SPACs: Fertile Fishing Grounds for Liquidation Value Investors

In Blank Checks Firing Blanks (Breakingviews.com via NYTimes.com), Lauren Silva Laughlin and George Hay write about the recent performance of blank check companies, otherwise known as special-purpose acquisition corporations or SPACs. Blank checks are shell companies that raise money from the public in order to acquire a business the identity of which is not known at the time the capital is raised. The trick is that a deal must be consummated before a certain date or the funds must be returned to the investors.

Many of the blank checks raised in 2007 are running out of time to complete an acquisition. While some 2007 SPACs did manage to seal a deal, it seems most were unable to do so because of the turmoil in the markets and were forced to liquidate:

About 40 of 66 SPACs that started in 2007 have been liquidated or will probably end up being liquidated, according to SPAC Research Partners.

It turns out that those SPACs forced to liquidate have outperformed those that actually completed a transaction:

And SPACs that sat on cash and safe investments have actually outperformed those that did deals. Take the GSC Acquisition Company, established by GSC Group, a debt-focused investment firm. The SPAC’s bosses tried to acquire Complete Energy, a power producer. But the deal wasn’t completed in time, and GSC Acquisition was liquidated last month.

Investors received around $9.80 a share in cash, just shy of the $10 they paid in its initial public offering two years earlier.

Investors in SPACs that did deals haven’t been so lucky. Shares of Aldabra 2 Acquisition Corporation, for instance, have plunged more than 75 percent since that SPAC bought Boise Cascade’s paper, packaging and transportation business and changed its name to Boise Inc. in February 2008.

From a deep value investor’s point of view, SPACs present an interesting investment opportunity. The value analysis is simple enough: Most trade at a discount to net cash. The difficulty is in assessing which will actually return the cash and which will spray it away on an acquisition. In making such an assessment, it helps to have a large activist investor sitting on the register. Cue Daniel Loeb and Third Point LLC. Third Point’s most recent 13F filing shows a number of SPACs in Loeb’s portfolio, including the following (via Market Folly):

1. Liberty Acquisition Holdings (LIA): 11.75% of Loeb’s portfolio
2. Victory Acquisition Corp (VRY): 5% of Loeb’s portfolio
3. Trian Acquisition (TUX): 4.95% of Loeb’s portfolio
4. Triplecrown Acquisition (TCW): 4.35% of Loeb’s portfolio
5. Global Brands Acquisition (GQN): 2.4% of Loeb’s portfolio
6. Global Consumer Acquisition (GHC): 1.8% of Loeb’s portfolio

We haven’t looked at any of these in detail, but they might present a happy hunting ground for the liquidation value investor. We’ll return to these stocks if there’s further turmoil in the market.

Full Disclosure: We do not have a holding in any of the securities listed above.

Comments

[SPACpro:]

Actually, it is not necessary to assess which SPACs will return cash and which ones will complete an acquistion. If you wish to invest for the cash returned at liquidation, you simply buy the stock before the record date for any impending acquistion, vote your stock "no" and request redemption for your pro-rata share of the trust account. If the SPAC managers don't want you to vote no, they may approach you and purchase your shares before the vote (or contract with you to buy them at a fixed price just after the business combination). The good news for your yield: this gets you your cash a few months sooner than waiting for the SPAC to fully liquidate, so your IRR is higher.

Meanwhile, if an announced merger turns out to have real value in the eyes of the market, then your stock will trade up and you can sell for above the "trust value" if you aren't a long-term believer.

Jul 22 01:06 PM