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September 23, 2019
Welcome to the SPAC Research weekly newsletter.
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On Monday 9/16/2019, Mosaic Acquisition Corp. (MOSC) announced a merger agreement to acquire Vivint Smart Home, Inc., a leading smart home technology company, in a deal with an initial enterprise value of $5.6bn. The acquisition would be the largest ever for a SPAC.
Vivint is majority owned by The Blackstone Group, which has been considering an IPO of the company since 2017. Blackstone is rolling 100% of its equity in the company and investing $100mm in cash. The deal also includes a $125mm PIPE from Fortress Investment Group, Mosaic's $150mm forward purchase commitment, and a $5mm purchase from Mosaic CEO David Maura under a 10b5-1 trading plan. The deal has a 10.35mm share maximum redemption scenario, or 30% of public shares.
It's nice to see Blackstone going the SPAC route again (the company retained a majority rollover stake when it sold assets to Osprey Acquisition Corp. (OSPR) last year). (Correction: the original version of this newsletter erroneously referred to Blackstone as having been an anchor investor in five SPACs since 2017. BlackRock, Inc., not Blackstone, has anchored five SPACs since 2017). Private equity portfolio companies have represented an increasing share of SPAC target ownership over the past few years, and it's encouraging for the space in general to see sophisticated institutions willing to use the SPAC route to take portfolio companies public.
The deal contains an additional wrinkle that we haven't really seen before in SPACs: an $81mm cash break-up fee. The fee itself is likely just a deterrent for any would-be competing bid, but it's worth considering what would happen if a SPAC were to receive a termination fee that was much larger than its obligations outside the trust account. This is not a professional legal opinion, but we don't see anything in a typical SPAC's charter documents that would provide for common stockholders to directly benefit from such a windfall. It wouldn't be a great look, but hypothetically could a sponsor wind up and redeem all public shares for the actual cash-in-trust amount, leaving the termination fee as an asset on the balance sheet for the benefit of Class B shareholders?
Redemption of Warrants for Stock
We thought this would be a useful time to take a closer look at the redemption for common stock feature that Mosaic and a handful of other SPACs have included in their warrant agreements since 2017. The feature allows issuers to exchange outstanding warrants post-closing -- if their stock's share price is above $10 -- for a number of common shares according to a pre-specified schedule. For example, if a company's common stock is trading at $12 with 30 months until warrant expiration, the company will be allowed to redeem outstanding warrants for 0.250 shares, resulting in an exchange value of $3.
We plotted the schedule on the chart below so it's easier to visualize what warrantholders would actually receive if a SPAC were to redeem its warrants this way.
The redemption-for-stock feature has mostly been used by upper tier sponsors who have sold units at IPO with only 1/3 warrant, suggesting it may be a top tier only feature. It's not surprising that a target company with a significant warrant overhang would like to have clarity on what it would take in terms of share issuance to eliminate the warrants. But the redemption-for-stock feature may be a positive for warrantholders too.
We've talked about SPAC warrant values and liquidity issues before. Moving a large block of SPAC warrants can be challenging outside volume spikes related to news flow, and many of the best outcomes for warrantholders come in connection with a tender or exchange offer. It's possible that any factor that moves acquisition targets closer to providing a liquidity event at a reasonable premium is a positive for warrantholders. Compare the chart above to the Mosaic Acquisition warrants, which closed this week at $1.22. If the underlying common stock were to trade at $10.00 six months after deal closing, the company could redeem those same warrants for common stock worth approximately $2.60.
So how does the redemption-for-stock schedule compare to the actual exchange value received by warrantholders in SPAC tenders over the past few years? Note: the exchange values plotted below are color coded the same way the redemption-for-stock curves are.
|The historical warrant exchange offers we've seen have come at a bit of a premium to the redemption-for-stock exchange schedule. But it makes sense that issuers would have to offer more generous terms given they have had to solicit tenders and consent from warrantholders. We think the schedule looks pretty fair and we expect to see more of the redemption-for-stock feature in the future since it can be beneficial for all sides.
One more note - if you look at this list of all SPACs that have included the redemption-for-stock feature, you'll notice that all but a few were Deutsche Bank deals. Deutsche Bank has pretty much focused exclusively on top tier sponsors, but so have other bulge bracket banks that haven't propagated this warrant feature. Kudos to Deutsche Bank for this addition to the SPAC market!
