March 1, 2023 – When faced with challenging circumstances, routine methods and strategies may not work. In difficult environments, out-of-the-box thinking and creativity can overcome seemingly insurmountable hurdles.
The surge in inflation, an equity bear market, and the dramatic rise in interest rates over the past couple of years has created a business environment that is just about as challenging as they come. As a result, business leaders have had to find innovative ways to adapt and survive. This durability involves creative problem-solving, improvisation, and finding alternative ways to do things including unorthodox and novel deal structures.
There likely is not a more challenging environment than the present for a SPAC sponsor. Market conditions are grueling, with a shuttered PIPE financing market, negative investor sentiment, and poor deSPAC performance. In addition, there is a flood of blank check companies competing for deals.
The current deluge of SPACs battling for merger targets results from a massive boom in blank check IPO issuance in 2021 when more than $160 billion was raised by hundreds of SPACs.
Source: Accelerate
Given the typical SPAC issued in 2021 had two years to complete a deal, hundreds of sponsors are now approaching their deal deadline over the next weeks and months.
If a sponsor does not close a merger prior to the vehicle’s deadline, it must liquidate, returning its cash in trust (plus interest) to investors.
In 2023, more than $75 billion of SPAC capital is set to mature. Next month, a stunning $25 billion of SPAC capital will mature, with nearly all of this capital going back into the hands of investors through liquidations and redemptions.
Source: Accelerate
With the vast SPAC maturity wall working its way through the market and a merger market that is fraught with frustration, record blank check liquidations are expected to continue.
In the past year, there have been 180 SPAC liquidations, up from just one in 2021 and 2020.
Source: Accelerate
These 180 SPAC liquidations returned nearly $55 billion to investors, including accrued interest. While this return of capital is not such a bad thing for investors, it is the worst-case scenario for sponsors.
A SPAC sponsor puts up the at-risk capital to fund a blank check’s working capital and to pay banker fees, lawyer fees, accounting fees, etc. Typically, this at-risk capital represents between 2% and 3% of the IPO proceeds.
Over the past couple of years, SPAC sponsors have lost a cumulative $1.4 billion funding blank check companies that liquidated without a deal.
These 180 sponsors of liquidated SPACs launched vehicles with high hopes, caught in the frenzy in which, as Barry Sternlicht told CNBC, “if you can walk, you can do a SPAC.” Instead, they ended up with huge losses and a lot of work with nothing to show for it.
Desperate times call for creative measures.
Given the straightforward, orthodox SPAC merger is nearly impossible to do these days, we are seeing a significant amount of creativity from sponsors to get transactions across the finish line.
One of the most novel structures to be utilized is the reSPAC, in which a company that previously went public via a SPAC later merges with another SPAC.
Sounds crazy, right?
Perhaps, but put together the desire to do a deal from a SPAC nearing its maturity with a public company that is rapidly burning cash and shut out from the capital markets, and the reSPAC was born.
Wejo described itself as a leader in connected vehicle data. The company first entered a business combination with Virtuoso Acquisition at an $800 million enterprise value in May 2021. The deal was expected to come with $230 million of the SPAC’s cash in trust along with a $100 million PIPE financing. However, the markets weakened over the next several months, and when the deal closed in November of that year, nearly 60% of the SPAC’s cash was redeemed.
Subsequently, cash-burning Wejo entered the public markets with significantly less cash than expected. Within one year of trading, its stock was down more than 90%, trading below $1.00. The company’s access to capital was shut, and its cash reserves were rapidly dwindling.
While several deSPACs have gone bankrupt within their first year of trading, Wejo was not going down without a fight. Earlier this year, in a last-ditch effort to raise capital, it entered into a business combination with another SPAC, TKB Critical Technologies 1. This reSPAC transaction ascribed a $120 million valuation to Wejo, down from its previous $800 million enterprise value in its first blank check merger. The deal is also unique from TKB Critical’s perspective, given the target company was already a Nasdaq-listed public company (SPACs typically merge with private companies, or sometimes even foreign-listed public companies if they are eager to get a deal done).
Granted, the reSPAC merger has not yet closed, so its success, or lack thereof, is yet to be proven. However, the unique pricing mechanism of the consideration offered, which prices the SPAC at $11.25 per share (a 12.5% premium to NAV) is an attempt to entice arbitrageurs to not redeem and hedge instead, with the result of a deSPAC transaction without substantial redemptions.
If this reSPAC merger proves to be successful, look for many to follow. It has the potential to kill two birds with one stone – the sponsors get to salvage their risk capital and a cash-strapped public company receives a capital injection.
It may not put a considerable dent in the upcoming blank check maturity wall, however, the novel reSPAC structure may be the creative measure that this challenging market needs.
The Accelerate AlphaRank SPAC Monitor details various metrics on the current opportunity set while offering details on every individual SPAC currently outstanding. The Accelerate AlphaRank SPAC Effective Yield tracks the average arbitrage yield offered. The Accelerate AlphaRank SPAC Index tracks the price return of the SPAC universe.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). The Accelerate Arbitrage Fund may hold a number of securities discussed in this research. Visit AccelerateShares.com for more information.
