Pre-Merger SPACs

Venue to discuss pre-merger SPAC ideas.

As we are in a SPAC bubble with a number of stocks generating double/triple digit returns from SPAC mergers this year (as opposed to a terrible track record historically) and a number of members have asked about ideas of pre-merger SPACs.

I am personally very sceptical about SPACs from a fundamental value perspective. I think that the success of trading pre-merger SPACs depends on correctly guessing the hype a particular SPAC or merger will generate from the Robinhood crowd (no idea how to do that consitently).

But hey, blind pre-merger SPAC investing seems to work quite well this year, so as long as it makes money, why not.

Here are some resources for those interested in learning more about SPACs.

Good overview from Harward Law on SPACs what SPACs are, their structures and incentives:
https://corpgov.law.harvard.edu/2018/07/06/special-purpose-acquisition-companies-an-introduction/

A simpler presentation on SPAC basics:
https://www.winston.com/images/content/1/3/v2/135061/Winston-Strawn-SPAC-Basics-Presentation-2018.pdf

Finally, some thoughts on the current SPAC bubble:
Bubble warning: even college kids are touting Spacs (Financial Times)
SPACs Could Be a Bubble That Never Quite Pops (WSJ)
Where Did All These SPACs Come From (Forbes)
Record IPO & SPAC Bubble (WolfStreet)

Published on: December 11, 2020  •  Published by:
Category: SPAC

52 COMMENTS

    1. nostradamus

      Not so many now, but about a month ago there were countless SPAC’s trading below trust value; the market right now is being flooded with SPAC after SPAC, I’d wait until the hype dies down to go shopping.

      1. Theodore

        Second this – warrants on average were ~$1 earlier this year and now all the way up to $2.15 (means implied volatility on these warrants is ~40% from ~20% previously). There are some attractive post-deal candidates like HYMC, HYAC, FSDC, ACAM, VSPR that can sometimes go unfollowed and trade down after ticker change that are worth keeping an eye on.

        Trading under trust in these times is typically reflective of very poor quality (i.e. churchill SPACs that deal binge and osprey technology)

  1. EC

    I know of two but I haven’t really looked: SBG, ASPL. Also the market is closed, so I don’t know what they will be at tomorrow. But they do exist.

    Their warrants have detached, so you will only be buying the trust value. You can only redeem when the trust expires or when they vote on a merger. It might be good to think of these like zero-coupon bonds with credit risk.

  2. Michael Lax

    Thanks, DT. Looks like a pretty small list? Also, is there a way to track trust values?

  3. Theodore

    You can make the list larger by making the number of rows larger at the bottom of the table – for now only tracking ~300 securities with warrants. Trust values can be found in latest filings (usually 10-Q), but this is usually similar to the IPO raise

  4. Tom

    As you know, generally warrants are exercisable at the later of 30 days from the completion of an acquisition or a year from the IPO, subject to an effective S-1. Does anyone know the reasoning for the condition of waiting at least a year from the initial IPO? Is this a legal constraint or a business consideration? I’m curious because there are a couple of deals that are likely to have effective S-1s before the year is up and I’m wondering if the warrant agreements might be amended to allow exercise prior to the one year period expires.

  5. Brian

    Implied vol is very high on spacs right now b/c of the high chance of big pops. One conservative way to play is buy spacs trading not too far above liquidation value and sell covered calls.

    1. Fa

      Do you have a list of SPACs not too far above liquidation value AND with liquid options?
      Many thanks

  6. blades

    I’ve searched the watchlist linked to above, and found zero situations like that at this point. Not many pre-deal SPACs have options.

  7. g4734g

    Im trading Rbac and PSTH options…….RBAC has not announced deal……buying the stock at 10.98 and selling march 10 calls ( execution at $1.32) tall order to announce deal and close in 12 weeks

  8. Jim Davis

    Seeing quite a few spacs where the fair value of the units is well below the stock+ warrant . And yes, Im using the correct fractional number of warrants in the calc.

    Seems too good to be true. I know there is a fee to split, but if you do it in size , still looks like free money (if you hedge the long unit with short stock).

    Is it ? Or is there a catch ?