News From the Past Week
IPOs and S-1's
- Apex Technology Acquisition Corporation (APXT) raised $350mm for an acquisition in the software and technology sector. Apex is led by Jeff Epstein, an operating partner with Bessemer Venture Partners. From 2008 to 2011, Mr. Epstein was executive vice president and chief financial officer of Oracle Corporation. Serving as advisors to Apex are Alex Vieux and Steven Fletcher who are also advisors to ChaSerg Technology Acquisition Corp (CTAC).
- BI Acquisition Corp. (BIAC) filed to raise $200mm for an acquisition in metals, mining and natural resources. BIAC is led by Chairman Alan Kestenbaum and CEO David Cheney. Mr. Kestenbaum is the founder of Bedrock Industries, LP, a privately-held metals, mining and natural resources company that is the principal shareholder of Stelco Holdings Inc. (TSX: STLC), where Mr. Cheney has been an executive since 2017. Deutsche Bank is sole book-runner. Units contain 1/3 warrant, and the redemption-for-stock feature is included.
- China Yunhong Holdings (ZGYH) amended its registration statement after nearly three months of silence since its initial S-1. The new units will include a right and half a warrant, in what is essentially the industry standard at this point for smaller, Asia-focused SPACs.
Warrant Cash Payment
- Trinity Merger Corp. (TMCX) took a page out of the Thunder Bridge Acquisition (TBRG) playbook. On Friday 9/20/2019, the company announced a change to the solicitation fee the company had planned to pay warrantholders in exchange for consent to amend the terms of TMCX's public warrants. Instead of $0.30 per warrant, the company will pay $1.60 and each whole share warrant will become exercisable for 1/4 share. Warrants traded up above $1.30 on Friday. The deal's max redemption scenario has tightened from 17.5mm public shares (50.7%) to 12.1mm shares (35%), in order to ensure there are enough funds to pay approximately $66mm to both public and PIPE warrantholders at closing.
- Gordon Pointe Acquisition Corp (GPAQ) announced a definitive agreement to acquire HOF Village, a sports, entertainment and media company founded by the Pro Football Hall of Fame. The transaction is valued at $390mm, with existing HOF Village shareholders to own 60% of the combined company at closing. The merger agreement included some contradictory language that seemed to indicate that warrantholders who redeemed their common shares for cash would not receive warrants in the new company. We spent the better part of the morning on the day of announcement trying to determine if GPAQ was trying to subordinate such warrantholders. We received assurances from management and bankers on the deal that all warrantholders will receive warrants in the new company, but the company has not yet issued any formal correction to the merger agreement.
GIG Rights Tender
- GigCapital, Inc. (GIG) announced a non-binding agreement with funds managed by Greenhaven Road Capital. The agreement contemplates GIG buying back the shares into which up to 10mm GIG rights (67.2% of all outstanding GIG rights) that Greenhaven owns (or will own) will convert upon closing of GigCapital's business combination with Kaleyra. The shares would be be purchased at an average price of approximately $10.65, or $1.065 per right (for a total of $10.65mm). The agreement doesn't yet specify when the shares would be repurchased (or with what funds), but Greenhaven would agree not to sell or hedge its position until at least 1/1/2020 -- suggesting the repurchase would not be concurrent with closing. Given the path dependency of the success of many SPAC transactions (especially those with rights), GIG's plan to reduce the impact of shares issuable to rights holders continues to look like a clever way to minimize the detrimental impact of rights to the de-SPACing process and could serve as a model for future sponsors trying to get over the finish line.
- TPG Pace Holdings Corp. (TPGH) shareholders approved a charter extension through 12/31/2019 on Friday 9/20/2019. Holders of 3,247,267 public shares (7.2%) exercised conversion rights and approximately $10.29 per share was removed from trust to pay such holders. Approximately $430mm remains in trust.
- Opes Acquisition Corp. (OPES) shareholders approved a charter extension through 11/15/2019, with holders of 2.28mm public shares (~20%) electing redemption. The company deposited $0.033 for each remaining share for the first month of the extension period, and may do so again by 10/15/2019 for the second.
- Bloomberg ran a piece speculating that Apollo Global Management Inc. is considering investing in pipeline operator Western Midstream Partners LP through its SPAC, Spartan Energy Acquisition Corp. (SPAQ). Occidental Petroleum Corp. is seeking a buyer to take majority control of Western Midstream which it took control of through its takeover of Anadarko Petroleum Corp. SPAQ declined to comment on the rumor.
|Disclosures: Site administrators are long MOSC, MOSC/W, APXTU, TMCX, TMCXW, GPAQW, GIG/W, GIG/R, TPGH, OPESW, SPAQ/W and may trade in or out of positions in these or other SPAC securities at any time. Nothing on spacresearch.com is a solicitation to buy or sell any investment.