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December 9, 2019
Welcome to the SPAC Research weekly newsletter.

SPAC Conference 2020
The agenda is out for the SPAC Conference 2020, to be held February 6, 2020 at the Crowne Plaza Times Square in New York City. SPAC Research Founder Benjamin Kwasnick will give a presentation on "SPACs by The Numbers" about the quantitative elements of SPAC IPO activity and pre- and post-business combination performance and trading. Note: SPAC Research subscribers who wish to attend are eligible to save $100 until the end of December. Register here and use Coupon Code RESEARCH2020 to save $100 now.

Post-Business Combination Performance vs. Benchmarks
In recent months, we've examined performance for SPACs post-business combination, and explored measurements for deSPAC-ing success. We've been using a new lens to examine SPAC business combinations, tracking the amount of equity actually sold at each deal closing (with unredeemed public shares considered sold at the per-share amount remaining in trust). We like that metric because it shows the dollar value of shares the SPAC was able to move into the hands of fundamental investors in the target company. It also provides a much cleaner endpoint against which to measure the present value of the target company.

We saw that large SPACs (those over $250mm in size) have represented an overwhelming majority of the total equity sold at deal closings in the past few years. And a sector breakdown revealed that SPAC deals in the energy space were down more than 60% in the aggregate since closing, while other closed SPAC deals are in the black.

We have frequently lamented how financial journalists and market commentators point to the number of closed SPAC deals with stock prices in the low single digits as evidence that SPACs destroy shareholder value. It's true there have been some notable flops among former SPACs. But our study in March showed that most of the closed deals that have traded poorly redeemed the majority of their shares sold at IPO and have little in the way of a public float.

Additionally, stock price alone is a shallow measure of performance. So we took each of the 68 SPAC deal closings since 2016 and measured the present value of the equity sold at closing.

Taking that analysis a step further, we also compared each of those deals to a benchmark and measured that benchmark's performance since deal closing. We used the Invesco S&P SmallCap sector ETFs for companies with a clear BICS classification, and we used the iShares Russell 2000 ETF (ARCA: IWM) when there wasn't an obvious sector comparison.
The result is a percentage that represents how much each SPAC deal has over- or under-performed its benchmark since the deal closed.

An example: the rightmost dot on the chart below is FGL Holdings (NYSE: FG), formerly CF Corp. (CFCO). That deal sold $1,764mm worth of equity at deal closing ($694mm worth of unredeemed public shares and $1,070mm in forward purchase, anchor and PIPE commitments -- at an average price per share of $10.02). Those shares are worth $1,573mm today at a common stock price of $8.94, for a decline of 10.81%. Meanwhile, the Invesco S&P Small Cap Financials ETF (NASDAQ: PSCF) is up 0.79% since 11/30/2017, meaning FG has trailed its benchmark by 11.6% since closing.

The first important takeaway from the chart is the lower left corner. Yes, there are a number of SPAC deals that have trailed their benchmarks by a large amount since closing. But most of them sold very little equity at closing, and a comparatively small amount of capital has experienced their weak performance.

The chart may feel a little busy with all the colors, but we wanted to highlight a number of sector specific phenomena. SPAC deals in the energy space have lost almost 60% of their value since closing. But our small cap energy benchmark, the Invesco S&P Small Cap Energy ETF (NASDAQ: PSCE) is down more than 70% in the past three years. Some energy SPACs have beaten PSCE materially, with Magnolia Oil & Gas (NYSE: MGY) up over 12% while PSCE is down more than 60% since closing. And even Alta Mesa (OTC: AMRQQ), which filed for Chapter 11 bankruptcy protection this year has "only" trailed PSCE by 44% since that deal closed in February 2018.

SPACs that closed deals with financial and TMT companies have performed fairly well. But a majority of SPACs in the industrial and healthcare space have lagged their sector comparisons. And SPACs in the "other" bucket have almost universally closed deals with minimal amounts of equity at closing and underperformed.

Here's a three-year chart of the benchmarks ETFs we used.
Click to expand
One can quibble with the choice of benchmarks - it's not always obvious what the best comparison set is for businesses that come out of SPAC transactions. But most SPACs are small cap (or micro cap) companies, and it seems unreasonable to compare their performance against the S&P500.

In total, 69 closed SPAC deals since 2016 have sold $18.5bn worth of equity at closing. Those shares are worth $16.4bn today -- a decline of 11.6%. But if all that capital (approximately 1/3 of which has been in energy deals) had been invested in these sector benchmarks instead, it would be worth $16.5bn -- a decline of 10.8%. By this measure, closed SPAC deals since 2016 have trailed their benchmarks by roughly 0.8% overall.

So what do we hope to convey here? We're not advocating a strategy of allocating capital to all closed SPAC deals as an alternative to a portfolio of small cap sector investments. What we are trying to show is that plenty of SPACs have beaten their comps since closing, especially among the subset of SPAC deals that sold a material amount of equity to new shareholders.

