Count Spartan Energy Acquisition (NYSE:SPAQ) as an avenue to electric vehicle (EV) exposure and the 48% year-to-date gain for SPAQ stock reflects related enthusiasm.
However, SPAQ stock is following a trajectory similar to those of so many special purpose acquisition companies (SPACs), including those foraying into the EV space. SPACs, or blank-check companies, file for initial public offerings (IPOs), go public and use the IPO cash to hunt for a firm to merge with. In the interim period, the SPAC’s stock usually trades flat, spikes when a deal is announced and often gives back a substantial portion of those gains.
That’s the path Spartan Energy is following. After private equity giant Apollo Global Management (NYSE:APO), Spartan’s majority owner, arranged a deal for the SPAC to merge with EV maker Fisker, the blank-check firm’s shares spiked in July. Now, the stock resides 30% below those highs.
For previously bankrupt Fisker, this is a sweetheart arrangement. It’s getting $1 billion in cash, enough to survive for a couple of years until it can start work on the Fisker Ocean late in 2022.
No Guarantees for SPAQ Stock
Obviously, the good news for Spartan Energy is that it’s a SPAC with a deal in hand. Amid all the ebullience surrounding blank-check companies in 2020, vehicles that existed for 30 years, some investors may be losing site that SPACs have two years to get a deal done or liquidate.
For long-term investors that like the opportunity set offered by the target firm, it’s clearly better to be involved with a SPAC that has an announced deal. However, there are examples of SPAC deals falling apart. That doesn’t mean the same fate will befall Spartan Energy, but there other issues for investors to consider here, not the least of which is the blank-check label isn’t a guarantee of future returns.
“Of the 313 SPACs IPOs since the start of 2015, 93 have completed mergers and taken a company public,” notes Renaissance Capital. “Of these, the common shares have delivered an average loss of -9.6% and a median return of -29.1%, compared to the average aftermarket return of 37.2% for traditional IPOs since 2015. Only 29 of the SPACS in this group (31.1%) had positive returns as of Wednesday’s close.”
What that data reveal is something of a blank-check “dirty secret.” This is who usually makes money in SPAC deals. The folks behind the SPAC, the target company and its early investors and hedge funds that were able to use blank-check units as Treasury alternatives.
Know What You’re Buying
To repeat, an investor buying shares of Spartan Energy today is essentially making two wagers. First, that the Fisker deal will reach the finish line. Second, that Fisker is a credible player in the EV industry.
“The success of the SPAC depends on the success of the company it acquires,” according to Morningstar. “As established, the research, due diligence, and checks behind these acquisitions may not be as stringent as they would have been in the case of a traditional IPO or public company acquisition.”
As for Fisker, there may be something to see here. The company recently said its Ocean prototype could be ready later this month and founder Henrik Fisker said on Twitter that there are already 36,000 registrations across 123 countries for the car.
Data like that is music to SPAC investors’ ears, but as other EV companies previously taught, the lesson here is about Fisker’s ability to land registrations. It’s about the manufacturer’s ability to actually bring a vehicle to market and sell it.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.