Description

GTYH warrants currently trade for 65c and should be redeemed for 70-72c at transaction close in 5 weeks Implying an 8-11% and of course a much higher IRR.

While overall there has been carnage in SPACs/DeSPACs there have been some opportunities if investors embrace a little complexity.  Most recently we have seen these opportunities manifest in DeSPAC warrants, primarily as it pertains to ratio adjustments; exercise price adjustments and M&A adjustments.  Today’s idea takes advantage of the M&A adjustment.

On April 29, 2022 GTY Technology Holdings (GTYH) agreed to be acquired by GI Partners for $6.30 in cash representing a 123%/57% premium over the 1 day and 90-day VWAP.  On June 1 (today), GTYH set the vote date as June 30, 2022, with closing shortly thereafter.  Most importantly, for this trade, GTYH’s original SPAC warrants remain outstanding.

Pursuant to the warrant agreement  https://www.sec.gov/Archives/edgar/data/1682325/000114420416130756/v451554_ex4-4.htm  (section 4.4) in the case of a cash acquisition the warrants will be valued at Black-Scholes.  The agreement goes on to spell out the key assumptions:

Price: 10-day VWAP into close – (I assume a 6.25 VWAP vs. 6.30 acquisition price)

Volatility: 90 day volatility obtained from the HVT function on Bloomberg determined the day prior to announcement

Risk free interest rate shall correspond to the US treasury rate equal to the remaining term of the warrant

Note: the SPAC transaction closed on 2/19/19 and the warrants have a 5 year life.  Assuming the transaction closes on 7/7 what would result in 592 days remaining which you can see in the calculation below

If we assume the transaction closes 1 week after the meeting the implied value of the warrants would be 70c – see the math below.  Note I reviewed the calculation with one of the larger SPAC brokers and they are at 72c, so lets call it 70-72c

The precedent transaction is TLMD/TLMDW. This idea clearly illiquid and only suitable for PAs. 

Key Risks:

• Transaction Breaks / or is delayed
• VWAP into closing is much lower than $6.25 (currently ~$6.10)
• As a hedge against the deal breaking, if you were so inclined, you could purchase some $5 August puts for 10c.  Shares were $2.65 prior to transaction announcement (warrants 11c) suggesting $2+ per put if the deal falls through.

Catalyst

The deal closing