition Corp (Announced)
-8.23% ~ $ 9.30 | ANDA - Andina Acquisition Corp. III (Announced)
-6.81% ~ $ 9.30 | ACND - Ascendant Digital Acquisition Corp (Announced)
-6.56% ~ $ 12.40 | PSAC - Property Solutions Acquisition Corp (Announced)
-6.39% ~ $ 9.37 | NHIC - NewHold Investment Corporation (Announced)
-5.45% ~ $ 12.31 | TPGY - TPG Pace Beneficial Finance Corp (Announced)
-3.81% ~ $ 9.60 | TWND - Tailwind Acquisition Corp (Announced)
-3.68% ~ $ 11.00 | AGC - ALTIMETER GROWTH CORP (Announced)
-3.49% ~ $ 22.96 | CCIV - Churchill Capital Corp IV (Announced)
-3.47% ~ $ 10.02 | EMPW - Empower Ltd (Announced)
-3.26% ~ $ 10.97 | FWAA - Fifth Wall Acquisition Corp. I (Announced)
-3.01% ~ $ 13.53 | GHVI - Gores Holdings VI Inc (Announced)
-2.85% ~ $ 10.55 | PDAC - Peridot Acquisition Corp (Announced)
-2.63% ~ $ 10.38 | SRAC - Stable Road Acquisition Corp. (Announced)
-2.25% ~ $ 10.00 | DCRB - Decarbonization Plus Acquisition Corp (Announced)
-2.20% ~ $ 9.78 | GFOR - Graf Acquisition Corp. IV (Pre-Deal)
-2.07% ~ $ 10.40 | VACQ - Vector Acquisition Corp (Announced)

More from Boardroom Alpha

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Footnotes:
1. assuming they reach earnout thresholds on 4.5mm shares

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report.)