The most important thing to SPAC investors is front-end returns. But sponsors need to keep bringing quality companies public via the SPAC format to keep the machine going. Fortunately, this study shows the process is working.

Speaking of front end returns, if you're interested in an update to our last study on SPAC returns from IPO to business combination, check out this report we prepared for the SPAC Conference 2020!

News From the Past Week
IPOs and S-1's
  • Gores Holdings IV (GHIV) filed to raise $400mm and become the second issuer to IPO with 1/4 warrant coverage in each unit. Gores IV will be Alec Gores' fifth SPAC. The first two consummated successful business combinations that now trade as Hostess Brands Inc. (NASDAQ: TWNK) and Verra Mobility Corp. (NASDAQ: VRRM) -- both of which closed Friday above $14. Gores III (GRSH) recently announced a $1.5bn transaction with government contractor PAE. And Gores Metropoulos Inc. (GMHI), which raised $400mm in February, is still seeking a business combination target. Aside from the 1/4 warrant coverage, Gores IV is similar in terms to previous Gores SPACs, with warrants that include a redemption for stock mechanism and a $750,000 annual working capital withdrawal allowance from trust account earnings. But the sponsor's risk capital will come in the form of warrants purchased at $2 each, a slight giveback to IPO investors for the reduced warrant coverage. Deutsche Bank is sole book-runner.
Tender Offer Extension
  • TKK Symphony Acquisition Corporation (TKKS) extended its tender offer again, until Monday 12/16/2019. It's unclear exactly what prompted the extension, although the most recent tender offer documents included additional China-related risk factors. Approximately 21mm shares (84.2%) had been validly tendered as of the extension.

  • Regalwood Global Energy Ltd. (RWGE) will redeem all outstanding public shares effective 12/16/2019 for approximately $10.37 each rather than contribute to trust to try and extend the company's charter.
Deal Amendment
  • Legacy Acquisition Corp. (LGC) announced an amendment to its deal with Blue Valor that will cause its sponsor to forfeit up to half of its 7.5mm promote shares, depending on the funds available from LGC's trust account at closing. The forfeiture will kick in if the trust account contains less than $270mm at closing, with the full 3.75mm shares forfeited if public redemptions bring the trust account below $120mm. The company also announced it would pursue the possibility of a tender offer for outstanding warrants after the deal closes.
Approval Meetings Next Week
  • Boxwood Merger Corp. (BWMC) will hold a meeting Thursday 12/12/2019 to approve its acquisition of Atlas Technical Consultants. The deal carries a minimum cash condition of $100mm with a maximum redemption scenario of 50% of the company's public shares, assuming no alternative financing. Recent proxies have referenced a potential PIPE transaction but nothing formal has been announced.
  • New Frontier Corporation (NFC) will hold a meeting Thursday 12/12/2019 to approve its acquisition of United Family Healthcare. The company announced $26mm in additional PIPE investment this week and will have enough cash to close the deal even if all unrestricted public shares elect to redeem for cash.
  • Pivotal Acquisition Corp. (PVT) will hold a meeting Thursday 12/12/2019 to approve its acquisition of KLDiscovery. The company's announced backstop investment from sponsor affiliate MGG Investment Group is intended to cover possible redemptions associated with the transaction.
Charter Extensions
  • KBL Merger Corp. IV (KBLM) shareholders approved an extension until 4/6/2020 to close the company's deal to acquire CannBioRx. Approximately 3.7mm public shares exercised redemption rights, leaving just under $12mm remaining in the trust account.
  • HL Acquisition Corp. (HCCH) will hold a meeting 1/2/20 to extend its charter to a date TBD. The amount of a monthly contribution to trust for remaining public shares has not yet been determined.
Deal Rumor
  • Reuters reported that GS Acquisition Holdings Corp. (GSAH) is in talks to acquire US backup power equipment firm Vertiv for more than $5bn including debt. Vertiv is a portfolio company of Platinum Equity, the private equity firm founded by serial SPAC sponsor Alec Gores' brother, Tom Gores. Platinum Equity has plenty of experience taking companies public via the SPAC route. The company sold smart transportation firm Verra Mobility to Gores Holdings II back in 2018, and agreed to sell government contractor PAE to Gores Holdings III last month.
Disclosures: Site administrators are long GMHIU, GMHI, GMHIW, GRSH, GRSHW, TKKSR, TKKSW, RWGE/W, LGC/W, BWMC, BWMCW, NFC/W, STNLW, HCCHR, HCCHW, KBLMR, KBLMW, GSAH.U, GSAH, GSAH/W and may trade in or out of positions in these or other SPAC securities at any time. Nothing on is a recommendation or solicitation to buy or sell any investment.