Buy Alberton Acquisition Corp.'s Rights, Not The Warrants

Summary

• Alberton Acquisition Corporation has announced a merger with SolarMax Technology, Inc., a solar panel engineering, procurement, and construction service.
• SolarMax Technology, Inc. has installed more than 12,000 systems in the US and the largest US-based solar developer in China today.
• Each warrant is exercisable for one-half of one ordinary share.
• Each right receives one-tenth of one ordinary share at the merger.
• At today's price, buy the rights, not the warrants.

I would like to present an argument on why investors should buy the rights and not the warrants to Alberton Acquisition Corporation (NASDAQ:ALAC). As this piece is directed to those already invested in the firm, I will offer a short introduction to the merger and focus on an investment strategy.

On Oct. 28, 2020, Alberton Acquisition Corporation entered into a merger agreement with SolarMax Technology, Inc. Alberton Acquisition Corporation shares have a value of $300 million. After the merger, they will be listed on the Nasdaq under the ticker SMXT.

The Target Firm

SolarMax Technology, Inc. is a solar panel engineering, procurement, and construction (EPC) service firm, founded in 2008. Each project consists of a custom design and installation completed by the firm, assuring that each specification meets company standards. They have recently expanded into electric car charging and offer in-house financing to customers.

They design and assemble solar panels in their 165,000 square foot facility in Riverside, California. They have already installed more than 12,000 systems. In 2015, they expanded into the Chinese market through the expansion of antipollution programs, becoming the largest US-based solar developer in China today. They launched their FLEX Energy Storage Systems in 2016, which doubled the energy storage capacity of their previous system. They primarily operate solar farms in China and sell solar energy systems in the US.

Operating since 2008, they have increased revenue annually. SolarMax Technology, Inc. retained $57 million in sales for the 12 months ending on September 30, 2019. I am bullish on the firm. They have been in the industry for more than a decade and aggressively grown their project portfolio annually. Information on the recent financials has yet to be released and an investor presentation is not publicly available. I expect their business to benefit from the Biden administration. The promo video can be found here.

The Details

Alberton Acquisition Corporation created 11,500,000 Units (including over-allotment) at the offering on October 2, 2018. An additional 500,000 units were created for the representative. Warrants were added to the offering later that month. Each unit is composed of one ordinary share, one warrant, and one right. After the merger, the rights will increase the share count by 1,150,000 shares + 50,000 shares for the representative. Warrants will increase the share count by 6,000,000 if exercised.

Each right (NASDAQ:ALACR) will give the owner 1/10th of a share upon the consummation of the Business Combination with SolarMax Technology, Inc.

Each warrant (NASDAQ:ALACW) entitles the holder to purchase one-half of one Ordinary Share at a price of $11.50 per full share during the period commencing on the later of the closing of a Business Combination (as defined below), and terminating on the fifth (5th) anniversary of the closing of an initial Business Combination. The call to redemption will be exercised by the firm when the share price has been at least $16.00 for 20 trading days within a 30 trading day period. Warrant holders will have 30 days to convert their shares.

The Math

First I will give you today's price (2/1/21) then I will run numbers on the two options.

• Ordinary Shares: $13.40
• Rights: $0.80
• Warrants $1.20

I am making the assumption that if you are reading this article you are already bullish on the firm and believe the merger will go through. The failure to complete the merger prices both the warrant and the right at $0. Both financial instruments offer the same risk concerning the merger. Therefore, discussing whether the merger will be successful is irrelevant to this argument.

If the merger fails the ordinary shares go back to $10. This put option makes the investment in the shares less risky than either the warrant or the rights.

For a base case, I will assume the shares reach the target price of $16 for 20 days, forcing the conversion of the warrants.

The total price per share with the rights is 10 times $0.80 for a total of $8 dollars. That is a 100% upside from today's price ($8 to $16 target price). If the price remains stays around $13 then buying the rights today offers a 62.5% return if the merger completes and the ordinary share price remains the same. I would expect that a 10% dilution would put downward pressure on the price.

The total price per share with the warrants is 2 times $1.20 plus $11.50 for a total of $13.90. That is an upside of ~15% ($13.90 to $16 target price) . If the price remains around $13, then the ~15% return is pushed into the future. If one considers the time value of money, the 15% return becomes less valuable over time. If the price reaches $16, not only has the additional rights been redeemed diluting the share count, an additional 6,000,000 shares will increase dilution putting downward pressure on the price.

