Is the special purpose acquisition company (SPAC) boom turning into a bust? Shares of SPACs have fallen sharply over the past two weeks. On top of that, one fund manager is already warning that they’re about to get lit up.
The dirty little secret with blank-check companies is that the quality of the average deal could be pretty low. As Nate Koppikar of Orso Partners says, “You can get away with saying anything you feel like if you sell to the SPAC market.” Now, though, with its index down 13%, Koppikar warns that the market will be “dead” if this rout continues for another week or two.
So, it’s vital to be careful when picking SPACs at this point. But what marks the blank-check companies that you should avoid?
One of the big signs of trouble with SPACs is if their shares barely stay above $10 after the deal target has been announced. This means that the market is not particularly happy with the proposed merger. If a SPAC deal is hot, shares will generally trade up to $15, $18, $20 or even higher. If it stays at $10.50 or $11, however, there’s a decent chance that the deal will ultimately be a dud.
As such, while there are some high-priced SPACs with risky prospects, I’d argue that it’s most imperative to watch the names that are just barely hanging on over the $10 mark. Once a SPAC breaks that $10 par, it becomes a troubled offering. There’s a chance the deal won’t even close. And if it does, short sellers will often go after it. So, these SPACs could still succeed, but they’re in the danger zone.
- Alussa Energy Acquisition (NYSE:ALUS)
- CF Finance Acquisition III (NASDAQ:CFAC)
- Agba Acquisition (NASDAQ:AGBA)
- Gores Holdings V (NASDAQ:GRSV)
- GX Acquisition (NASDAQ:GXGX)
- Nebula Caravel Acquisition (NASDAQ:NEBC)
- Fortress Value Acquisition II (NYSE:FAII)
SPACs to Avoid: Alussa Energy Acquisition (ALUS)
Deal target: Freyr
Current share price: $10.44
The Alussa-Freyr deal is not a particularly terrible arrangement as far as SPACs go. However, it’s worth highlighting because it shows the difference between a hot SPAC and one that’s getting ignored by the market. Without any investor attention, Freyr could end up being a bust.
With the Freyr merger, Alussa intends to dominate the market for clean battery production. This should work, right? After all, Quantumscape (NYSE:QS) has been one of the biggest SPAC winners in the space. So, why is QS stock worth over $50 and ALUS stock just shy of $11?
Reading through the investor presentation, a few things stand out. First, the company is based in Norway — the American market tends to prefer companies based in the Silicon Valley or other engineering hotspots like Boston. Second, it’s unclear how much proprietary technology Freyr has itself.
In fact, the company has partnered up with 24M, a battery technology start-up. 24M was co-founded by the same person who co-founded A123 Systems (now bankrupt) and American Superconductor (NASDAQ:AMSC), which is down significantly since its own 1991 initial public offering (IPO). So, partnering with a firm related to that track record is fairly uninspiring.
Finally, Freyr doesn’t appear to be very far along in the commercialization process. Their presentation speaks of potential 2025 revenues and EBITDA if things go well (Page 6). However, they haven’t even built a factory yet. So, investors in ALUS stock have to put faith in the concept. Admittedly, that’s also true of Quantumscape — but that firm checks way more boxes in terms of credibility and media coverage.
CF Finance Acquisition III (CFAC)
Deal target: Aeye
Current share price: $10.27
Just recently, CF Finance announced a deal with Aeye. Working in lidar, Aeye’s business is fairly technical, so let me give you the official overview:
“AEye is the premier provider of high-performance, active LiDAR systems for vehicle autonomy, advanced driver-assistance systems (ADAS), and robotic vision applications. AEye’s software-definable iDAR™ (Intelligent Detection and Ranging) platform combines solid-state active LiDAR, an optionally fused low-light HD camera, and integrated deterministic artificial intelligence to capture more intelligent information with less data, enabling faster, more accurate, and more reliable perception.”
At first glance, this sounds like it should be a really hot deal, right? The technology certainly seems impressive. It wasn’t though. CFAC stock actually plunged from about $13.50 to roughly $11 once it announced the bid for Aeye. Today, shares continue to slide and are now close to the all-important $10 mark.
So, what’s gone wrong? This situation is like the one with Freyr. In the lidar space, you already have Luminar (NASDAQ:LAZR) and Velodyne (NASDAQ:VLDR). There’s a law of diminishing returns here. LAZR stock is up at about $26, VLDR is at $15 and now the third lidar name can barely hold $10. Most retail traders aren’t going to work through the complex differences between all these platforms.
Instead, lidar sounds like a great investment theme so the first name to debut got the majority of interest. Velodyne was reasonably popular as well. Now, though, folks already have lidar stocks in their portfolios and hardly need another. Perhaps Aeye can best the competition through superior execution in coming years. For now, though, this pick of the SPACs isn’t attracting much trading — and justifiably so.
Agba Acquisition (AGBA)
Deal target: Convoy
Current share price: $10.50
Agba Acquisition quietly announced its deal to buy Convoy back in November. Why hasn’t the market paid attention? Probably because this is not an interesting deal. In the world of SPACs, it doesn’t make a whole ton of sense.
What is Convoy? Well, the announcement press release notes, “The IFA [independent financial advisory] Business provides advice and sells a full range of financial services products from long-term life insurance, savings to mortgages to local and foreign retail customers […] it is one of the largest IFA businesses in Hong Kong.”
