Virgin Galactic Holdings: Early Cashless Redemption Provision On Warrants Could Cause A Stock Price Crash

Feb. 20, 2020 9:09 AM ETVirgin Galactic Holdings, Inc. (SPCE)98 Comments
Edward Vranic, CFA profile picture
Edward Vranic, CFA
5.77K Followers

Summary

  • SPCE warrants are trading below their intrinsic value, but don't represent an arbitrage opportunity.
  • SPCE has been unable to register the warrants in a timely manner, meaning that they cannot yet be exercised for cash over three months after listing.
  • Warrant holders are in a unique situation where they might be forced into cashless exercise of their warrants for less than their intrinsic value.
  • SPCE would be smart to avoid forcing the cashless exercise of warrants until full registration of securities is effective.
  • The company should issue a press release to clarify its intent for early redemption of the warrants prior to them being exercisable to calm fears over this issue.

Editor's note: this article was updated on 2/25/20 to reflect a corrected calculation.

Virgin Galactic Holdings, Inc. (NYSE:SPCE) has been on an absolute tear recently. The stock closed up 21% to $28.68 last Friday and has tripled in two months with apparently no end in sight. The warrants (SPCE-WT) also followed suit by closing up 38% to $15.69 but sit $1.49 below their $17.18 intrinsic value. I have written about several special purpose acquisition corporations, or SPAC deals in the past. These include Repay Holdings Corporation (RPAY), Akerna Corp. (KERN), The Peck Company Holdings, Inc. (PECK) and most recently Vivint Smart Home, Inc. (VVNT).

Most of these listings had warrants that traded below their intrinsic value shortly after completion of their business combination with their respective blank check listing. This created an arbitrage opportunity where one could buy the warrants and short the stock while waiting for the securities to become registered and the warrants exercisable. However, unlike these other listings, SPCE and its warrants do not present an arbitrage opportunity. There is a very good reason why SPCE's warrants trade at a discount to their intrinsic value. The early redemption clause on a cashless basis combined with management's inability to register the warrants in a timely manner have created a unique situation which could result in significant downward pressure on the stock should management opt for the cashless provision.

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YCharts

Unique situation caused by SPCE's slow action to register warrants

Like all SPAC deals, SPCE has issued warrants with a strike price of $11.50 and a time to expiry of five years. Per the prospectus agreement, these warrants were supposed to be exercisable 30 days after the completion of the Business Combination. These warrants should have become exercisable by late November but aren't yet as management has dragged

This article was written by

Edward Vranic, CFA profile picture
5.77K Followers
I am a private investor based out of Toronto, Canada and I have been investing since 2003. After 8 years in Corporate Finance with a Canadian Telecom company I have decided to dedicate myself full-time to the capital markets. I write on Seeking Alpha to demonstrate my financial analysis and writing skills across a variety of industries and to take advantage of any story-based trading opportunity that may arise. My passion and greatest depth of knowledge is on Canadian small cap stocks and I consider my blog posts to be some of my best work. I am interested in any freelance opportunities that may arise outside of Seeking Alpha on Canadian or American listed stocks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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