Example

Let's assume that an investor wants to take a small position of $1200.

• The Rights
  • $1200 purchases 1,500 rights at $0.80 each which are converted to 150 shares at merger.
  • At today's price of $13.40, the total value is $2,010 for a gain of $810.
  • If the share price reaches $16.00, the total value is $2,400 with a total gain of $1200: 100% return
• The Warrants
  • $1200 purchases 1,000 warrants at $1.20 each which are converted to 500 shares at $11.50 each when the price reaches at least $16 for 20 days (call for redemption).
  • At today's price of $13.40, the warrants cannot be exercised.
  • If the share price reaches $16.00 (call for redemption), I would expect the spread between two warrants and the share price to equal ~$11.50. The value of each pair of warrants would equal ~$4.50. Each individual warrant would equal ~$2.25. The total value would be $2250 with a total gain of $1050: 87.5% return

Since both financial instruments go to zero if the merger fails, there is no reason to consider a failed merger. However, if the stock does suffer in the short term and drops to $10. The holder of the rights can exit their position with a $300 gain (25% return). The warrant holders will likely lose value with a negative return if they want to exit their position.

The rights position does not suffer a loss unless the stock price drops below $8 after the merger. This provides returns even if the solar panel enthusiasm wanes. Also, consider that ordinary shareholders will have already suffered a loss of $5.40 (~40% loss) per share based on today's price of $13.40.

Because the warrants have to be converted thirty days after the price is at or above $16 for 20 out of 30 trading days, the warrants don't have as much call-option value as other SPACs which set the price at $24. The higher price allows shareholders to hold the warrants till a higher price offering much higher returns. Alberton Acquisition Corporation set the price at $16 and it is unlikely to change.

With simple algebra, we can find the equilibrium price between the warrants and the rights at ~$16.43 [500 (x - 11.50) = 150x]. If the price quickly escalates past that point before share conversion, the warrant holders will be better off. But, the price action has to increase within that 30-day window to capture the additional value. After warrant conversion, the share price will likely drop shortly after due to share dilution.

The Formula

As the price is sure to change I offer a breakdown of the calculation.

• R = Price of 10 Rights (Equals one share at conversion)
• W = Price of 2 Warrants (Equals one share at conversion)
• I = Investment amount
• X = Equilibrium Price between Warrants and Rights
• C = Warrant conversion price)

We divide the investment by the rights (I/R) and warrants (I/W) to determine the number of shares. We multiply the number of shares of rights by the equilibrium price (X). For the warrants, we subtract the conversion price from the equilibrium price (X - C). Then we solve for X.

I/W (X - C) = (I/R)X

X = C / (1 -W/R)

Plugging in the numbers from the previous example we get the following:

R = $.80 x 10 = $8.00

W = $1.20 x 2 = $2.40

X = C / (1 -W/R) = 11.50 / (1 - $2.4/$8) = ~16.43

You can input the current market prices to determine the equilibrium price on any given day. As long as the price is above $16, I would argue that the rights are a better buy than the warrants, considering all risk factors.

Risks

There are significant risks in buying warrants or rights. A failed merger will likely result in a complete loss. Albert Acquisition Corporation has already exceeded the 2-year SPAC window and filed an extension with the SEC to complete the merger. If the SPAC fails to merge, Albert Acquisition Corporation will be likely be dissolved. The ordinary shares will redeem their initial investment plus interest but rights and warrants will essentially be worthless.

The second major concern is that a definitive agreement has yet to be signed. On Dec. 30, 2020, Albert Acquisition Corporation filed a registration statement on Form S-4 with the SEC in connection with meetings of stockholders. When Nasdaq has approved the continued listing of Albert Acquisition Corporation's stock following the Merger and the SEC has declared the S-4 effective, the firms can have a shareholders meeting to approve the merger. Considering the LOI was signed in October, the length of time to file the DA is concerning.

Finally, the Albert Acquisition Corporation website has not been updated since September 2020. Having an outdated website seems unprofessional. The costs to maintain a website is nominal when considering the size of the transaction. I am concerned but hope that the lack of updates is due to the due diligence required to complete the merger.

