Today I wanted to highlight five special purpose acquisition company (SPAC) stocks with merger agreements that have publicly listed warrants that are trading in-the-money right now.
In case some of those terms is new to you, a warrant allows its holder to buy or sell shares of a company from/to the company at a specific price at a specific time. And by trading in-the-money, I mean that the warrants’ prices have risen far enough to be above their exercise prices. Therefore, the warrants can be exercised profitably and they have real intrinsic value.
But more importantly, these SPAC stocks warrants offer more leverage to the investor in the underlying SPAC stocks. And since they are in-the-money, with real intrinsic value attributable to the warrants, they offer a relatively safe investment.
I will provide examples of this in-the-money leverage effect with each of these SPAC stocks below.
Therefore, you get more bang for the buck with these warrants, assuming the merger deals close. Again, these five warrants are only for in-the-money SPACs with announced mergers that have not yet closed.
Two Key Points with SPAC Warrants
Also, keep in mind two things. First, all of these SPAC stocks have the same exercise price: $11.50 per share. In other words, the underlying stock must have risen above $11.50 before the associated warrant price is in-the-money.
Second, although the exercise prices are good for five years, each of these SPAC warrants has a redeemable feature that solely benefits the SPAC itself, not the investor. Each of the SPAC warrants are callable by the company for 1 cent per warrant. The warrant holders have a 30-day window to act.
The trigger for the call feature is this: once the warrant trades for 20 trading days at an average price of $18 or higher within a 30 day period, the company (SPAC) can buy back the warrant (in 30 days) for 1 cent per warrant.
Therefore, during that 30-day period, the warrant holder has to sell the warrant in the market, or else exercise the warrant by paying $11.50 to the company. This allows them to buy a share of the SPAC stock. This call feature allows the company to receive more capital when all the warrants are exercised by the end of the 30 days. Therefore they usually wait until the in-the-money dollar amount is quite substantial.
It also tends to limit the in-the-money trading price to be just above their intrinsic value. Most SPACs end up calling or redeeming their in-the-money warrants well before the five-year exercise period ends.
Here are the five in-the-money warrants with merger agreements:
- DiamondPeak Holdings Warrants (NASDAQ:DPHCW)
- Spartan Energy Acquisition Corp Warrants (NYSE:SPAQ.WS)
- Landcadia Holdings II Warrants (NASDAQ:LCAHW)
- Kensington Capital Acquisition Corp. Warrants (NYSE:KCAC.WS)
- Gores Metropoulos Warrants (NASDAQ:GMHIW)
Let’s dive in and look at these in-the-money warrants.
5 In-the-Money SPAC Stocks Warrants: DiamondPeak Holdings Warrants (DPHCW)
Underlying Stock: DiamondPeak Holdings (NASDAQ:DPHC)
Merger Target: Lordstown Motors
The warrants for this SPAC stock trade for $8.72 since the underlying stock, DiamondPeak Holdings are at $21.10. As with all SPAC warrants, the exercise price is $11.50. Therefore, the intrinsic value is $21.20 minus $11.50 or $9.60.
So, in this case, the warrants sell below their intrinsic value. This is probably because the DPHC stock is trading above $18. Therefore, it is highly likely that once the merger closes, Lordstown Motors will likely call the warrants. This puts selling pressure on the warrants.
In my recent article about SPAC stocks, I highlighted that DPHC stock, which will change its symbol to RIDE, is likely going to be worth 75% more at the time. That implied that DPHC stock is worth $21.44. This is only slightly above the price today of $21.10.
However, the in-the-money warrants would then have an intrinsic value of $9.60, or 14% above today’s price. Therefore, I suggest that since the price of the warrants is below this, the warrants are undervalued.
The company may end up redeeming the warrants after the merger closes. Therefore, it might be worthwhile to actually exercise the warrants rather than selling them at that point.
Spartan Energy Acquisition Corp Warrants (SPAQ.WS)
Underlying Stock: Spartan Energy Acquisition Corp. (NYSE:SPAQ)
Merger Target: Fisker
The underlying stock, Spartan Energy Acquisition Corp. is going to merge with Fisker, an EV company. I wrote about this company in a recent article on SPAC stocks and set its value at about $24.40.
Therefore, since SPAQ now trades for $14.91, the associated warrants (SPAQ.WS) are in-the-money by $2.69 (i.e., $14.91 minus $11.50). But the warrants are trading for $5.06 per warrant, so there is some premium here over the intrinsic value. Obviously, these warrants are not in callable territory yet (i.e., above $18), so they offer substantial upside and hence the premium.
The warrants have significant leverage here compared to the underlying equity. For example, if the stock hits the target price, it will rise by $9.49, or up 63.6% (i.e., $9.49 divided by $14.91).
But the warrants have $12.90 in intrinsic value to go if the stock hits $24.40 (i.e., $24.20 minus $11.50). Moreover, the warrants, trading at $5.06 now, have a lower denominator, so the price rises by 155% (i.e., $12.90 divided by $ 5.06 less 1).
