The Star Maritime SPAC consists of 20 million units comprising of a share of common and one warrant.  Each warrant is exerciseable at $8.00, callable only when the common trades at $14.25, and expires in December 2009.  However, the warrants are NOT exerciseable until/unless the common shareholders approve an acqusition by the company.  If shareholders reject an acqusition proposal (none has yet been made) or if no proposal is made, these warrants will expire worthless.

 

Of all the SPAC's out there, why Star Maritime?  Star is unusual in several respects.  One it is a large SPAC ($200 million).  Secondly, and most importantly, the insiders purchased $11.3 million of units on the offering which may not "be sold, assigned or transferred until we consummate a business combination".  (In other words, no deal and this management team is out $11+ million in cash plus time spent, etc.).  Thirdly, as an inducement to have the management team make such a large investemnt the insiders own roughly 35% of the common versys the traditional 20% in most SPACs.  Lastly, as opposed to most SPACs where a 20% negative vote can kill the deal, at Star the threshold is 33%.

 

The stated target for Star is to purchase one or more businesses in the shipping industry.  It is one year since the IPO, so hopefully some significant progress has already been made to locate a potential target (s).  The current "held in trust (HIT)" for the common is about $10.20.  If we assume the company were to announce a deal today the shares would probaly have to trade pretty close to $10.20 for the deal to receive shareholders' approval (it is possible that some investors would vote in favor even if the stock was slightly below the "HIT" level if they own warrants).  In any case, it doesn't seem to require a big leap of faith that if a transaction is approved that the warrants could trade at about $2.40 each (or three times their current price).

 

Now for the $64 million question.  How likely is it that Star's management team will 1) propose a transaction and 2) that the shareholders will approve it?  As for the first point it seems almost inconceivable that a transaction won't be proposed.  Point two is much more difficult to handicap.  It seems to me that with $11+ million at risk, the Star team will do anything possible to try to get a favorable vote...even if it requires them to reduce the dilution by taking less stock.

 

The downside risk in the warrants is a 100% loss.  The upside is at least a triple.  Just an acquistion announcement of any kind would likely jettison these warrants sharply higher.  Again I must stress that unlike the EDA warrants where the risk was abou 5%, the risk here is very significant.  However, I believe that with management looking at a potnetial $11+ million loss, the likelihood of a transaction is quite high.