- 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.
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 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.
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.
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.
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.
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.
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.
This article was written by
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.
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