Description

Short DWAC

DWAC has been previously written up twice, however, both write-ups were from early 2022.  

While we view DWAC as a fundamental short, there is also a near term catalyst in the extension vote that provides an opportunity for a near-term gain.

Background on the Shareholder Vote

SPACs can extent their maturity date with a shareholder vote.  This is usually a seamless stress-free exercise, however, when retail investors are the majority shareholders, sourcing the votes can occasionally be problematic.

DWAC is currently seeking its second extension vote to increase the SPAC’s maturity from 9/8/23 to 9/8/24.  The original vote was scheduled for 8/17/23, but after failing to secure an adequate number of votes, the vote has been delayed to September 5.  Technically speaking, DWAC can delay the vote again until 9/8.

Prior Extension Votes

DWAC went public on 9/2/21.  Per the IPO prospectus, DWAC had 12 months to consummate a transaction or up to 18 months if the sponsor contributed 10c for up to 2 3-month extensions.  Fast forward ~1 year, and with the SPAC trading significantly above trust value, management realized that rather than paying for an extension, they could hold an extension vote.  Since it would be in the best interest of all DWAC shareholders to approve the extension (as opposed to getting liquidated at trust value), it should easily pass.  This would be a fair assumption for an institutionally held stock, but retail investors proved less willing to vote.

Management was unable to secure sufficient votes and was required to contribute 10c to extend the SPAC’s life by 3-months.  The intention was to use the extension to secure votes for a longer extension.

After several adjournments of the shareholder meeting on 11/23/22 DWAC announced that they had the votes to extend through 9/8/23.

“The Extension Amendment was approved by a vote of approximately 98% of the shares of common stock voted, which represented approximately 66% of the outstanding shares of common stock on August 12, 2022, the record date”

24,549,053 shares voted in favor of the extension

Note: there are ~30.0mm Class A shares and 7.2mm class B shares or 37.2mm total shares.  The shares voting in favor of the extension represented 66% of total.

Events since the Prior Extension

Following the extension approval, the transaction has progressed at a snail's pace, however there are a few important updates worth highlighting.  Candidly, these factor into the bear case if the vote is approved and less so about impacting the vote as a catalyst.

1. One of the board members and key investors was indicted on insider trading charges.  I highly recommend reading the about it for entertainment purposes
2. Patrick Orlando, the SPACs CEO was replaced.  Eric Swider was made interim CEO on 3/19/23 and made full time CEO on 7/6/23
3. The SEC settled with the SPAC for $18 million (to be paid at closing), creating a path forward for the SPAC, although you have to wonder why TMTG would be willing to absorb an $18mm hit
4. Following the end of exclusivity, Trump returned to Twitter on 8/24

The Current Extension Vote

On 6/6/23 DWAC filed a preliminary proxy for another 1 year extension.  The proxy went definitive on 7/14/23 with a meeting date of 8/17/23 and a record date of 7/10/23.

Since the definitive proxy, DWAC has put out press releases and engaged their proxy solicitor, Alliance Advisors, to encourage investors to vote.

The meeting was then postponed until 9/5

On 8/22 DWAC put out a press release saying “EVERY VOTE IS NEEDED BY SEPTEMBER 5, 2023 TO PREVENT LIQUIDATION ON SEPTEMBER 8, 2023!”

On 8/24 DWAC changed the voting standard to by 65% of the Class A and B shares voting together as one class.  It is unclear to me why they were able to apply this lower standard, however, this is the same standard applied to the first extension vote, which was problematic for DWAC.

To be clear, we don’t know how many votes DWAC currently has.  We do know that they are struggling to get enough votes. Truth Social is even emailing its users telling them to vote for the deal if they owned shares on the record date!  Assuming all of the Class B (sponsor) shares vote for the extension 57% of the Class A shares will also need to vote affirmatively.

One of the key challenges is the amount of turnover since the record date.  50.6mm shares have traded since the record date representing 169% of shares outstanding.  31.3mm shares traded on 7/21.  So there is this weird dynamic where retail investors who no longer own the stock need to vote to get this extension approved.

Structuring the Trade

There are several ways to structure this trade:

Shorting the common

Buying puts or some other synthetic short combination.  The September options expiry is 9/15 which is beyond the liquidation date.

Price Target

While it's hard to pinpoint the probabilities of each scenario, it's worth noting the stock traded from $17-18 before the news flow changed to we need the votes, which would be a 13% loss from here.

There's 29% downside to the cash in trust should the SPAC not receive the votes. Further, given the expenses the SPAC is paying out right now on legal and the ethical history of the sponsors, I think it's a fair assumption they will take use whatever than can in trust to pay their expenses so the cash in trust number could be even lower. 

Truth Social

Should the deal close, the fundamental merits to the short post deal close are numerous and we can discuss in the comment section. The growth in users has slowed as evidenced by the weak app downloads. The company hasn't posted any relevant information on how the target is doing lately, which tells you all you need to know. The remaining PIPE investors will likely be racing for the exits as soon as possible. 

Risks

The most obvious risk is they get the votes, any options trade expires and there is a potential cost to carrying the short position through deal consummation.

They don’t get the votes but for whatever reason they don’t liquidate on the 8^th and strange trading continues.

Catalyst

The vote on Sept 5!