SPACs — special purpose acquisition companies — are very hot in the market these days. Recent SPAC mergers DraftKings (NASDAQ:DKNG) and Nikola (NASDAQ:NKLA) have done very well. With that in mind, I wanted to find five SPACs that have agreed to merge with a private company.
These deals should close and complete their reverse mergers sometime in the third or fourth quarter. Thereafter, the existing SPAC stock symbol will change into the symbol for the merged company.
By buying any of these pre-merger SPAC stocks, an investor can get in on the bottom floor, so to speak. The potential for huge upside profits, once the reverse merger goes into effect and the stock symbol changes, is very high.
Why Are SPACs So Hot?
One reason for this is because the general investing public tends to wait to buy these stocks until after the reverse merger. In some cases, investors are not aware that you can buy the SPAC stock first. In other cases, they are not aware of the newly public company until it starts trading under its own symbol.
These are considered reverse mergers, not IPOs. The reason is that the SPAC stock — the sponsor — has already had its IPO. In follow-on transactions, the sponsor issues shares to a private company. Often these private companies are owned by private equity funds.
However, the target company shareholders end up with most of the shares. In most cases, they obtain well over 80%-90% of the total shares. Therefore, the agreed merger deal allows their management and board to control the combined company.
Therefore, it is considered a “reverse” merger. The sponsor would normally control the shares and control the company’s board and management after the merger. But in these SPAC reverse mergers, the target company ends up in control of most of the shares, and the board. Moreover, it gets to control the cash that the SPAC raised in its IPO. So, by definition, the transaction is a reverse merger.
Here are five pre-merger SPACs to watch:
- FinTech Acquisition Corp III (NASDAQ:FTAC)
- Schultze Special Purpose Acquisition Corp (NASDAQ:SAMA)
- DiamondPeak Holdings (NASDAQ:DPHC)
- Churchill Capital III (NYSE:CCXX)
- Spartan Energy Acquisition Corp (NYSE:SPAQ)
SPACs: FinTech Acquisition Corp III (FTAC)
On Aug. 3, FTAC agreed to merge with Paya, an Atlanta-based payments company with $30 billion of transactions. The deal will have an implied enterprise value of $1.3 billion. The new symbol will be PAYA.
The agreed-upon transaction, which should close sometime in Q4, will include a $200 million capital raise called a private investment in public equity (PIPE). In addition, there will be $50 million from other large co-investors, and FTAC itself has $357 million. Therefore the new company will have $607 million, before transaction expenses.
Moreover, it turns out that Paya is controlled by a large private equity fund called GTCR. The PIPE investment will include other high-quality investment funds, such as Franklin Templeton (NYSE:BEN) and Wellington Management. The bottom line is that the public shareholders will own just 31% of the combined company. It will be lower after deal warrants are exercised. This low level of public ownership tends to push up SPACs.
In a slide presentation, Paya says it has the highest proportion, 85% of its total, of “card not present” (CNP) transaction volume in the industry. All online e-commerce transactions are CNP payments. Paya is well suited for the huge expected growth in internet sales by retailers.
Moreover, the deal is at 19.6 times EV to adjusted 2021 EBITDA. But its public peers trade on average at 26.2 times. Some are at 28 times. This implies that the stock could rise 38% to 47%.
But this is based on FTAC stock trading at its IPO price of $10. FTAC is now at $10.39. But it is potentially worth $13.80 to $14.70, based on the Paya presentation. Therefore, this SPAC looks to be at least 40% undervalued.
Schultze Special Purpose Acquisition (SAMA)
Schultze Special Purpose Acquisition Corp agreed on July 25 to merge with Clever Leaves, a Canadian cannabis company. Clever Leaves makes all its cannabis very cheaply in facilities in Colombia. That is its key selling point, as it drives its profit advantage, selling its product throughout the world. Clever Leaves says it can make cannabis at just 20 cents per gram, or 5% to 10% of the cost in Canada.
The reverse merger with SAMA stock will allow Clever Leaves to raise a net $111 million in cash and just $37 million in debt at an enterprise value of $255 million. Once the deal closes the new symbol will be CLVR.
SAMA stock, and CLVR after the merger, is very cheap. Here is why. First, the company’s slide presentation shows on page 22 that it expects by 2022 to have $140 million in revenue and $47 million in EBITDA.
Second, SAMA stock’s market capitalization, according to Yahoo! Finance, is $165 million. After the merger, there will be 32.9 million shares outstanding fully diluted. This puts Cleaver Leaves’ pro-forma market cap at $334.5 million, using today’s price of $10.17 for SAMA stock.
