3 SPACs Staring Down The Gun
Hedge Fund Manager, Value, Event Driven, Special Situations
Seeking Alpha Analyst Since 2011
#1 ranked arbitrage service
#1 ranked event driven service
#1 ranked M&A service
Show me the incentive and I will show you the outcome.
Never, ever, think about something else when you should be thinking about the power of incentives.
I think I've been in the top five percent of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it.
- Charlie Munger
When I think about SPACs, I think about incentives. Sponsors are incented to find a deal, a good deal if possible, but in a pinch any deal will do. In particular, I am thinking about three SPACs scheduled to be liquidated in November if they don’t get deals approved. KBL (KBLMU) sponsors personally have over five million, Orisun (ORSNU) has over two million, and Monocle (MNCLU) has over seven million dollars at stake. All of that would get wiped out if they fail to close deals. Will they close? A majority probably will, either the easy way (with outside passive minority investors supporting their deals and not redeeming) or the hard way (re-cutting deals with their targets and re-cutting deals with their SPAC investors). In each case, the benefit of re-cutting will strongly benefit their warrant holders.
KBL is an undersized SPAC without the support of first tier underwriters. The sponsors’ SPAC record is poor. Their first one was tiny. Their second one was a debacle, down 60% after a strong recovery having been down over 96% earlier this year. One of their directors consulted with another SPAC that is, coincidentally down almost the same amount: -62%. Their third one failed to reach a deal. This is their fourth. To entice investors to trust them again, they had to offer a rich brew of securities in their units, which consist of a stock, warrant, and right. Such structural generosity is a surefire sign of desperation. Their warrants cost only about $0.22, the lowest priced warrants among any SPACs with announced business combinations. This extreme market aversion to these warrants is surpassed by only five SPACs that don’t even have deals yet. What, if anything, is the opportunity for investors? The sponsors have 2,875,000 shares of promote. If they are willing to transfer most or all of this value to outside holders in order to protect their at-risk capital, there might be some upside to the warrants. This is not quite convincing enough for me, but I’m frequently asked “what is the cheapest SPAC warrant?” and among the SPACs with deals, this is your answer. And boy does it seem to largely justify its low price.
Orisun (ORSNU) is another undersized SPAC. Their underwriter is an obscure firm with less than 2% of the SPAC underwriting market. At $0.31, their warrants are the second lowest priced among all SPACs with announced business combinations. Like KBL, they needed to pack their units to get investor interest – each includes a share, warrant, and right. I’ve taken a pass on this one so far, too. Any interest in their warrants would be in anticipation of their re-cutting their deals, both the deal with the deal target and the deal with their security holders. The warrant could pop if they are given a kicker, but looks fairly grim otherwise.
At $0.39, Monocle (MNCLU) offers the third lowest priced warrant (MNCLW) among SPACs with deals. Their unit structure is cleaner: simply a share and a full warrant. Their share price is currently hugging their cash in trust. They have just over two months until liquidation if they don’t first close their deal. Time is getting tight to find an alternative deal, but there is plenty of time to re-cut the one that they already have and to re-cut the deal with their security holders. This warrant could have a significant upside from today’s price. The Covid crisis could allow the sponsors to re-cut the deal to a more attractive price for the SPAC holders. They could also re-cut the warrant structure. A re-cut deal could be a strong recovery play heading into year-end.
Warrants are inherently leveraged securities, but these low-priced warrants are even more leveraged to these deal outcomes. For a small amount of money, you can buy a lot of exposure to deals most likely to re-cut their acquisitions and re-cut their securities’ structures in ways that could enrich warrant holders. For less than a dollar, you can buy one of each; if even one of them succeeds, it will probably pay for the losers with plenty left over.
Analyst's Disclosure: I/we have a beneficial long position in the shares of MNCL, MNCLU, MNCLW either through stock ownership, options, or other derivatives.
The information contained on this article is not and should not be construed as investment advice, and does not purport to be and does not express any opinion as to the price at which the securities of any company may trade at any time. The information and opinions provided herein should not be taken as specific advice on the merits of any investment decision. Investors should make their own decisions regarding the prospects of any company discussed herein based on such investors’ own review of publicly available information and should not rely on the information contained herein. The information contained in this article has been prepared based on publicly available information and proprietary research. The author does not guarantee the accuracy or completeness of the information provided in this document. All statements and expressions herein are the sole opinion of the author and are subject to change without notice. Any projections, market outlooks or estimates herein are forward-looking statements and are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. Except where otherwise indicated, the information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. The author, the author’s affiliates, and clients of the author’s affiliates may currently have long or short positions in the securities of certain of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions. A MNCLU sponsor is a business partner and relative. Neither the author nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein. In addition, nothing presented herein shall constitute an offer to sell or the solicitation of any offer to buy any security.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.