On May 18, TPG Pace Beneficial Finance (NYSE:TPGY) lost 13% of its value on news that the special purpose acquisition company’s (SPAC) merger with EVBox would be delayed. Over the second half of May, TPGY stock managed to recover some of those losses.
However, if you’re new to SPAC investing, TPGY is an excellent example of the risks associated with buying these stocks pre-merger.
The SPAC Has 24 Months
TPG Pace Beneficial Finance sold 35 million units on Oct. 6. Each unit included one share of TPGY stock and one-fifth of a warrant to buy another share at an exercise price of $11.50. That means if you bought five units for $50, and at some point in the future, exercised your right to buy another share at $11.50, you would ultimately get six shares at an average price of $10.25 [5 x $10 + $11.50 / 6].
TPGY is trading about 33% above the cost to buy the six shares as I write this. That’s an unrealized, annualized gain of 50% [33 / 8 months x 12 months].
So, what’s the problem?
The boilerplate front page of TPGY’s initial public offering states, “If we are unable to complete our initial business combination within 24 months from the closing of this offering, we will redeem 100% of the public shares at a per-share price ….”
In the simplest terms, if the SPAC doesn’t find a target by Oct. 6, 2022, the funds held in the trust account get returned to investors. So, you’d get back slightly less than $10 per share plus two years of interest.
Your 50% annual return turns into 1-2% per year in a best-case scenario. Since Oct. 6, the S&P 500 is up 25%, a slightly more pedestrian annualized return of 38%. However, if it does that for another 16 months, the opportunity cost of keeping your funds in a trust exponentially rises.
What Are the Odds?
I’d have to ask InvestorPlace’s resident oddsmaker, Mark Hake, what the odds are that TPG Pace Beneficial Finance fails to close its deal with EVBox, the European charging station network, and then fails to find another target within approximately 13 months?
Why 13 months?
In late May, as InvestorPlace contributor David Moadel pointed out, the two parties amended the Business Combination Agreement, or BCA, by three months to Sept. 6. That’s precisely 13 months to the second anniversary of its IPO, which is the drop-dead date for finding a partner.
As my colleague stated in his article, it’s possible that TPGY could fall below $10 in the future were the merger partners to cancel their wedding plans.
Think about it: After announcing a deal within 65 days of its IPO, waiting nine months for a wedding, only to be called off at the altar seems like a major disappointment TPGY investors wouldn’t soon forget.
More importantly, it’s a lesson on what you shouldn’t expect from a SPAC.
The Bottom Line on TPGY Stock
The last time I wrote about TPGY was in April when I said I would eat my hat if the stock were worth $45, the estimate given by Mark Hake, who I mentioned earlier.
Now, in fairness to my colleague, he was estimating its value based on the assumption that the merger actually went through. Even that’s now at risk.
“[B]oth EVBox and ChargePoint are facing increased competition, combined with a bit of an unknown as to the ultimate uptake for EV purchases over the next few years. That makes handicapping both of them that much more difficult,” I wrote on April 19.
Since my article, TSLA has lost 15% of its value and trades slightly above $600, while CHPT and TPGY are up 23% and down 13%, respectively, over the same period.
Making money on clean energy’s become a lot harder in 2021.
The Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW) is down more than 17% year-to-date through June 2 compared to the S&P 500, which is up almost 14% over the same period. However, over the past 52 weeks, the numbers look completely different.
As David Moadel stated, the risk of the merger falling through is questionable enough that it’s hard to understand buying at this point.
The lesson to be learned here?
Don’t buy a SPAC until it’s de-SPAC’d.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.