Therefore, the in-the-money warrants offer an investor in SPAQ stock over twice (and a half) the potential increase. There is a potential 155% gain from the warrants as opposed to 63.6% potential gain with the stock. This is calculated if the stock hits its target price of $24.40 once the merger goes through.
So now you are starting to see the leverage that in-the-money warrants have over equities. And the next SPAC stock warrant has even more of this leverage effect.
Landcadia Holdings II (LCAHW)
Underlying Stock: Landcadia Holdings II (NASDAQ:LCA)
Merger Target: Golden Nugget Online Gaming
In my previous article on Landcadia Holdings II (NASDAQ:LCA), which is due to merge with Golden Nugget Online Gaming, I set its value at $36. This is just 100% above the present price of $17.98 for LCA stock (symbol will change to GNOG after the merger).
But here is something interesting. The LCA warrants (symbol LCAHW) have an expected return of 282% if the stock hits $36. Here is why.
The warrants are now trading for $6.41 since they are in-the-money (i.e., the LCA stock is above the exercise price of $11.50). But their intrinsic value will be much higher if the underlying stock hits $36 after the merger. That is because $36 minus the exercise price of $11.50 will be $24.50 per warrant.
Therefore an investor in the warrants would make $24.50 divided by $6.41, or a gain of 282%. This expected return of 282% is almost 3 times the doubling that the equity investor in LCA stock will make. So the warrants’ leverage over the stock price expected returns is significant.
Again, the downside risk is limited, since the stock is now significantly above the exercise price. Moreover, there is still no call risk, since the stock is still trading below $18.00.
Kensington Capital Acquisition Corp Warrants (KCAC.WS)
Underlying Stock: Kensington Capital Acquisition Corp. (NYSE:KCAC)
Merger Target: QuantumScape
On Sept. 3, Kensington Capital Acquisition Corp agreed to merge with an EV battery maker, QuantumScape. The deal has an implied enterprise value of $3.3 billion and will provide $1 billion in cash and funding commitments to QuantumScape.
The company is developing next-generation solid-state lithium-metal batteries, as opposed to lithium-ion batteries presently used in electric vehicles. These are known as solid-state electric batteries (EVs). The company has a deal with Volkswagen (OTMKTS:VWAGY) to install its EVs in their cars. The stock symbol and the warrants will change their symbol to QS and QSW respectively when the merger closes.
The SPAC stock immediately shot up above $18 ($18.25) and so the warrants listed on the NYSE (KCAC.WS) are now in-the-money (i.e., the stock is over $11.50). The warrants are not trading at $5.38, but again have significant leverage over the underlying equity.
For example, I believe that the stock (KCAC) is worth double the price at which it was trading prior to the announcement, or $22. This means the in-the-money intrinsic value for the warrants is $10.50.
Since the KCAC.WS warrants are now trading at $5.38, their target price return is 95% (i.e., $10.50 divided by $5.38). By contrast, the equity (LCA) has just a 20.5% expected return (i.e. $22 target price divided by $18.25 LCA price today).
Therefore, in this case, the leverage is over 4 times (i.e. 95% warrants expected return is over 4 times the 20% expected stock return). However, keep in mind that now that the stock is above $18, the KCAC.WS warrants could be called once the merger goes through (assuming the other daily trading conditions are met).
Gores Metropoulos Warrants (GMHIW)
Underlying Stock: Gore Metropoulos (NASDAQ:GMHI)
Merger Target: Luminar
I previously wrote about Luminar, an automotive lidar technology company, which agreed on Aug. 24 to merge with the Gores Metropoulos (NASDAQ:GMHI) SPAC. In my article, I set GMHI stock’s value at $20 per share. The stock will change its symbol to LAZR once the merger goes through (warrants will be LAZRW).
Right now GMHI stock trades for $12.27, so the GMHIW warrants are now barely in the money (i.e., since the exercise price is $11.50). The warrants are at $3.90, which is higher than their intrinsic value of 77 cents (i.e. $12.47 minus $11.50).
This higher premium may be due to the fact that investors expect the SPAC stock to pop once the merger goes through. Remember I believe it is worth $20, so the implied target price for the GMHIW warrants will be at least $8.50.
This represents an expected return of $8.5o, or a gain of 118% (i.e., $8.50 divided by $3.90) for the GMHIW warrants. By contrast, the expected return for the GMHI stock is just 63%. Therefore, the warrants have almost twice as must return leverage.
Summary – In-The-Money Warrants for SPAC Stocks
I have put together a summary of these numbers for each warrant and the related SPAC stocks below.
Keep in mind that this leverage effect works on the downside as well. So it the stocks fall from here the risk is much higher for the warrants to fall much more, especially if they are no longer in-the-money.
Nevertheless, I have found, although I cannot prove it, that SPAC stocks that immediately get above their $11.50 warrants’ exercise price, tend to do well after their merger closes.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.