This year has become a boom year for special purpose acquisition companies, or SPACs. Some postmerger returns have been stunning, including those of Nikola Motors, Virgin Galactic, and DraftKings —all of which went public by combining with SPACs. New SPAC issuance is soaring, with multiple initial public offerings a week for several weeks running. And big names like Bill Ackman want in.
More recently, investors have begun bidding up shares of SPACs that have agreed to attractive deals, but months before their combinations close. Tortoise Acquisition (ticker: SHLL), which will merge with electric-truck company Hyliion this fall, has nearly tripled since its deal announcement in June. On Monday, shares of Landcadia Holdings II (LCA), a SPAC sponsored by Landry’s CEO and Houston Rockets owner Tilman Fertitta, said it plans to merge with Fertitta’s Golden Nugget gaming franchise. The stock popped more than 50% in the next two days.
Also known as “blank-check companies,” SPACs raise money from public and private investors and then identify an acquisition target and buy it, typically within two years. Barron’s screened for SPACs that are less than six months from their deadlines (thus might be about to announce deals), and compared their market prices to their current estimated trust value per share.
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Source: SPACInsider, FactSet
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There are 21 SPACs on the market searching for targets that have less than half a year before their completion dates. Of those, just five trade below their estimated trust value as calculated by SPACInsider, a website devoted to research and data about SPACs.
By convention, SPACs sell units in an initial public offering at $10 each, which gives investors a common share and a fraction of a warrant. The cash raised in a SPAC IPO goes into a trust, where it earns interest until the merger is completed. At that time, shareholders can redeem their stock for a proportionate share of the cash in the SPAC’s trust.
That creates a nearly risk-free arbitrage opportunity: buying a SPAC’s shares when they’re trading at a discount to the cash in its trust. By holding through the SPAC’s merger, investors can earn a minimum of that discount plus the yield on U.S. Treasurys that the SPAC holds. If the SPAC’s deal is a dud, or if sponsors can’t find one by the deadline, the shareholder redeems his or her shares and receives the trust value. If the deal is a hit and the shares trade higher than the trust value, investors can sell at the market price.
For example, at a recent $9.99 per share, GreenVision Acquisition Corp. (GRNV) trades for a 1.1% discount to its $10.10 estimated trust value per share. Its deadline is Nov. 21, but the SPAC’s sponsor has the option to extend by three months twice, each time adding 10 cents per share to the trust.
The arbitrage opportunity is simple, and investors can lock in a risk-free—albeit modest—gain. Should investors hold for about five months through GreenVision’s original deadline and redeem for cash, they can receive an annualized 2.64% yield. A one-year Treasury bill yields 0.17%.
The odds of a blockbuster acquisition that causes GreenVision’s stock to soar appear smaller. For starters, the SPAC is on the small side, with just $57.5 million in its trust—it’s targeting a combination with a business valued at $100 million to $300 million in the health care and life science industries. GreenVision’s sponsors are its CEO David Fu and CFO Karl Ye, both with backgrounds in mergers and acquisitions but relatively unknown players, and its underwriter is I-Bankers Securities.
A better chance for a merger-announcement stock pop might come from FinTech Acquisition Corp. III (FTAC), the third SPAC from a team focused on targets in fintech. Its CEO, Daniel Cohen, was involved in the first two FinTech SPACs, and holds board or executive positions at payments and banking firm The Bancorp (TBBK) and investment firm Cohen & Company (COHN). IPO proceeds were $345 million and the SPAC’s deadline is Nov. 20.
Fintech Acquisition I merged with payment processor CardConnect in 2016, and was later acquired by First Data (now Fiserv ) at $15 a share. FinTech Acquisition II combined with International Money Express (IMXI) in 2018. The stock recently traded for $12.61.
That’s a solid record, and the fintech and payments space is just as hot today. But the market expects an attractive deal: Fintech III’s shares recently traded for $11.13, a 7.6% premium to its estimated trust value.
One word of caution, however: If a SPAC can’t consummate a merger within its specified term, its trust is liquidated and returned to stockholders, while warrants expire worthless. That gives sponsors an incentive to get a deal done—but also means investors should pay particularly close attention to transactions announced right before the deadline, when the pressure to find one is highest.
Write to Nicholas Jasinski at firstname.lastname@example.org