I estimate that Tuscan Holdings Corp (NASDAQ:THCB) will be worth at least 50% more than its present price. THCB stock will be worth this much depending on several things happening in the near future.
My estimate is based on how I have seen how various special purpose acquisition companies (SPAC) mergers proceed.
First, it needs to announce a definitive agreement to merge with Microvast, a private electric vehicle (EV) battery maker based in China and Texas. THCB stock shot up to $17.10 as of Dec. 31, due to the preliminary non-binding agreement to merge they announced on Nov. 13.
This announcement of a non-binding term sheet is somewhat unusual. Typically both parties don’t announce a merger until a definitive, or non-binding agreement to merge has been reached. In this case, the rise in THCB stock could cause problems with the final terms of the SPAC merger.
For example, often a SPAC merger occurs with the issuance of private equity in a private investment in public equity (PIPE) deal with a hedge fund. This enhances the total funds that Microvast will receive at the closing. But the problem is almost always the SPAC merger issues the PIPE equity at $10.00 per share, the price of most SPAC IPOs.
So why would THCB equity investors be willing to give the PIPE investors such a huge discount to the $17.10 existing price? This could cause a number of institutional investors to balk at agreeing to the deal.
A Closer Look at THCB Stock
Here is what that means. Let’s say that THCB agrees to issue $100 million in 10 million new shares at $10.00 per share to the PIPE investors.
This would mean that they have a $71 million instant profit (i.e. 10 million times $7.10 per share) at the $17.10 existing profit. Why would the existing THCB stock shareholders agree to this? The transfer of wealth from them to the PIPE investors is too large.
Nevertheless, assuming this issue can be resolved (perhaps by issuing a smaller amount of shares at a higher price, say $15.00 to the PIPE investors), the upside for THCB stock is clear.
What the Deal Might Look Like
In the latest 10-Q filing by Tuscan Holdings Corp, the balance sheet indicates that this SPAC has 65 million shares outstanding. However, there are already 27.11 million shares issued (although they could be subject to redemption if shareholders don’t approve a merger).
That leaves another 37.89 million shares it could sell to a PIPE investment group. Assuming the issues get worked out as to the price, that would leave 65 million shares outstanding. The implied market capitalization is $1.112 billion. This is seen by multiplying today’s price by the total authorized shares of 65 million.
Couldn’t they sell more than 37.89 million shares to a PIPE group? Yes, they can. But there would have to be a new shareholder meeting to approve this increase in the authorized shares.
I don’t think this will happen, especially since the terms will be very sensitive if the PIPE investors get to buy in at $10.00 per share. Therefore, for all intents and purposes, there will be 65 million shares in this SPAC deal.
Moreover, assuming all shareholders agree to this merger, or at least 90% of them, the private company Microvast will receive cash at the closing. It’s likely the majority of Tuscan’s $282 million in cash will be left in the combined company.
If that $100 million is sold to a PIPE group, the total cash in the combined company will be about $350 million. This is based on my estimate that just 10% of existing shareholders request a redemption.
At the close the combined company will have a market cap of $1.11 billion and also $350 million in cash. That gives it an implied enterprise value (EV) of just $760 million.
What THCB Stock Is Worth
Microvast has said they expect to generate over $100 million in sales this year. Their electric batteries are already installed in over 28,000 vehicles worldwide. I expect that in several years their revenue will be forecast to reach $250 million.
Therefore, the implied EV-to-sales multiple is only three times (i.e., $760 million divided by $250 million). Normally the ratio will be at least five-to-six times forecast sales.
As a result, the enterprise value for Microvast/THCB will be $1.25 billion to $1.5 billion (i.e., 5 and 6 times $250 million). Moreover, to get the market cap we add back the $350 million in cash. So the pro forma market capitalization will be $1.6 billion and $1.85 billion.
Since there will be 65 million shares outstanding, that implies that THCB is worth between $24.62 and $28.46 per share. That represents a potential gain of 44% to 66%. On average that is a gain of 55% over today’s price.
As long as a definitive merger is announced, THCB stock will be worth at least 50% more than today.
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.