As published in Finance et Investissement on 3 June 2024 (in French).
Can SPACs, those beleaguered blank-cheque companies whose recent history is as volatile and unpredictable as the emotional health of a certain former president of the United States, be staging a comeback?
The SPAC sector, which raises money through public exchange listings and then acquires companies that will go public, got some notable attention in March when special-purpose acquisition company,
Digital World Acquisition Corp “DWAC” completed its merger with Trump Media & Technology Group “TMTG” with a listing on the NASDAQ under ticker DJT.
With plans to target middle market and emerging growth technology-focused businesses in America, DWAC raised $250 million in its SPAC IPO on September 2021. Shortly after its public debut, the SPAC announced the merger with TMTG which owns Truth Social an alt-tech social media platform, in October 2021. Through a lengthy and complex process with multiple extensions, charges of illegal insider trading and an investigation into the SPAC by the SEC which resulted in the SPAC settling by paying a fine, the merger was finally approved on March 22, 2024. Since the start of the year, DWAC’s shares have increased 145% which values TMTG at around US$9 billion, according to the Financial Times. In addition to Trump’s payout, three participating hedge funds made an astounding profit.
Since announcing TMTG as the target of the SPAC merger, DWAC shares traded at a significant premium to trust value indicating the considerable halo effect of being associated with the former president and the optionality inherent in SPACs when merging with a company that gains interest from speculators.
AltC Acquisition Corp. (NYSE: ALCC), a SPAC backed by Sam Altman the founder and CEO of OpenAI which is merging with Okla Inc., a developer of next-gen nuclear reactors, also trades at a significant premium to trust value.
As euphoria and speculative fervor returns to the market, SPACs backed by a sponsor or merging with companies of notoriety could trade at significant premiums to trust leading to a more compelling SPAC arbitrage investment environment like the SPAC bubble of 2020/2021.
Outside of the fervor surrounding DJT, activity remains muted in the SPAC sector. In March, there were two SPAC IPOs with 12 SPAC deals closing and five SPACs liquidating. With the SPAC liquidation, at end of month, there were 235 active SPACs with 104 of them actively searching for targets.
Our positioning regarding SPACs remains conservative, focused on SPACs liquidating or redeeming and targeting a yield in excess of 6.5%. At the end the first quarter, SPACs searching for targets were trading at a discount to trust value, which provided a yield-to-maturity of 5.80%. SPAC arbitrage is effectively equivalent to acquiring a treasury bill at a discount. SPACs currently provide a similar yield to US corporate investment grade bonds but with lower credit risk, shorter duration and a tax advantage, as SPAC returns are primarily capital gains. As market euphoria returns and the IPO market reopens, opportunities may arise in SPAC IPO arbitrage investments.
