Falcon Capital Acquisition Is A SPAC Redemption Arbitrage Opportunity

Apr. 18, 2021 8:30 AM ETSharecare, Inc. (SHCR)24 Comments


  • They have an announced deal, but the shares trade below trust value.
  • The redemption option will be available very soon.
  • Buying to redeem for trust value is a low-risk arbitrage opportunity.
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Falcon Bird in Desert
Photo by SCShutter/iStock via Getty Images

Falcon Capital Acquisition (FCAC) is a special purpose acquisition company (SPAC). The firm raised $345 MM into a trust account by selling shares at $10 (as is typical for SPACs) and went 'hunting' for an acquisition. They found Sharecare, a digital health company. This piece won't be primarily about the pros and cons of an investment in Sharecare, but if you're interested in that you can check out their investor presentation here.

Instead, this piece is about some free optionality. I like free stuff, and there is a free option here. It's actually a bit better than that, as you get paid to take the option. In this case, the optionality is that FCAC shares might trade above the price they paid for Sharecare between now and the close of the deal. The market would have to value the business more than that for the option to end up in the money. However, there is some upside even if the market doesn't get excited about the merger. That's why I think this option is free - the shares trade at a level where a reasonable profit can be made without the market getting excited about the deal, and if that does happen the upside is free.

FCAC shares trade at $9.93, which is below the $10 per share they raised into their trust account. That's important, because part of the deal with Falcon Capital (and SPACs in general) is that you can withdraw your share of the trust account on the earlier of the business combination or the expiry of the SPAC. Falcon is a relatively new one, so their deadline to complete an acquisition is not until September 2022. However, because they have already found something, the option to redeem the shares is accelerated to the close of the acquisition.

Falcon Capital announced the deal with Sharecare was firm on February 12th, 2021, with an expected close date of Q2 2021. Based on that and the dates of their recent filings, I'd expect it to close either in late May or early June. Deterministically, Tuesday June 1st seems like a reasonable estimate.

The internal rate of return (IRR) of investing $9.93 now for $10 back on June 1st is 5.8%. I calculated the IRR by first dividing $10 by $9.93, which produces a quotient of 1.007049. Then, to convert that to an annual rate you take that to the exponent of 365 days divided by the 45 days until June 1st. That gives 1.0586, or a 5.86% return. The XIRR function in Excel produces the same result.

That isn't spectacular, but the risk is quite low here. The only reason you might not get the $10 back in a short timeframe is if the current deal fails and they cancel it to try something different.

I think that is very unlikely for a couple of reasons. SPAC deals almost never get voted down - you can vote in favor and still redeem. So those who want their $10 back vote in favor, and those who want the deal vote in favor. But they generally have a clause stating that there are minimum proceeds required for the deal to go through. In the case of FCAC/Sharecare, Sharecare isn't obligated to complete the deal unless the cash proceeds are more than $400 MM. However, they have already secured a PIPE [private investment in public equity] deal for $425 MM, and an agreement from investors holding $42 MM in FCAC shares not to redeem. So that condition will be met, and investors should have the option to redeem their shares for the $10 shortly. Even if it wasn't, I think Sharecare would be inclined to waive it as the SPAC bubble has deflated quite a bit since this agreement was announced. That means it's unlikely they'd be able to get as good a deal elsewhere for the business.

Basically, I'm looking at this as a heads-I-win, tails-I-win a bit less type of opportunity. Redeeming the shares for the trust value is an acceptable low-risk type investment, with a free option of the market getting excited for SPAC deals (or Sharecare specifically) sometime between now and the close of the arrangement.

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This article was written by

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Author of Microcap Review
Analysis of underfollowed microcaps worldwide, plus arbitrage and net-nets

I look for companies with a margin of safety to their value, and I dislike downside risk. I subscribe to the first rule of investing: "Do not lose money."

I believe small and microcap stocks, as well as special situations, are the best place to look for value in the markets, as most people overlook these companies, making them more likely to be mis-priced. To exploit these opportunities, I have a subscription service with multiple microcap calls every month.

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Disclosure: I am/we are long FCAC. 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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