Conclusion

Through a simple example, I have shown that the rights offer a better risk/return profile than the warrants. If you are bullish on SolarMax Technology, Inc., buy the rights, not the warrants.

Analyst’s Disclosure: I am/we are long ALACR. 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.

Comments

[bluenautica]

We are almost a year since you wrote this, how do you feel about ALAC now?

[lanlet]

October 26, 2021 is the extended merge deadline.

[rtj321]

Any new insights here?

[SPAC lover]

this is a wicked company.

got some ALACR at 40 cents. sold today at 65 cents

[SPAC lover]

The merger success rate is about 60%. But it is on very thin ice.
It needs to keep $5 million + in the trust account. Without PIPE making it a bit risky. It may have about $7 million to 9 million now. Insiders control majorities of the shares. almost all of the initial IPO 10 million shares have been redeemed at $10.51. Not sure how it has met the>300 shareholder limit for NASDAQ listing, but it has done that.

for now, ALAC > $10. After the merger, it would likely fall below $10 so if you bought ALACR, convert quickly after the merger is done and sell it.

SolarMax is not a good quality company or it would not accept the condition to merge with ALAC without any cash or PIPE money. It is just using ALAC to become a public company. The sponsor is trying to keep its free sponsors' shares and warrants live.

[SPAC lover]

There is no PIPE, there are only $4 million shares left. Most of the original ALAC unit buyers have redeemed their money at $10.50 in April 2020 while they approved the extension.

The deal is a possible but slim chance.

NASDAQ may delist it since it does not have 300 shareholders (unless all Seeking Alpha members buy one share each).

That is why ALACR< 50 cents.

ALAC at $10.89 is an illusion since it is not actively traded. Insiders are holding it trying to get the deal done.

[SPAC lover]

Agree that Rights are better than Warrants.

However, ALAC is no longer a Blank check company. Most of the fund has been redeemed. It is now an empty check company.

SolarMax would get ALAC stocks but no Cash money.

That is the main risk. Unless SolarMax tries to save ALAC, or try to go to the public.

You can see ALAC trading volume very low. its stock price is more or less an illusion. There is no money left in Trust fund (maybe a few $million, not normal $100 or $200 million in most SPAC)

[SPAC lover]

There is no more money in the Trust Fund.

Trust Account

Following the closing of the Initial Public Offering on October 26, 2018, an amount of $100,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Public Units in the Initial Public Offering and the Private Units was placed in a trust account (“Trust Account”). Following the closing of underwriters’ exercise of over-allotment option on November 20, 2018, an additional $14,879,920 of net proceeds ($10.00 per Unit) was placed in the Trust Account, bringing the aggregate proceeds held in the Trust Account to $114,879,920.

On April 23, 2020, the Company filed an amendment to its Articles of Association with the Registrar of the British Virgin Islands to extend the time that it needs to complete an initial Business Combination from April 27, 2020 to October 26, 2020 or such an earlier date as determined by its board of directors (the “Extension”). In connection with the Extension, shareholders holding 10,073,512 public shares exercised their right to redeem such shares for a pro rata portion of the Trust Account. As a result, an aggregate of $105,879,118 (or $10.51 per share) was removed from the Trust Account to pay such shareholders.

On October 26, 2020, the Company filed an amendment to its Articles of Association with the Registrar of the British Virgin Islands to extend the time that it needs to complete an initial Business Combination from October 26, 2020 to April 26, 2021 or such an earlier date as determined by its board of directors (the “Second Extension”). In connection with the Second Extension, shareholders holding 1,000 public shares exercised their right to redeem such shares for a pro rata portion of the Trust Account. As a result, an aggregate of $10,770 (or $10.77013 per share) was removed from the Trust Account to pay such shareholders.

[Thenet]

hey i got some rights as you recommended. this stocks behavior and the management vagueness is worrying, no investor presentation yet and lots of wierd stuff. do you think we should be worrid here? thanks!

[rtj321]

@Michael-Paul James do the rights expire in April? That could be the clear reason why they are trading so low, if that is the case.

