SPAC Series: Bullish On Gores Guggenheim

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Summary

  • GGPI is a good speculative play on the rumour of merger discussions with Polestar, an electric vehicle company.
  • Both the prospect of Polestar and the track record of the Gores Group as a Sponsor make GGPI a good investment choice.
  • Investors in GGPI can participate in the potential upside of an initial public listing with limited downside.
  • GGPI shares can be redeemed at the investor’s discretion for $10 or held through the business combination.

Bundle of dollars and a bag of SPAC on scales. The concept of attracting investors" money to fund the merger of companies into a new one. Assessing the value of the new company and profitability.
Andrii Yalanskyi/iStock via Getty Images

SPAC Payoffs

Gores Guggenheim Inc. (GGPI) is a buy at a price at or below $10 for investors looking for a speculative play in a volatile and unpredictable market.

With the S&P500 and NASDAQ not budging from their heights, investors are increasingly turning to small cap stocks in search of runs outpacing the broader market. This could explain why meme stocks such as GameStop Corp. (GME) and AMC Entertainment Holdings, Inc. (AMC) continue to cycle through volatile peaks and valleys.

A less risky play would be to invest in a pre-merger Special Purpose Acquisition Corporation (SPAC) to capture the potential for an upside once a merger is finalized. While there is the opportunity cost of parking funds in a shell company, there is significantly less volatility and downside risk as compared to investing in a meme stock given the redemption features of a SPAC.

One attractive opportunity is GGPI - there have been rumors circulating of a GGPI merger with Polestar, a Swedish electric car company. If the deal comes to fruition, GGPI has potential for substantial initial upside that has been typical in high profile initial public listings in the current market environment. If the deal is unsuccessful, investors can dispose of the shares close to Net Asset Value (NAV) or redeem the shares for $10, limiting the downside.

In the current environment, SPAC deals, even with an unpromising target acquisition, can achieve returns of 5x solely on the wave of investor optimism. Below is a table of select SPAC initial public listings in 2021, along with the highest share price reached after the initial listing and the share price as of July 20, 2021. As seen in the table below, there is generally an initial peak in share price followed by a decline. The median of the 2021 SPAC returns to date from the initial public listing as summarized on SPACTrack is WM Technology, Inc. (MAPS), which has a 41% return to date from the SPAC IPO price. Approximately two thirds of the SPAC IPOs in 2021 have generated positive returns from the SPAC IPO price.

Target

Sponsor

Initial SPAC offering price

Highest share price since public listing

Closing share Price as of July 20, 2021

Clover Health Investments, Corp. (CLOV)

Social Capital Hedosophia Holdings Corp. III (IPOC)

$10 for 1 common share and one-third of warrant

$28.85

$8.35

Luminar Technologies, Inc. (LAZR)

Gores Metropoulos, Inc (GMHI)

$10 for 1 common share and one-third of warrant

$47.80

$18.25

United Wholesale Mortgage, LLC (UWMC)

Gores Holdings IV, Inc (GHIV)

$10 for 1 common share and one-fourth of warrant

$14.38

$7.50

Stem, Inc. (STEM)

Star Peak Energy Transition Corp (STPK)

$10 for 1 common share and one-third of warrant

$51.49

$26.47

WM Technology, Inc. (MAPS)

Silver Spike Acquisition Corp (SSPK)

$10 for 1 common share and one-half of warrant

$29.50

$14.82

Careful selection of pre-merger SPACs can result in a lucrative payoff immediately post merger. If the investor believes in the value proposition of the resulting entity, they can hold beyond the initial listing for long-term gains.

In our view, GGPI and Polestar would be a transaction with both the potential for an initial spike and as a long term hold. An electric vehicle startup tech company has the right appeal to attract attention and momentum. Polestar’s ambitious objective of competing with Tesla has already thrust the electric vehicle company into headlines. Furthermore, Polestar is already in production in Sweden and has plans to start production in the U.S. Market. If the GGPI and Polestar deal is successful, and the financial metrics and the projections (to be released in the proxy statement) are promising, there is a high chance the initial listing will generate attractive returns for a pre-merger investor and continue to do so after the initial hype. If the merger does not go through, investors are protected from downside through the redemption option for the SPAC units.