Third, the EV-sales ratio is cheap. For example, $334.5 million divided by $140 million in revenue implies the ratio is just 2.4 times.
Canadian pot stocks like Tilray (NASDAQ:TLRY) and Aurora Cannabis (NYSE:ACB) trade at 3 times to 4 times 2021 expected revenue. Moreover, none of these companies are profitable yet, even on an EBITDA basis.
That means that SAMA stock is very cheap at today’s price. I expected it will rise 100%.
SPACs: DiamondPeak Holdings (DPHC)
On Aug. 1, DiamondPeak Holdings agreed to merge with Lordstown Motors, an electric truck maker. The deal is expected to close in Q4, and once the reverse merger is final, the new symbol for Lordstown Motors will change to RIDE.
The deal ends up raising $675 million for Lordstown and it will be conducted at an enterprise value of $1.6 billion. This includes a PIPE deal for $500 million. General Motors (NYSE:GM) will invest $75 million of that $500 million. After all costs and debt repayments, the final amount that Lordstown receives is $675 million, including $280 million that DiamondPeak Holdings already has from its IPO.
Lordstown, as a private company, bought one of GM’s plants. It now has 27,000 orders, representing $1.4 billion of potential revenue, to make its electric Endurance pickup truck. Lordstown claims its EV truck will get 75 miles per gallon.
DiamondPeak Holdings has risen briskly to $12.25 from its $10 IPO price earlier this year. That gives DPHC stock a $429 million market value now. However, a company presentation says that the SPAC holders will own just 21% of the company’s shares. Therefore, that implies that the post-merger market cap is now $2.04 billion at the current price of $12.25.
Importantly, DPHC says there will be no additional capital requirements. This implies its valuation is just 2 times or 3 times sales. Tesla (NASDAQ:TSLA), for example, trades at 10.8 times its historical sales.
Therefore, I believe that DPHC stock will rise at least 50% to 100% over the next year or so.
Churchill Capital III (CCXX)
On July 12, Churchill Capital III agreed to merge with MultiPlan, a large software provider for health insurance companies. The deal value is at an enterprise value of $11 billion. Right now MultiPlan is controlled by a private equity fund, Hellman & Friedman.
Since the announcement, CCXX continues to rise. Barron’s says this will be the largest U.S. SPAC deal ever when the reverse merger closes. MultiPlan will get $3.7 billion in new cash, from both debt and equity sources.
MultiPlan’s investor presentation shows that it expects to make $860 million in adjusted EBITDA by 2021. The problem is this company is hard to properly value. None of its competitors are public.
However, as a software and data company, it could potentially receive a high valuation of 18 times to 20 times EV-EBITDA. For example, Microsoft (NASDAQ:MSFT) trades for 23 times its historical EV-EBITDA. On a forward basis, this is about 18 times to 20 times.
Therefore, CCXX stock trades at a pro-forma ratio of 13.6 times now. But if the post-merger stock moved up to an 18 times ratio, the stock would rise by 32% from today’s price.
As a note, it appears that the company has not chosen a post-merger ticker for CCXX.
Spartan Energy Acquisition (SPAQ)
On July 13 Spartan Energy Acquisition agreed to merge with Fisker. Fisker will make an electric SUV in 2022. According to Barron’s, Fisker expects to make 225,000 electric SUVs a year by 2025.
The reverse merger transaction is at a $2.9 billion enterprise valuation, assuming a $10 price for SPAQ stock. However, the stock has now risen to $12.36, so the new EV is almost 24% higher at $3.6 billion.
By the way, this $2.9 billion valuation number is on the press release. But a related slide presentation says the deal is at pro-forma value of $1.9 billion. So it is not clear which one applies. If the $1.9 billion EV number applies, the present valuation is almost 24% higher at $2.35 billion.
The deal will provide $1 billion to Fisker. The slide presentation implies it is very cheap. For example, the $1.9 EV valuation implies just 0.6 times 2023 estimated sales of $3.3 billion. It also implies just 4.3 times adjusted EBITDA of $441 million in 2023.
Therefore, since SPAQ stock has risen, the new EV-sales ratio is 0.76 times. That assumes a $1.9 billion valuation at the transaction. But if we assume a $2.9 valuation, after the recent stock price increase the ratio is 1.2 times. The same applies to the EV-EBITDA ratios. It is now either 5.6 times or 8.37 times.
The stock could easily double or triple by 2023, possibly much more than that. Again, Tesla stock trades for over 10.8 times historical sales.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
