Tuscan Holdings (NASDAQ:THCB) stock no doubt could be a big-time winner. The SPAC (special purpose acquisition company) is merging with battery tech play Microvast — and SPACs in the electric-vehicle (EV) market have done very well indeed.
For now, however, the emphasis is on “could be.” Tuscan sits in a somewhat odd situation by SPAC standards, with the merger target disclosed but the details of the transaction not yet revealed. Two months after a letter of intent was signed, there’s still been no news.
That’s one big concern. The other, related, issue is the stock price. THCB trades at $16 per share, above its own initial offering price of $10. That could be a steal — if the Microvast deal closes and if the terms of the deal are favorable to Tuscan stockholders. Right now, those both look like huge “ifs.” As a result, patience is probably the right strategy here.
A Strange Situation
The stunning rise in SPAC mergers was one of the biggest market trends of 2020. The amount of capital raised by SPACs jumped nearly sixfold last year.
Tuscan itself actually went public in March 2019, but in November 2020 it appeared the company finally had found a target. Bloomberg reported on Nov. 12 that Microvast and Tuscan were in talks to merge. The next day, Tuscan Holdings confirmed that report, announcing that it had signed a letter of intent “related to a business combination” with Microvast. But this wasn’t a typical SPAC announcement.
Nearly every SPAC, when announcing its target, discloses a signed merger agreement. Those agreements aren’t necessarily final — they need to be approved by shareholders — but the terms of the merger are set. In most cases, the merger price is $10 per share, but the amount of the merged company to be owned by the SPAC, existing shareholders and concurrent private investors can vary greatly.
When the merger is announced, SPACs also disclose information about the business with which they’re merging. Revenue, growth rates, profitability and multi-year forecasts are the norm. After all, SPAC shareholders have the right not only to vote for or against the merger but also to redeem their shares. It’s nearly impossible to make those important decisions without that data.
None of those things have happened with Tuscan Holdings yet. There’s been no announcement of a signed agreement, no data on Microvast itself and, crucially, no disclosure as to how much of Microvast THCB shareholders will wind up owning.
The Problem with THCB Stock
That’s a huge problem at the moment, for several reasons.
First, it’s now been two months since the letter of intent was signed. It’s difficult to understand exactly what the holdup might be. EV SPACs are torrid, which suggests Tuscan Holdings should be willing to negotiate. Indeed, THCB stock has roared to $16 even without a signed agreement.
Second, we have exceedingly little data about Microvast itself. The November announcement did disclose that the company would target over $100 million in revenue “this financial year,” which presumably refers to calendar 2020. But as a private company, Microvast doesn’t disclose detailed financials. We don’t even know how fast that revenue is growing at the moment.
Finally, and perhaps most importantly, we have no idea what the assumed valuation of the merger will be. Bloomberg reported a valuation around $2 billion, but the delay in any official merger announcement suggests there may be some disagreement on that front.
And that valuation makes a huge difference to THCB stock. Tuscan closed its third quarter with $256 million in cash. At a $2 billion valuation, THCB shareholders would own about 13% of the merged company, give or take. At $3 billion, they get under 9% of shares. At $1.5 billion, closer to 17%.
Patience Is Advised
Quite obviously, the assigned valuation makes a huge difference to THCB stock. And so it’s impossible to pound the table too forcefully — or at all — without understanding that fact, as well as having a better understanding of Microvast’s positioning in the battery space.
There are other worries as well. It took Tuscan 19 months to find a target — perhaps because its original plan fell through. Tuscan originally was looking to bring cannabis companies public (hence the THCB ticker).
The pivot from the “hot” sector of early 2019 to the “hot” sector of late 2020 seems a potential concern. So does the length of time from Tuscan’s IPO to the November announcement.
There simply are a number of questions regarding THCB stock that don’t have an answer yet. Yet the stock still has rallied some 60% since November. Until those questions are answered, it seems unwise to pay a premium for what, at the moment, remains just a bank account full of cash without a merger partner.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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