Dec 11, 2021 - Economy

SPAC merger troubles get worse

Illustration of money in the shape of downward pointing arrows.

Illustration: Shoshana Gordon/Axios

There's been an uptick in cancellations of special purpose acquisition company (SPAC) mergers, with three since Thanksgiving and eight since the beginning of Q4.

Why it matters: After the SPAC euphoria of 2020 and early 2021, the market is continuing its reverse trip to Earth.

Driving the news: FAST Acquisition Corp. and Fertitta Entertainment canceled their merger on Friday, as did Pathfinder Acquisition Corp. and ServiceMax earlier this week.

  • Other high-profile combinations that have fallen through this quarter include Northern Star Investment Corp. II and Apex Fintech Solutions, and Valo Health and Khosla Ventures Acquisition Co.

By the numbers: There were seven terminations for all of Q3, none in Q2, one in Q1 and seven in all of 2020, per SPAC Research.

  • As of Thursday, there have also been three recut deals and 10 minimum cash restructurings in Q4.

Between the lines: Deal terminations are a lagging indicator, says SPAC Research founder Ben Kwasnick.

  • The increase can be traced in part to a recent wave of merger close deadlines, pushing the parties to either consummate or walk away.
  • Many are citing “market conditions” as the reason for walking away, which makes sense given the rise in stock redemptions that began this summer. If a SPAC is now trading below $10 and redemptions mean there’s no longer enough cash in trust to meet the deal’s requirements, the target may opt out.
  • Or if the parties don’t think the initial valuation will be supported by investors, the target company may decide it’s better to remain private for now.

Yes, but: There are always outliers. BuzzFeed, for example, went ahead with the merger despite a 94% redemption level.

  • Conversely, the Wynn Interactive and Austerlitz Acquisition Corp. I cancellation was a surprise. “Gaming is hot, gaming remains desirable, top quality sponsor … I definitely didn’t expect that one to fall apart,” says Kwasnick.

The intrigue: Deal terminations are still in line with the overall level of SPAC activity.

  • There were 121 live deals at the beginning of this quarter and 150 at the beginning of Q3 — many times more than any quarter since the start of 2019. But Kwasnick expects that to change.
  • Also: “It’s interesting that IPOs are still getting done, lots of them,” he adds. “The market has found an equilibrium with IPOs ... if you just overfund the trust account, shareholders will back anything — but that phenomenon is expensive for sponsors because the overfunding comes from their pockets.” So it’s unclear how long that will last.

The bottom line: We might be past the “anything goes” SPAC era.

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