Aug 21, 2021

Axios Pro Rata

Hello and welcome back to our Saturday edition!

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Today’s Smart Brevity™ count is 834 words, a 3-minute read.

1 big thing: The SPAC winter

Illustration: Shoshana Gordon/Axios

SPAC enthusiasm is slowing, as evidenced by rising redemption rates.

Between the lines: “Redemption rates are very much a barometer of market sentiment,” explains SPAC Research founder Ben Kwasnick.

  • Higher redemption rates mean that investors are skeptical of the market and the deals — choosing to pull their money instead of risking losses if the stock price dives.

By the numbers: In July, the majority of SPAC deals saw redemption rates north of 50%.

  • About a quarter of them had redemption rates of 80% or above.
  • That’s in sharp contrast with the period between October 2020 and March 2021, when most had 0% redemptions.

Yes, but: Investors are still voting to approve most mergers — even if they're redeeming their shares for those very same deals — a behavior that's concerning some experts. (More on that below.)

The big picture: “We’re digesting a really long period of over-exuberance, and there’s an oversupply in the market,” Kwasnick tells Axios, adding that there’s decreased demand for SPAC IPOs.

  • And one byproduct of this weakened demand has been an uptick in sponsors getting anchor investors for their IPOs, often by offering them more favorable terms and even some of their own founder shares.
  • “I’ve heard if you can bring the implied cost basis down to $9.50 for anchor investors, they’re usually willing to buy 10% of your IPO," an industry source told Axios.

Meanwhile: The market is also less attractive for PIPE investors.

  • During the boom, when SPAC common shares were trading above their IPO price, participating in a PIPE often meant guaranteed gains.
  • But that dynamic’s changed with many SPAC stocks trading below their IPO prices.
  • So while the ratio of PIPE size to a deal’s minimum cash requirements was at 100% back in February, according to SPAC Research data, it came down to 60% by July.

The bottom line: The SPAC winter is here.

2. A redemption proposal

Illustration: Aïda Amer/Axios

Two researchers are proposing in a new paper that regulators prohibit SPAC mergers from going forward if more than half of the investors redeem their stock.

Why it matters: While redemptions have gone up, shareholders are still keeping their warrants — and voting in favor of acquisitions, a phenomenon the researchers call “empty voting.”

Catch up quick: SPAC investors typically get both common shares and warrants, the latter of which they can keep and use for governance.

  • This change over a decade ago was meant to make SPACs more investor-friendly so they wouldn't be stuck holding shares they didn't really want.

What they’re saying: "The ability of shareholders to vote 'yes' and nevertheless jump ship in a de-SPAC is a species of empty voting," write Usha Rodrigues (University of Georgia School of Law) and Mike Stegemoller (Baylor University).

  • "It is deeply troubling because, in mergers especially, voting interests typically accompany economic interests."

Between the lines: One concern is that these investors are not only greenlighting a deal they’ve simultaneously said they don’t believe in by giving back their stock, but since early investors are typically institutional players, they may be giving the wrong signal to retail investors who come in after them.

3. Today in Bill Ackman...

Illustration: Aïda Amer/Axios

The troubles for the largest SPAC ever raised — Bill Ackman’s Pershing Square Tontine Holdings — keep piling up. The latest is a lawsuit filed earlier this week, alleging that it’s not a company but an investment vehicle and should be regulated as such.

Driving the news: In a new letter to shareholders, Ackman is proposing that he shut down PSTH and return investor money along with warrants to buy into a new vehicle, a SPARC (a “special purpose acquisition rights company”).

  • Ackman first proposed this structure as part of the Universal Music stake deal that was eventually scrapped.
  • Unlike the usual SPAC, this structure wouldn’t ask for investors’ money upfront — only if a merger is announced — and there are no time limits.

Between the lines: The lawsuit is pitting a desire by SPAC sponsors to get creative with their structures, against regulators' (and investors') desire to reign in those vehicles before someone seriously gets hurt.

  • Former U.S. Securities and Exchange Commissioner Robert Jackson is on the plaintiff's legal team.

Yes, but: Regulators and the New York Stock Exchange will still have to approve the SPARC, so Ackman is not out of the woods yet.

  • And some investors might not be happy with the move if they bought stock when it was trading above the IPO price and are now forced to get less money back.
📚 Due Diligence
🧩 Trivia

This isn't Bill Ackman's first time making headlines in the SPAC world.

  • Question: What company did the SPAC he co-sponsored acquire in 2012?
🧮 Final Numbers
Expand chart
Reproduced from SPAC Research; Chart: Axios Visuals

🙏 Thanks for reading! See you on Monday for Pro Rata’s weekday programming, and please ask your friends, colleagues and SPAC investors to sign up.

Trivia answer: Justice Holdings Ltd. acquired restaurant chain Burger King for $1.4 billion in cash in 2012.