Better Than A Money Market, With A Warrant To Boot

| About: BGS Acquisition (BGSC)

Many investors are not aware of Special Purpose Acquisition Companies, or SPACs. SPAC's are essentially shell companies, previously referred to as blank check companies as they hold nothing but cash, almost always in the form of short-term Treasuries. They are formed for the sole purpose of acquiring an operating company that SPAC management thinks they can improve.

SPAC's got a bad name when they were associated with "boiler room" brokerage operations that turned out to be scams. These blank check companies were promoted by unscrupulous brokerage firms that engaged in "pump and dump" schemes to prop up the prices of penny stocks that were nothing but shells . Investors lost billions to these schemes prompting the SEC to promulgate new rules to govern these companies which eventually emerged as SPACs.

SPACs have a limited time period during which to sign a letter of intent to acquire or merge with an existing business, usually 12 to 18 months, as defined by the offering documents. If this does not happen within the proscribed period, all assets must be returned to the unit holders. If a letter of intent is signed, management has an additional 6 months to close the transaction.

There are often opportunities to purchase SPAC units for less than par value (usually $6 or $10 per share) even though the assets are held in short term Treasuries. One of these current opportunities is BGS Acquisition Company (BGSCU). This SPAC was formed primarily by Julio Gutierrez, a successful investor in Argentina cable television and agriculture. Additional members of the management team can be found in the company's EDGAR online filings. They intend to make an acquisition in the Latin American market or the Hispanic market of the United States. This, however, is not what interests to me.

BGSCU (includes one share of stock and one warrant) is currently trading at 9.85 and traded as low as 9.59 on May 21. At a price of 9.70, this provides a yield of 3.1% over thirteen months if no deal is announced and 3.1% over nineteen months if a deal is announced. That is better than current money market rates on what is essentially an investment in short-term treasuries, arguably the safest securities in the market. In addition, each share entitles you to one warrant in the new company, which is a long-term call option on the company, for no cost. This all assumes that BGS will not have any interest earnings from the treasuries to distribute to unitholders at the time a deal is consummated. This could increase final yields.

While this is not exactly a high-yield investment, it beats money market and CD rates with the potential upside of a warrant. It seems as though SPAC's could be back!

Disclosure: I am long BGSCU.

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