Star Peak Energy Illustrates the Woes SPACs Face

If you weren’t paying close attention to Star Peak Energy’s planned merger with Stem Inc. (NYSE:STEM), a company that’s developed a battery storage system that allows its users to switch between battery and grid power, you would have missed the fact Star Peak’s shareholders overwhelmingly voted on April 27 to OK the combination. STPK stock barely moved on the news.

A photo of wooden blocks that say SPAC on a folded newspaper.
Source: Dmitry Demidovich/ShutterStock.com

On April 29, STEM stock began trading in New York to little fanfare except for a press release from the company. 

It seems like ever since the calendar turned from 2020, the amount of coverage surrounding successful special purpose acquisition company (SPAC) votes and combinations has been reduced to press releases and little else. 

What the blazes is going on? In today’s rant, I consider the topic. 

STPK Stock or STEM Stock; It Really Doesn’t Matter

A classic example of the lethargy set in involves Clover Health Investments (NASDAQ:CLOV). It got a decent amount of coverage in 2020 when it announced it would combine with Social Capital Hedosophia Holdings Corp III, a SPAC backed by Chamath Palihapitiya raised $720 million in April 2020.

However, when the SPAC’s shareholders approved the merger on Jan. 8, very little appeared in the mainstream media except for a press release announcing the vote results. Of course, it doesn’t help that CLOV is down 46% year-to-date through April 29 and has fallen below $10, the price at which the SPAC sold units.

Seriously, a company operating in the electrification field should get more attention. Even my InvestorPlace colleague Chris MacDonald noted the absence of excitement surrounding Stem’s first day of trading.

In February, I wrote about Star Peak Energy and the odds of it doubling once it merged with Stem. InvestorPlace’s Mark Hake argued at the end of January that it would easily double post-merger. At the time of Hake’s article, STPK was trading around $27. 

When I chimed in around mid-to-late February, it was up 63% to $44. It needed to jump 50% from there to get to my colleague’s $67.91 valuation. Near the end of STEM’s first day of trading, it’s at $28, around where it was in January. 

It’s lost all of its momentum and then some.

SPACs Are on Hold

Part of the reason SPACs have been underperforming in recent weeks has to do with the Securities and Exchange Commission (SEC) stating that warrants issued by SPACs, generally considered equity on a company’s balance sheet, would need to be reclassified as a liability if they’re tied to the performance of the underlying stock or if they include a cash-out provision. 

My InvestorPlace colleague, Dana Blankenhorn, recently discussed the issue about Lucid Motors and its pending merger with Churchill Capital IV (NYSE:CCIV).

Blankenhorn recommended investors avoid CCIV stock until the whole issue is sorted with the SEC and the combination is completed. Until then, he feels it’s too difficult to evaluate the company’s chances. 

On April 22, Social Capital Hedosophia Holdings Corp V (NYSE:IPOE) resubmitted its S-4 with an amendment that moves $99 million in equity related to warrants and labels them “warrant liabilities.” 

Due to the change, IPOE, which is slated to merge with California fintech SoFi, generated a loss of $55.8 million from July 10 through Dec. 31. Previously, in its March 31 filing amendment of its S-4, it lost just $646,393. The increase is due to the change in the fair value of the warrant liabilities. 

Personally, I don’t think it’s a big deal from an analysis standpoint. However, the time and money required to restate a company’s financial statements won’t be cheap.

So, this, more than anything, has put SPACs on hold. 

But as Blankenhorn also pointed out, the SEC is not prepared to allow SPACs to make ridiculous projections without some basis in fact or substance. That will reduce the interest of companies going public and well-connected business people wanting to do a SPAC in the first place. 

The Bottom Line

As I stated in February, Stem’s potential for future gains is excellent. But like many of the SPACs taking companies public, they’ll promise you the moon, even if it’s really only a really bright streetlamp in disguise. 

Until the SEC gives its full blessing to a SPAC process that works for all investors, I’m not sure the average investor ought to be investing in these de-SPACs. Too much can and will go wrong. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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