Business & Investment

What is the reason for the transport SPAC bubbles to level off?

There are no special-purpose acquisition companies that aim to open up their startups. On the contrary, more than 500 SPACs are currently looking for targets across all sectors. However, in almost all cases, a SPAC that has completed a merger with a transportation company is performing like a riskier investment than in 2020.

What’s wrong?

FreightWaves talked about the background to SPAC experts who agreed to share insights without attribution. They explained some of the reasons for SPAC’s hot state of raising funds to merge with companies that may not be ready for prime time.

Initial public offerings of SPAC are primarily sold to institutional investors, and subsequent private equity investments (PIPEs) are sold only to those investors. SPAC shares are available to all investors, including so-called memetic shares and retailers who create variable pricing through unregulated message boards that distribute legal and untrue information about companies and transactions.

SPACs that complete a merger with a target are less restrictive than traditional IPOs that are prohibited from forecasting future revenues and profits. Traditional IPOs are tightly controlled by investment banks that primarily market-make and sell stock to institutional investors and insiders, forcing the general public to buy stock after pricing it. increase.

Individual investors can participate in SPACs at any time after the sponsor company is listed — at their interest or risk.

Few transactions are rejected in the SPAC world

Only a year ago, SPAC transactions were rarely rejected due to the great excitement of the potential for electrification and decarbonization of hydrogen. In the SPAC world, investors often succumbed to each other to gain greater stakes without the diligence needed to see if a target company could be self-reliant.

Is there a better example than Nikola? Startup electric trucks and hydrogen companies were pioneers of SPACs. Much touted by founder Trevor Milton, some of his allegations turned out to be untrue, and Milton awaits trial for federal fraud in April next year.

But his exaggeration has pushed SPAC sponsor VectoIQ’s stake to more than three times the $ 10 price. When the business combination ended in early June 2020 and Nicola (NASDAQ: NKLA) Independent, stock prices continued to rise, reaching $ 93.99 before starting a long recession. Nicola closed at $ 10.46 per share on Friday.

“Nikola has had a huge impact not only on its own, but on all other companies in the SPAC sector as a whole, because Trevor has made its stock an enthusiastic supporter,” said one SPAC expert. I am. “He really opened a courtroom for individual investors on all his television appearances, and the media was very happy to be able to put his great personality on their show — and stocks for it. Ran. “

Now, in the post-Milton era, it is up to Nicola to prove that it can produce large trucks and produce hydrogen. Investors will come back if the company does so, according to another SPAC expert.

The ebb and flow of the tide pulls up all the boats

Nicola’s rising tides affected other transport SPACs in electrification and transport, serving as a tugboat to Hyliion Holdings, a lesser-known manufacturer of hybrid electric powertrains at the time.

Hylion (NYSE: HYLN) Little outside the world of traditional investors engaged in promotion. Founder Thomas Healy was Milton’s antithesis, a straightforward engineer who avoided overkill. However, retailers have pushed Hyliion shares to over $ 58 before going public in October 2020. Excited investors didn’t think the business plans for electric hybrid trucks with natural gas and batteries were years ahead.

Hyliion’s stock couldn’t keep its price because it wasn’t profitable and the cost to production was rising. After a year behind the recently announced Hypertruck ERX, Hyliion’s share price closed at $ 6.69 on Friday, just above the 52-week low. Hyliion also needs to be done to get the investors back. A company follower who yells Hyliion on Twitter to show the momentum of the order.

SEC scrutiny

The SPAC enthusiasm continued after the first quarter of 2021, but as scrutiny progressed, the size of the transaction shrank, with a few exceptions.

The Securities and Exchange Commission has approved most SPAC IPO transactions for several months with few comments, but has begun to raise a warning signal to delay the roll of SPACs as it works with Congress to change the way SPACs are regulated. I did.

First, there was an accounting change to the stock acquisition rights granted to SPAC IPO investors in installments, which had to be recorded in the company’s books as a liability rather than a share.

The SEC then asked about the length of the SPAC sponsor’s stock lockup. SPAC sponsors typically acquire 20% of the first common stock of a new SPAC as a “promotion” fee. The Commission recently expressed concern for individual investors. Currently, a similar call is being heard by parliamentarians.

“I think the SEC is worried about individual investors because this is a very technical transaction,” said one SPAC expert.

Hedge funds and early redemption

Nowadays, it is becoming more common to redeem large amounts of SPAC shares before the business combination ends. SPACIPO investors are essentially risk-free. They will pay $ 10 per share, acquire a portion of the warrant to buy the merged company’s shares for $ 11.50, and be able to recover all cash 48 hours before the business combination is completed.

Holders of SPAC shares are aware of all the details of the proposed combination before making a redemption decision. And they can retain the warrants produced by the first purchase, whether or not they are redeemed.

For hedge funds, which are SPAC’s largest investors, it’s a mutually beneficial deal. If the SPAC announces a trade-up transaction, the fund will either continue to invest or make a profit and sell it in the open market. If the announced transaction fails, you can redeem it before the transaction is completed and keep the $ 11.50 warrant option as a bonus.

This arrangement has led to an oversupply of hedge fund capital that is willing to invest in SPACs. Due to the recent decline in SPAC transactions, redemption has also become a free financing method for investors who choose to exercise their monthly withdrawal rights. In addition, hedge funds participating in SPAC are largely unknown until the merged company submits a registration statement after closure. Names like BlackRock and Fidelity have been the focus of attention in advance for investment.

“SPACs and companies are excited about the participation of these basic investors, so they see the names advertised in PIPE,” said one SPAC expert.

Hedge fund managers can redeem SPAC shares without loss. And they can use that revenue to cover the cost of their previous commitment to buy PIPE shares. These shares will not be registered for sale until 30-60 days after the end of the SPAC merger. Many IPOs are trading at prices less than $ 10 that PIPE investors have agreed to pay.

Significant redemption has recently been made by the public autonomous truck company Aurora Innovation (Aurora Innovation (Aurora Innovation)NASDAQ: AUR) And embarkation trucks (NASDAQ: EMBK) Quite difficult. Aurora redeemed $ 755 million worth of SPAC shares before the merger was completed, embarking on $ 300 million and reducing the available earnings it was expecting to fund its business plans.

With the bag

Individual investors who purchase SPAC shares and choose not to redeem them can keep their bags. In the case of Embark, the shares of sponsor Northern Genesis Acquisition Corp. were trading for approximately $ 9.90 prior to the business combination. When Emberk opened the deal, the stock was opened more than $ 1 less.

“SPAC individual investors who pay less than $ 10 per share will enjoy risk-free trading until the redemption date, but there are risks the day after the closure,” said one SPAC investor. “And if they don’t really understand all the levers, they can make [unwise decisions leading up to and past redemption because they really don’t understand the financial implications.”

Embark Trucks concludes SPAC but bolting investors take back $300M

Self-driving startup Aurora Innovation trades 14.67 lower in public debut

SPAC shareholders approve merger to make Hyliion public

Click for more FreightWaves articles by Alan Adler.

What is the reason for the transport SPAC bubbles to level off? What is the reason for the transport SPAC bubbles to level off?

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