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August 26, 2019
Welcome to the SPAC Research weekly newsletter.

Trading Discount to Trust Value
Anyone invested in SPACs as a yield play has been keenly aware of the massive rally we've seen in fixed income this year. Global investors have been buying up bonds of all kinds, and SPACs, with their commonalities with convertible bonds, are no exception.

Now that we're 45 days past the end of Q2, the vast majority of SPACs have filed their 10-Q and we can compare where each one was trading on 6/30/2019 to the redemption value of its trust account on that date. The average discount to trust value is an easy way to get a sense of how expensive the universe of SPAC common equity is at a given time. (In fact, one of our favorite queries on the site is to sort our YTM page by the "Premium/Discount to Est. Current Cash" column.)

The chart below only includes SPACs without a definitive business combination agreement as of 6/30/2019.

As the global rally in fixed income continued in Q2, so did the rally in SPAC common equity. As far as we can tell, SPAC common shares are trading at their smallest average discount to trust value ever, which seems in line with the fact that bonds around the world are doing essentially the same thing. A handful of SPACs are also trading at a premium to the rest of the group for various reasons, from the market's perceived likelihood of a high-quality deal to the expectation of a sponsor extension contribution that will boost the amount of cash in trust.

We layered the last three quarters of data on top of each other so it's easier to see the movement of prices over time.
What's interesting is that SPAC common shares closed the gap to trust value more in Q1 than Q2, even as Treasury yields fell further during Q2 than Q1. We've seen record SPAC IPO volume this year, but the space is still small enough that it's hard to tease out how much of the movement came from tracking Treasurys vs. from new capital flowing into existing SPACs.

As with last quarter, we also put together an annualized version of this comparison, shown below. The average annualized discount to cash in trust for the entire group of SPACs has gone from 3.04% at year-end 2018, to 1.92% at 3/31/2019, to 1.49% at 6/30/2019. Using our estimates for current cash in trust, we have that average annualized discount at 1.44% today.
Click to expand
Of course, this means that buyers of SPAC common equity in the open market now will achieve less absolute return from "catching up" to the trust account than was previously available. But buyers of SPAC shares will still earn Treasury interest rates. And their ultimate returns will still depend on the ability of sponsors to source and close quality deals.

One final note: It will be interesting to see how the market processes the fact that SPACs that haven't rolled their trust account into new Treasurys since May are likely still invested in 6-month paper at rates materially greater than the rest of the field.

News From the Past Week

IPOs and S-1's
  • Experience Investment Corp. (EXPC) filed to raise $250mm for an acquisition in the travel and leisure sector. The company is sponsored by KSL Capital Partners, a private equity fund dedicated to investing in travel and leisure businesses. Since 2005, KSL has raised a combined $11bn in equity capital across four private equity funds and sports a number of prestigious portfolio properties. EXPC will be led by Eric Affeldt, former president of ClubCorp, a privately held owner and operator of golf, dining and fitness clubs and General Aviation Holdings, an aviation holding company. Deutsche Bank, Citigroup & JP Morgan are joint book-runners.
  • New Providence Acquisition Corp. (NPA) filed to raise $200mm for an acquisition in the consumer sector. NPA will be led by two co-CEOs: Alexander Coleman, who has served as a managing partner at Annex Capital Management, Sea Hunter Therapeutics, and Citicorp Venture Capital, and Gary P. Smith, former CEO of Big Red, Inc. and a former executive at PepsiCo and Red Bull. BTIG is sole book-runner.
Launch of De-SPACing efforts
  • GigCapital, Inc. (GIG) put out an unconventional press release announcing the launching of its de-SPACing efforts on Monday 8/19/2019. The release notes potential activities that are typical for SPACs marketing a business combination, including raising equity, borrowing, and addressing outstanding rights. The company is trying to close its acquisition of Kaleyra S.p.A, a CPaaS provider. Founder Avi Katz has engaged in creative SPAC innovations before, from pioneering a fixed monthly trust account extension contribution (instead of a per-share extension contribution) to establishing his own branding mechanism for his family of SPACs as "Private-to-Public Equity (PPE)" companies. We've seen what a rights overhang can do to a post-combination stock price, so it's understandable the company might want to address the rights. However there's not much precedent for a rights buyout prior to closing and it might be challenging to pay rights holders a higher price than any hypothetical PIPE investors would pay for shares. Meanwhile, a significant chunk of the sponsor's founder shares becomes subject to an earnout if the company experiences further redemptions at the eventual approval meeting.
Deal Announcements
  • Legacy Acquisition Corp. (LGC) announced a definitive share agreement to acquire the Blue Impact group businesses - a portfolio of leading digital, media, social, creative and data analytic advertising and marketing assets and agencies. The transaction represents a pro forma enterprise value of $587mm, a 7.7x EV/2019E Adjusted EBITDA multiple. The sellers will receive 30mm Legacy common shares and up to $222mm in earnouts dependent on the growth rate of one of the Blue Impact businesses. The investor presentation references a $90mm cash purchase of an existing minority interest, but Blue Impact's parent company, BFICG (a publicly listed Chinese holding company) will roll 100% of its equity. The full agreement has not yet been made public and we don't know if there's a minimum cash condition associated with the deal.

Charter Extensions
  • Big Rock Partners Acquisition Corp. (BRPA) shareholders approved a charter extension until 11/22/2018, with 846,888 public shares redeeming for cash. Just over $41mm remains in the trust account. The company deposited $0.02 per remaining public share into the trust account for the first month, and has the option to continue extending with $0.02 monthly deposits until November.
  • Opes Acquisition Corp. (OPES) filed a preliminary proxy for a shareholder meeting to extend the company's charter from 9/16/2019 until a date TBD in 2019. The proxy indicates a monthly trust account contribution which is also TBD.
Upcoming Events This Week
  • Constellation Alpha Capital Corp. (CNAC) and Modern Media Acquisition Corp. (MMDM) plan to hold shareholder meetings on Tuesday 8/27/2019 and Wednesday 8/28/2019, respectively, to approve the companies' proposed business combinations. CNAC has secured PIPE commitments of approximately $24mm at $3.25 per share in an amount sufficient to meet the minimum cash condition for its deal with molecular genomics company DermTech. MMDM has not yet released any information regarding the company's contemplated $47mm PIPE to attempt to meet the minimum cash condition for its deal with UK-based streaming music provider Akazoo.
Disclosures: Site administrators are long GIG, GIG/W, GIG/R, LGC, LGC/W, BRPAR, OPESW, CNACR, CNACW, CNAC, MMDMW, MMDMR and short MMDM and may trade in or out of positions in these or other SPAC securities at any time. Nothing on is a solicitation to buy or sell any investment.