Now, that may or may not be a good business. But the more important question is this: why list it in the United States? Hong Kong has one of the most robust stock markets in the world. So, particularly for a financial services company, why list on a far-off stock exchange rather than one where the investors know your products and presumably like you?
This is often a sign of a bad SPAC deal — when a company chooses to go public in a market that makes little logical sense. Further, I doubt that even an American financial advisory company would be welcomed by the market at this point. It’s just not something people are really looking to invest in right now. That’s why AGBA stock’s price continues to tick along barely above the $10 mark.
Gores Holdings V (GRSV)
Deal target: Ardagh Metal Packaging
Current share price: $10.19
Gores is a long-time player in the SPAC space. As you can see from this one’s name, this isn’t their first deal. In fact, past deals have been successful and caught the market’s interest. For example, Luminar hit the jackpot, recently garnering attention and positive hype.
However, lightning didn’t strike twice with the latest deal, when Gores decided to buy Ardagh Metal Packaging, a company that’s no more exciting than its name would suggest. Ardagh Metal Packaging is a subsidiary of Ardagh (NYSE:ARD), a firm that mainly makes glass containers for a variety of foods and beverages. Once the SPAC deal is completed, though, Ardagh Metal Packaging will trade as its own separately listed entity.
Long story short, this is another weird fit for one of the SPACs. People often buy blank-check names hoping for a quick pop, particularly one that would cause a SPAC’s warrants to spike. A metal packaging business is not the sort of thing that attracts much speculative interest, though.
So, if anyone bought GRSV stock hoping for another Luminar-style winner, it’s time to get out of it now. This deal isn’t going to see any sort of speculative fervor.
GX Acquisition (GXGX)
Deal target: Celularity
Current share price: $10.06
When it comes to SPACs, this one is in trouble. Back in January, GX Acquisition announced a deal for clinical-stage biotech start-up Celularity. But the market has not been pleased. Shares dropped from about $11.50 to $10.45 once the deal was announced. Now, they’re slipping further and rest just a hair away from breaking the crucial $10 mark.
This poses significant risk for shareholders. As I mentioned before, if a SPAC breaks $10, you often see it move sharply lower after that. It becomes a busted story and speculators don’t want anything to do with it. Further, so much of the energy in the SPAC space is around the warrants attached to a stock. If GXGX stock busts $10, the warrants will start looking like long-shots. That will make people give up on both the underlying stock and the warrants.
As for the target company’s actual products portfolio, it’s all early stage stuff. Celularity’s pipeline is primarily in Phase 1 and only a couple of products are in Phase 2 or set to head there by the end of 2022. In other words, it will be years until the company can even start thinking about full Food and Drug Administration (FDA) approval (although it has made some progress with its Covid-19 cell therapy).
So, the stock is threatening to bust $10 any day now. If you like Celularity in particular, there’s a good chance you can get it at $6 or $7 once it breaks the SPAC floor. In the meantime, though, this is a name you should steer clear of.
Nebula Caravel Acquisition (NEBC)
Deal target: Rover
Current share price: $10.01
Is this company going public in an act of desperation? Rover is a dog-walking application. Business appeared to be alright — albeit not great — back in 2019. Predictably, however, the company has gone to the doghouse with the pandemic.
For the first nine months of 2020, its revenues plummeted 48% from the same period in 2019. Losses also came to $49 million for that period. Finally, Rover had rising cash burn even though it fired a slew of workers and cut overall costs by nearly 30%.
So, will this dog-walking application make a comeback once the economy fully reopens? Or, was it primarily a fad anyway and the pandemic just showed the weakness of this particular model? In any case, Nebula Caravel is hoping that speculators are willing to take a chance. However, the market appears to want little to do with NEBC stock. In fact, this one of the SPACs is dancing at the $10 threshold. Excuse the pun, but this merger is barking up the wrong tree.
Fortress Value Acquisition II (FAII)
Deal target: ATI Physical Therapy
Current share price: $10.12
Last on this list of SPACs, Fortress Value Acquisition II will be purchasing ATI Physical Therapy, one of the largest chains of outpatient therapy centers in the United States. ATI has grown quickly by buying other clinics. In fact, it specifically urges physical therapists to sell ATI their practices. So, this is a classic roll-up — combine a bunch of small businesses with low-profit margins together and you can cut overhead, earning more as a larger entity.
But this is hardly the first roll-up of medical practices on the stock exchange. There’s a checkered history of both dental and orthodontic practices trading publicly, for example. In theory, it could be a successful model to buy up a ton of mom-and-pop medical practices and gain scale benefits. However, it’s not been particularly lucrative when put to practice. Plus, there are a lot more legal and customer-specific requirements for healthcare versus, say, waste management — a category where roll-ups have been huge winners.
If you had to guess, you might suspect ATI wanted to sell now because business is more difficult with the pandemic. People are delaying a good deal of elective therapy. Moreover, the costs of that care are higher due to heightened sanitary precautions. So, if I were ATI, I’d certainly consider cashing out into the SPAC boom rather than riding the downturn as a private firm.
But the market seems unimpressed. Now, FAII stock is perilously close to breaking $10.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.