    1. Fa

      Usually, the margins are small enough so it doesn’t cover the conversion fees ( 300 USD at Interactive brokers) + the cost of carry….

      1. Jim Davis

        Nope. Not a good answer. 50 cents arb and a lousy 1k shares more than covers the fees.

      2. nostradamus

        I’d suggest either giving us the tickers and we can check it out, or just do the trade and let us know what happened.

        There’s not much use in discussing a theoretical here where we can’t look up any of the specifics.

  9. Jim Davis

    Heres another piece of madness. Kindly explain this

    BRPAU

    trading almost 2X fair value

    What is going on with this nonsense?

    1. Fa

      BRPAU is super illiquid, can’t be borrowed and I don’t think, you can recreate a unit from stock + warrant 🙁

    1. g4734g

      Guess it depends on your assessment of the risk reward and our own hurdle rate. I bought more rbac today at 10.72 and immediately sold the March 10 calls for 92 cents…….that’s a 10% plus annualized return, for what I believe is a very very long shot risk they announce a deal and bring it to a vote in next 9 weeks.

    1. wlblount

      my bad. missed the wrap around 10. A deal and run up locks you in .20, no deal returns at least 1.7% in 9 weeks unless it goes below 10. under what scenario would it go below 10?

      1. EC

        I could imagine a couple uncomfortable scenarios…

        At the end of the SPACS life if they don’t have a target, there’s usually a vote on whether to extend or not, this is also when you get to redeem if you choose to exit. if you’re short options through that period you will be naked if you redeem but others vote to extend the deadline.

        If you are short options through the merger, post-merger you’re exposed to all the price risk.

        If the managers announce a particularly bad merger target, expectations might fall, and the price could trade below $10.

        If for some reason there are shenanigans by the management, and the trust value falls below $10, you might be waiting through litigation.

  10. EC

    I found out yesterday through a reddit comment that IPOD, IPOE, IPOF also have option chains if anyone is interested.

    IPOD and IPOF have not announced acquisitions. IPOE announced with Sofi yesterday.

    Keep in mind the exposure you have with covered calls is also short puts. So I also look at what the puts are selling for, and consider if its worth it to insure for that premium.

  11. akashgupta

    Several SPAC Warrants now seem to be trading under intrinsic. Anyone have any colour on why this is so?
    E.g. IPOE (2pts under), CCIV (flips in and out)

  12. g4734g

    I am continuing the buy/write strategies on SPACs which have not announced deals. Buying RBAC and selling Feb and March 10 calls. Hard pressed to believe the embedded put is extinguished by March.

    akashgupta, may I ask where you are finding the best resource for SPAC and warrant listings, including strike prices, date, and other specifics….thanks

    1. Fa

      Do you have a list of SPACs which have not announced deals yet and have liquid options? beside PSTH and RBAC …. Thanks

  13. g4734g

    cciv has options if you want to play that game, thats akk I know but hard to keep track with so many spacs coming online every day…..I have my eye on John Malone’s LMACU, just came out dont know about the options

  14. g4734g

    Well RBAC is proving to be nice test of the buy write strategy and the protection the embedded put provides. They announced some pretty bad news last night as negotiations to acquire the Boston Red Sox have collapsed. Stock only down 22 cents to 10.65. After what happended with CCIV folks are willing to pay what they view is only 65 cents above their guaranteed price in exchange for the possibility RBAC somehow turns into CCIV

  15. g4734g

    six more pre deal SPACs began trading options today. I’ve had some good luck thus far with buying AACQ and selling the March 10 calls with an annualized return around 20%……the bet is the embedded put is still in place 6 week from now and at a minimum the arbs keep the price above 10 through option ex……current price 11.05
    here is todays new list

    fuse thca ccac soac faii aacq

  16. Michael Lax

    Is there an arbitrage opportunity with SPAC options versus warrants? As an example, FAII options expiring in November at $12.50 strike are trading at about .80, warrant is priced at $1.36, with strike of $11.50, expiration of 5 years post-combination, so you are paying very little for the additional time value.

    1
  17. R

    Is anyone aware of a good resource to see companies projected to join the Russell indices in June? I am curious if recent companies that have completed the SPAC process, such as ASLE, will be eligible. Not sure if ASLE meets the free-float market cap requirements for index inclusion along with any other requirements. Thanks.

