April 24, 2021 - 7:36pm EST by
2021 2022
Price: 9.85 EPS 0 0
Shares Out. (in M): 51 P/E 0 0
Market Cap (in $M): 502 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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Simple relative value idea within the SPAC universe. The market seems to be overlooking a tontine warrant structure. Get paid to receive a "free" tontine warrant. 

Looking at the SPAC market differently

You've all noticed the number of SPAC issuances has gone up tremendously in 2020 and 2021. A few times it has been insanely hot culminating in CCIV trading at $60 before having announced a deal. Currently, it is pretty much left for dead. I don't think I've ever seen an "asset class" with such rich picking. It reminds me of the Mauboussin graphic of Dispersion of returns. 

When Star Athletes and Investors Fade: The Paradox of Skill | Verum Partners

In the more obscure asset classes, it's easier to find mispricing and I think that's true for the SPAC market. 

Currently, SPACs aren't very hot. SPACs have never been very popular with professionals, besides with arb people, because the vehicle really stacks the deck against minority outside investors. They became very popular with retail once they were utilized to bring loss-making and pre-revenue venture capital companies to the stock market. 

I think this retail enthusiasm, and the accompanying insane deals this provoked, turned off even more professional investors. 

Probably the SEC didn't like everything it saw as they recently changed the rules in regards to how warrants have to be administrated. This is massively slowing down new issuance and is holding up deals. 

Because there is so much bad stuff going on where people will end up fleeced many professionals and media seem unwilling to egg on people to much. Most conversations about SPACs are accompanied by warnings. I think that's probably well deserved but it's another reason why stuff can get mispriced. 

Finally, because the market has been so hot for SPACs the issuance rate has literally been off the charts. I did not check but I think there are currently ~600 SPACs looking for a deal. 

By a rough estimate, I think I'm 50% invested in SPACs. I think there are so many interesting things to do with incredible risk/return characteristics. 

One of my largest positions is SVAC. It is currently trading at $9.85 and I think the fair value could be closer to $11. But there's definitely an opportunity to get much more. Trading up to $11 would mean picking up somewhere around $1.15 per share. 

Why I think it could easily trade up to $11. Starboard Value is an above-average sponsor. Some would argue a very good one. I'm not an expert on datacenters and I'm not looking to get behind the business long-term but it isn't one of the insane deals. The sellers rolled over into the deal and agreed to the same lock-up as Starboard Value. The shares include a tontine warrant (much like the one in Pershing Square Tontine Holdings). The units include 1/6th shares. Shareholders holding through the business combination get 1/6th warrant and a pro-rata share of the warrants belonging to shareholders who use the redemption feature. 

Among SPACs that have a target announced the median share price is $10.09 and $10.74 for a unit. The median warrant trades at $1.7. On average these SPACs are 7 months in the process and that's exactly where SVAC is. 

In my view, the market is missing the tontine warrant structure and not giving credit for it. If I adjust to give credit for it, the valuation should be closer to $11. 

The deal should close in Q2 or Q3 of 2021 and I'd expect to harvest a nice return before that date. The upside scenario should result in a 11.5%+ return within six months. It's not inconceivable at all that it is achieved within a quarter. 

The downside

On the downside SPACs have benefit from a redemption feature and if it trades really badly into the shareholder vote, it is possible to vote against the deal and get the $10 per unit. At the current price using this redemption feature would still result in a 1.5% return. 

The bad scenarios that seem reasonable is if the deal gets delayed because of the warrant issue for example.  

What is the market missing?

I believe the market is overlooking the tontine warrant value here. I noticed on Twitter how otherwise extremely knowledgeable SPAC investor talked about this deal and he seemed unaware of the warrant. 

There are six hundred SPACs that have come to market in a short period of time. They can be different in subtle ways and professional investors just did not have the time to go through everything. 

The retail crowd is almost certainly overlooking the tontine and not too interested in the data center idea. 

With the shares at $9.85 it is possible to pick up a positive return into the close and think of the warrants received as free upside. 

If I back out 1/6th of the value of a SVAC warrant (based on actual market price) I get to $10.59. 

I've compared all other SPACs that have a deal signed but not closed yet and there's nothing trading close to $10.59. The SPACs at the lower end of the range trade around $10.90. This is the cheapest SPAC with a deal announced easily. 

To limit risk further and focus on the overlooked warrant I've sold some longer-dated $12.5 calls  

I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Catalyst SVAC

SPACs have inbuilt catalysts. When the deal closes the tontine warrants get issued. Starboard, BC Partners, and Medina Capital have lock-up deals. That makes me less worried about a wall of selling after deal completion. I'd prefer to get out after the business combination event. 

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