Valuation and Due Diligence of Target

Another key consideration is the valuation of the target entity and the extent of the due diligence. To date Gores Group has been involved in five completed SPACs as summarized in the table below. Three out of the five mergers have maintained premiums above the initial pre-merger SPAC share price, with the deals in the technology space have performed particularly well. This is not surprising given Alec Gores’ expertise in transactions in the tech industry. A merger with Polestar would be well aligned with Gores’ past experience and interests.

Target

Industry

Sponsor

Initial SPAC offering price

Closing share Price as of July 20, 2021

Third Party Valuation Obtained

Luminar Technologies, Inc. (LAZR)

Technology

Gores Metropoulos, Inc (GMHI)

$10 for 1 common share and one-third of warrant

$17.90

Yes – Source: Proxy Statement

Hostess Brands, Inc. (TWNK)

Consumer Packaged Goods

Gores Sponsor IV LLC (GHIV)

$10 for 1 common share and one warrant

$16.29

Yes – Source Proxy Statement

PAE Incorporated (PAE)

Business Services

Gores Sponsor III LLC (GRSH)

$10 for 1 common share and one warrant

$9.49

Yes – Source Proxy Statement

United Wholesale Mortgage, LLC (UWMC)

Financial Services

Gores Holdings IV, Inc (GHIV)

$10 for 1 common share and one-fourth of warrant

$7.50

Yes – Source Proxy Statement

Verra Mobility (VRRM)

Technology

Gores Sponsor II LLC (GSHT)

$10 for 1 common share and one warrant

$14.95

Yes – Source Proxy Statement

Gores Group has obtained third party valuations for all of its targets in the past. This provides an added level of assurance that investors are paying a fair amount for the target entity. This is not a requirement for SPACs, for instance, many high profile SPAC initial public listings such as Clover Health Investments, Corp. (CLOV) and Nikola Corporation (NKLA) were not subject to a third party independent valuation. The share prices of both CLOV and NKLA have experienced significant declines from their heights. It is also worth mentioning that so far, none of the Gores Group past deals have been a subject of a short-seller’s report pointing to misleading statements, business practice misconduct and legal issues (as was the case for CLOV and Nikola), which is an indication of Gores Group’s sound due diligence practices.

SPAC Sponsor Incentives and Value Delivery

Investors should be wary of the lucrative Sponsor incentives structured into SPACs largely stemming from the Sponsor promote and warrants. Generally, Sponsors will receive a significant stake in the resulting public entity for a nominal initial investment. The terms of the Sponsor’s share in the resulting entity are settled as part of the merger and will not be disclosed to investors until the merger agreement is completed and the proxy statement is filed. Some SPACs have built in an incentive structure that aligns the Sponsor’s interest with the public investors, i.e. through Sponsor earn-out agreements, but these are rare. Given the typical asymmetrical compensation arrangement in SPAC transactions, Sponsors may be motivated to close a transaction without adequate due diligence and instead rely on pure hype and promotion to realize a profit.

The table below examines several previously mentioned high-profile SPAC transactions:

Sponsor

Promote

Initial Investment

Post-Merger Sponsor Ownership

Nikola Corporation (NKLA)

VectoIQ Holdings, LLC (Sponsor), Cowen Investments (Founder), Blackrock (Anchor Investor)

$25,000 for 20% of IPO entity

5,750,000 founder shares

$8,900,000

890,000 private units at $10/unit

1.6% of total equity value of $4B

Source: Nikola Investor Presentation p33

Sponsor share value after IPO: approx. $64M

Clover Health Investments, Corp. (CLOV)

SCH Sponsor III (Partnership between Chamath Palihapitiya, the founder and current Managing Partner of Social Capital, and Ian Osborne, a co-founder and the current CEO of Hedosophia)

