Amid a positive start to the Thursday session, DiamondHead Holdings (NASDAQ:DHHC) more than doubled its equity value. Primarily, DHHC stock may be responding to the blank-check firm’s disclosure of a private investment in public equity (PIPE) deal. In addition, investors likely waited to digest the Federal Reserve’s latest interest rate hike before bidding up DHHC stock.
Unlike some other relatively straightforward special purpose acquisition companies (SPACs), DiamondHead’s fundamental narrative features myriad complexities. First, the PIPE deal involves investors agreeing to purchase $80 million in original principal amount of convertible promissory notes and 744,588 shares of Class A common stock. This investment supports DiamondHead’s previously announced merger with Great Southern Homes (GSH).
Based in South Carolina, GSH focuses on providing high-quality, affordable homes for the entry-level and first move-up segments. Beyond its home state, GSH also has a presence in Georgia. Further, it bills itself as one of the largest homebuilders in the southeast. Following the completion of the business combination with the DiamondHead SPAC, GSH will be renamed United Homes Group.
Notably, DiamondHead’s management team disclosed the PIPE on March 22. However, DHHC stock moved little on the announcement day. At the time, investors digested the implications of the Fed’s decision to raise interest rates by a quarter point.
Nevertheless, with the market moving up the following day, the dynamic suggests that investors value the central bank’s commitment to tackling inflation over banking sector concerns. Therefore, DHHC stock may have responded in kind as the underlying enterprise benefits from accessible product pricing.
DHHC Stock May Benefit from Location, Location, Location
Another factor that likely bolstered sentiment for DHHC stock centers on GSH’s location advantage. Virtually every business and housing-related publication emphasizes the significance of location regarding real estate viability. While the sector itself remains a tricky environment to negotiate in the post-pandemic new normal, GSH may be able to carve out a lucrative niche.
Fundamentally, both Georgia and South Carolina attract millennial migration. For the former, tens of thousands have been flocking to the Peach State every year for jobs and lower costs of living. Regarding the latter, the familiar theme of lower costs attract young people. Combined with GSH’s focus on affordable housing, the narrative offers an attractive support baseline for DHHC stock.
As well, the Fed’s firm commitment to curbing historically high inflation should help ease affordability woes. With prices previously skyrocketing to unattainable heights, many first-time homebuyers found themselves priced out.
Still, prospective investors shouldn’t approach DHHC stock without conducting due diligence. Generally speaking, SPACs (following their mergers) tend to underperform over time and returns land all over the map. Indeed, the lackluster performance of several high-profile business combinations confirm this assessment.
As for the GSH merger specifically, the Fed’s actions to control inflation also raise borrowing costs. That hurts affordability on the backend, which may lead to the same net result: first-time buyers being priced out.
Why It Matters
Although SPACs generate plenty of emotions and excitement, it’s vital to consider the bigger picture. Notably, Harvard Business Review mentioned that the median redemption rate of SPAC deals hit 73%. If so many investors don’t want to get involved with the eventual merger deal, that doesn’t speak to high confidence in the process.
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.