  18. rc99ar

    PSTH below $20 now. Curious if anyone on this board is playing these SPAC arbs and what you like. Haven’t had one in the idea section for a while.

  19. g4734g

    Yes bought bunch at 19.70 s and sold oct 20’s for a dime………..also sold september 19 puts……and have some other positions as well…..some confusion regarding what exactly happens to the warrants…they are down from $3 yesterday to 96 cnets today

    1
    1. snowball

      Now that most pre-combination SPACs are trading below trust value, is there anything special about PSTH, which would suggest that PSTH’s small discount shouldn’t be wider and should revert to zero (or premium) faster than other SPACs?

      Food for thought: PTSH’s large size and higher target quality hurdle leads to longer expected wait time until a combination event, making short-term (<3 months) option-writing less risky?

      I am thinking about building a diversified basket of similar trades to what you've described, covering all SPACs with liquid options.

      If nothing is special about PSTH, then diversification (i.e. more frequent bets, more "breadth") might be more valuable than deep research on each name.

      1. g4734g

        What is different about PSTH is that they have announced plans to liquidate…(of course subject to a contingency) Over the past 6-9 months I have built the diversified basket you describe….almost all optionable except I will play those which can be redeemed within a month and I can make 6 or 7 cents. ( I have 5 redemptions in process now ajax, rmgb, snpr, gwac, others coming up)

        Unfortunately, the landscape has changed….there is no more pop when a DA is announced, and the implied volatility on the options has come way down vs where it was in April, which really was amazing returns given the built in redemption floors. You will have a hard time generating much, if any, option income on a 9.70 pre DA SPAC these days.

  20. rc99ar

    If the plan goes through aren’t the $23 warrants worthless? He’s going to give everyone back $20 and a new warrant that would allow you to buy into the next deal at NAV. Maybe some expect the existing warrants will convert to the new SPARC warrants? I haven’t been able to make sense of it.

    1. snowball

      PSTH warrants will indeed be converted into SPARC warrants, with the strike price reduced from $23 to $20 (if cash NAV value of SPARC is $20 per share) .

      From the Letter by Ackman: “Following the return of cash, we expect SPARC to issue one SPARC Distributable Warrant for each PSTH Distributable Warrant”.

      But a new question arises: should a $20 SPARC warrant be worth more or less than a $23 PSTH warrant? If less, how much less?

      The strike price is lower, but a SPARC warrant has no remaining option value post a combination event (holder has to decide to “exercise” or not at the time of combination).

      On the other hand, the SPARC has no “shot clock” for to consummate a transaction, so the option may have a longer expected life.

  21. g4734g

    Snowball,
    Ackman tweeted these two things below yesterday: My interpretation is current PSTH “stockholders” get a warrant to buy the newco, I believe at time of IBC, for NAV, assuming $20. And it coverts current warrants to new warrants with the same $23 strike and 5 year term. Do you see it differently? FYI he has a fairly active twitter presence where he tries to explain this stuff

    Bill Ackman
    @BillAckman
    ·
    Aug 20
    To clarify, if we are successful in getting SPARC approved, PSTH shares will receive $20 per share in cash plus the market value of a SPARC warrant, which should represent the option value of investing in our next IBC at SPARC’s cash NAV.

    Distributable Warrant (DW) holders will receive a warrant on identical terms in SPARC. Same five-year term, same strike at 15% premium to NAV to allow DW holders to participate in the SPARC merger on same terms as PSTH.

    1. snowball

      g4734g, Thanks for the tip!

      Ackmans’ new tweet has confused me even further.

      The PSTH $23 warrant has a five-year term, and clock starts at the time of IBC.

      The new SPARC $23 warrant to be given to PSTH warrant holders will have the “same” five year term, but the clock will presumably start at the time of warrant issuance, and terminate after the IBC.

      So the new SPARC $23 will be worth much less, or almost worthless as it makes not much sense for holders to exercise at 15% premium to cash NAV at the time of IBC .

      Unless, by “same term” Ackman means the SPARC $23 warrant’s five-year clock will also start at the time of IBC.

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