Social Capital Hedosophia Holdings Corp VI (NYSE:IPOF) is a SPACs (special purpose acquisition corp.) or blank-check company with no target yet. But not all SPACs are created equal. Those associated with Chamath Palihapitiya have enjoyed a premium, given his track record. Now IPOF stock has fallen to a level where its premium makes it a buy for investors.
Chamath Palihapitiya has set up this SPAC to merge with a large private technology company, which has not yet been revealed. IPOF stock now trades far below $15.95, its peak in early February. As of March 11, it was at $11.79, implying a 18% premium to its $10 IPO price.
Given that the company has $566 million in cash and is likely to raise at least a total of $1 billion, including its own cash, the target acquisition is likely to be quite large.
Typically, for example, the cash will represent 10% to 15% of the total transaction value. That implies a total enterprise value of at least $6.67 billion (15%) to $10 billion (10%) for the private company deal. And this could even be very low. It would not be out of the question for the deal to be twice as large.
If the company does not find a target in time, it will have to return its $566 million in cash, according to its latest 10-Q, to shareholders at $1o. Management has until Oct. 14, 2022, according to page 6 of its 10-Q, to find and complete a merger.
This means that the deal has to be announced no later than six months before then, or April 2022. So, IPOF stock has at least a year and three months left before you might see any major news.
Investors believe Chamath is more than likely to find a good target. They want to get a jump on the price before it announces the target. That is why the price is at a premium.
The market has speculated in the past that Stripe, a large financial payments company, might be open to going public. The problem is that the valuation is probably too high. As of last May the company was apparently worth at least $36 billion, according to U.S News and World Report. IPOF may not have enough cash, even with a PIPE deal (private investment in public equity). If the company was able to snag Stripe, that would likely send IPOF stock skyrocketing.
Market Sell-Off Strengthens SPAC Terms
It is impossible to know what target IPOF is looking at acquiring. The most likely target is a large software company or a division of a large software company that is spun off or carved out. But this is just speculation that is not worth much.
It doesn’t hurt that the SPAC price is at a premium to the IPO, in terms of Chamath’s ability to snag a high-profile target. this improves his negotiating ability with the target. It implies that the market will likely give the merged company a higher market value than might be otherwise attainable in an IPO.
The recent market sell-off of high-tech stocks in the past two weeks may also have a beneficial effect on his negotiations. If this had happened right before an IPO, the IPO might have been postponed by the market maker.
But in a SPAC merger, the deal is solely dependent on a shareholder vote. That is much less likely to be postponed or even declined by the shareholders of IPOF in a market sell-off. So this strengthens the sponsor’s hands in negotiating with a private company. They want the certainty of a transaction closing in order to get the cash offered by the SPAC and the related PIPE deal.
What To Do With IPOF Stock
If you wanted to get in on SPACs that are likely to spike once a deal is announced, now is a good time to move into IPOF stock. Its premium is lower and the likelihood of closing a deal is now much stronger.
It’s better to average cost into your position as well. this might mean paying successively higher prices over several days. But it could also mean the opposite.
Here is the bottom line. Chamath has a good year before IPOF stock will be under any sort of stress for a deadline to announce a deal. Look for him to announce some definitive transaction sometime between now and the end of the year.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.