[Michael-Paul James]

@rtj321 "Rights are convertible only upon consummation of an initial business combination." This implies that the rights are valid until an initial business combination. I found no notes on the expiration of rights except for the following: "In the event of a liquidation prior to our initial business combination, all of our warrants and rights, including the private warrants and rights will be worthless." If the SPAC is dissolved rights are worth zero. Remember you must have multiples of 10. You must "hold rights in multiples of 10 in order to receive shares for all of your rights upon consummation of the initial business combination"

You can read the s-1 here. All quoted words can be searched to find the sections in the document. S-1s are very long :)
sec.report/...

[rtj321]

@Michael-Paul James Thanks for the reply. I was only going off of nasdaq's site for quoting, that says they expire April 26th, 2021

[ArcterikLLC]

@Michael-Paul James Do you think this is still on track? The rights are trading higher than I would expect if it were dead, but they’ve provided no updates.

[bluenautica]

As of right now February 25th 2021 at 6pm the stock has dropped to $11 while the warrants have fallen to 0.75 and the Rights to 0.67. It is looking really bad for ALAC. Not sure what is going on as there is no bad news out there, except that they regained compliance to remain on NASDAQ. They failed to hold an annual shareholders meeting but are now planning on holding one, no date is set yet.

[Michael-Paul James]

@bluenautica Investors may be concerned that the merger will not consummate.

[Capital Gains]

Great explanation and information, thanks a lot

[Owen213]

The real takeaway here is that a company that hasn't updated it's website in months is now up 30% in 2 months at $14 with no news on it's DA. This is gambling not investing.

[Michael-Paul James]

@Owen213 Gambling generally consists of a rake. The pot shrinks as players play. I understand that the market has similarities to gambling. But, in the market, the pot increases not shrinks over time.

All risky behaviors don't necessarily mean gambling. Under that paradigm, all life is gambling, because all decisions involve some risks.

Investing in the market involves growing assets, and examining the risks and rewards of trades. In the long term, most win because the pot keeps getting bigger. Taking small positions minimizes the effects of a poor decision. But, even the great Warren Buffett bet big (40% of his portfolio, which is really risky) on American Express. It was one of his best trades. Even the Oracle of Omaha occasionally made a bad trade (Dexter Shoes, US Air, ConocoPhillips) but managed his overall portfolio phenomenally. He carefully looked at the risks and rewards and decided to make the trade. There are no guarantees. Every trade has risks. Anyone that tells you otherwise is selling something.

Diversified portfolios help mitigate risks. Another one of the great investors only invested in trades that had an expected return of 5 to 1 (I cannot recall his name right now). His argument was that he only had to be right 20% of the time. He was a great researcher and carefully considered each trade. I would not go all-in on this trade but I believe it is a good one. Many great traders have lost everything. That is just the nature of investing.

I just hope I am right more often than I am wrong :)

[joelav]

What are your odds that the merger goes through. I own the stock.

[Michael-Paul James]

@joelav I only know of 3 SPACs that have failed to merge. Akazoo failed to merge with Modern Media Acquisition Corp due to falsified documents. TGI Fridays terminated their SPAC merger with Allegro Merger. CEC Entertainment, Chuck E. Cheese, failed to merge with Leo Holdings. Both failed due to changes in market conditions and debt. SPAC failures are uncommon.

Thinking about this holistically. Both sides are motivated to make this succeed. ALAC is an old SPAC and if this fails they will likely be dissolved. They would be highly motivated to make this work. SolarMax will be motivated because even with the delays the stock price has already exceeded the $10 base by more than 30%. That makes the insider shares more valuable and liquid. They would also be highly motivated.

I acknowledge that there are unusual delays. The trade warrants careful consideration of all factors. The article may make the rights go up but if the merger fails the rights are worthless. All investments have inherent risk. The risk to return on this trade is within my risk tolerance. The trade offers a reasonable reward for my risk. I have estimated a 60% upside for the rights. If I assume the SPAC has a 66% or better chance of success then I am satisfied. The historical record doesn't offer any evidence that the probability of failure is greater than my assumptions.

My portfolio consists of around 50 positions that are well diversified in many sectors. I never take a position larger than 5% of my holdings. In the context of my portfolio, the risk is worth the return.

[joelav]

@Michael-Paul JamesThanks - with the ESG agenda getting more and more steam I see this one as a big winner.

[willpetty]

Rather a lot of fractions here - always makes me wonder.