$25,000 for 20% of pre-merger entity

20,700,000 founder shares

$16,400,000

10,933,333 warrants

8.2% of equity value of $4.4B

Source: Clover Health Proxy Statement pxiii

Sponsor share value after IPO: approx. $361M

Luminar Technologies, Inc. (LAZR)

Gores Metropoulos (Alec Gores and Dean Metropoulos)

$25,000 for 20% of pre-merger entity

10,000,000 founder shares

$10,000,000

6,666,666 warrants

3% of equity value of $3.4B

Source: Luminar Investor Presentation p41

Sponsor share value after IPO:

Approx. $102M

In each of the above deals, the Sponsor’s at-risk capital, consisting of the nominal paid-in-capital for the founder shares and the subsequent investments in private units or private warrants, are a fraction of the value of the Sponsor’s stake in the post-merger public entity. The Sponsor’s at-risk capital is forfeited if a merger does not occur within the allotted time (generally 24 months from the closing of the SPAC IPO). The stock of the post-merger company will need to fall significantly for the Sponsor to sustain a loss on their initial investment. However, if a deal is not realized, the Sponsor’s at-risk capital may be forfeited. As such, Sponsors may enter into a suboptimal merger and overpay for an inferior company.

The disproportionate sponsor incentive structure is typical of a SPAC deal and investors should invest in the SPAC only if there is expectation that the Sponsor can remain actively engaged with the target entity post-merger in order to leverage the Sponsor’s expertise and network to generate value beyond the Sponsor compensation. In the above examples, Steven Girsky, managing partner at Vecto IQ and Alec Gores, founder of Gores Group, remained on the board of the post-merger companies; this indicates some level of continued support and involvement in the company’s operations. Palihapitiya and Osborne do not appear involved with Clover Health post merger, yet the Sponsors retained a much greater stake in the resulting public entity.

If the merger of GGPI and Polestar proceeds, there is a good chance Alec Gores will remain on the board of the public entity, as was the case for Luminar. Note Alec Gore has not always remained involved in the governance of past post-merger companies; however, GGPI-Polestar merger would be the form of a highly visible and compelling tech startup to maintain the interest of an entrepreneur like Alec Gores. In any case, investors can look to the proxy statement once the merger is finalized to assess both the Sponsor incentives and the involvement of the Sponsor post-merger.

Closing Remarks

In conclusion, the bullish case for GGPI is due to the following:

  • There are rumors of GGPI merging with Polestar, an ideal candidate for an attention-grabbing initial public listing.
  • Gores Group is a premier SPAC Sponsor and has been involved in several successful SPAC deals in the past.
  • Gores Group has demonstrated success in a related sector (Gores Group’s Luminar has a collaboration with Volvo in using Luminar’s LiDAR technology for self-driving cars).
  • Gores Group has exhibited sound business practices in the valuation and due diligence of target entities and has shown continued involvement in the post-merger entity.
  • Shares of GGPI can be redeemed for $10 (less brokerage fees); this means for any share price below $10, the investors have minimal risk until a business combination takes place.

A Polestar merger can result in significant upside given the popularity of the electronic vehicle space. For a premium above the GGPI shares, investors can also purchase GGPI units (GPPIU), which consists of a share and one-fifth of a warrant, providing more opportunities to reap profits (however the warrants will be worthless if a merger is not completed). Once GGPI has entered into a merger agreement, investors should carefully review the proxy statement to understand the financial condition of the target entity and the Sponsor compensation arrangement to determine if the investment should be held through the merger and beyond.

This article was written by

SMB Insights profile picture
193 Followers
CPA with a passion for investing and a keen interest in identifying market anomalies. Frustrated by the misinformation and the lack of in-depth analysis on market opportunities, I want to share detailed insights with like minded investors.

Disclosure: I/we have a beneficial long position in the shares of GGPI either through stock ownership, options, or other derivatives. 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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