Special purpose acquisition company (SPAC) Freedom Acquisition I Corp (NYSE:FACT) generated some headlines on Monday when it announced a reverse merger agreement with solar energy specialist Complete Solaria. Unlike some other speculative SPACs, several high-profile accredited and institutional investors, including Carlyle Group (NASDAQ:CG) support FACT stock. Nevertheless, structural concerns remain about the longer-term viability of SPACs post-business combination.
Specifically for Complete Solaria, Reuters reported that the deal features a value of approximately $888 million. Assuming no redemptions, FACT stock could fetch up to $376 million in gross proceeds. Once the merger finalizes, the combined entity will likely trade on the New York Stock Exchange under the ticker symbol CSLR.
To clarify, SPACs feature no underlying business of their own. Instead, their purpose is to launch an initial public offering (IPO). Typically, these blank-check firms have two years to find a viable private business with which to combine. Pre-merger announcement stakeholders own the right to redeem their shares at the initial offering price (which may be different from the actual purchase price) if they do not agree with the merger target.
Undergirding FACT stock stands a compelling enterprise in Complete Solaria. Featuring two complementary vertically integrated businesses — one an end-to-end residential solar solutions provider and the other a project financing and software solutions arm — Complete Solaria could succeed where other SPACs failed.
Nevertheless, for retail investors, risks abound.
FACT Stock Entices but SPAC Reputational Harm Lingers
On one hand, the high-level support for FACT stock attracts speculative interest. In addition to Carlyle Group, billionaire entrepreneur T.J. Rodgers backs the Freedom Acquisition SPAC. Nevertheless, billionaires mathematically can absorb million-dollar mistakes relatively easily. The same cannot be said about every retail investor.
Immediately, SPACs face two major problems that may impose indirect blowback on FACT stock. First, SPACs may not be friendly to retail investors. Fundamentally, according to the Harvard Business Review, these shell companies feature a dilutive profile due to the exercising of underlying warrants. Throughout the new normal, many market participants found themselves caught out with warrant exercises sparking share price volatility.
The other related (though again indirect) challenge to FACT stock stems from reputational harm. Post-business combination, SPACs simply have not lived up to their hype. True, these blank-check firms allow average investors the opportunity to get in on a potentially viable opportunity on the ground floor. Unfortunately, once the ink on the business combination dries, the opportunity often sinks to the basement.
Per Indxx, post-business combination SPACs continue to underperform the benchmark equities index, which itself struggled throughout this year. Therefore, acquiring FACT stock carries tremendous risks, even with institutional support.
On the date of publication, Josh Enomoto 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.
