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Could SPACs On The SGX Be Potentially Undervalued Right Now?

Undervalued or a value trap?


Special Purpose Acquisition Companies, more commonly known as SPACs, had their first listings on the Singapore Exchange (SGX) in January 2022.

In total, three SPACs are currently listed. They are: 1) Vertex Technology Acquisition Corp or VTAC (SGX: VTA); 2) Pegasus Asia (SGX: PGU); and 3) Novo Tellus Alpha Acquisition (SGX: NTU). All three SPACs were listed in January 2022.

Since then, all three SPACs are trading below their IPO price of $5.

This could partially be because all three SPACs had their SPAC warrants detached from the SPAC shares – these warrants, hypothetically, should represent some value – and can be traded separately.

SPACs can be seen as blank check companies since SPAC investors do not have any sight of what will be the company they eventually invest in. They are giving money to the SPAC sponsors and it’s the sponsors who decide which company to invest in and at what price. Since there is some uncertainty, it makes sense that the current SPAC price is trading at a discount to the SPAC IPO price of $5.

There is however another feature in SPACs that we shouldn’t ignore when looking at whether SPACs are undervalued – the SPAC redemption.

SPAC Investors Can Always Choose To Redeem Their SPAC Shares For Cash

Similar to their U.S counterparts, SPAC investors in Singapore have the right to redeem their SPAC shares for cash prior to the SPAC merging with another company. This is an option that is fair to investors and may be exercised for various reasons. For example, if investors do not like the targeted company or disagree about its valuation, they may choose to redeem their SPAC units. Other investors may feel they are being diluted too much and prefer to redeem their SPAC units for cash.

But here’s where it may get a little tricky for us and investors to calculate.

On paper, SGX has stated that at least 90% of gross IPO proceeds raised must be placed in an escrow account (operated by an approved independent agent). It’s also mentioned that up to 10% of the IPO proceeds may also be expensed as the sponsor performs the search and attempts to execute a business combination. As explained in this article (see point 8), there may also be other instances when the escrow account diminishes in value. For example, VTAC’s prospectus states that “if third parties bring claims against us, the proceeds held in the Escrow Account could be reduced”.

However, all three SPACs on SGX have set aside 100% of their gross IPO proceeds into escrow accounts, even though SGX’s SPAC listing framework only requires at least 90% to be set aside.

This suggests that investors should expect to receive back the IPO subscription amount ($5.00 per share) in the event of redemption if they choose not to invest in the targeted company. Again, the return of the $5.00 IPO subscription price is not guaranteed, and there could be reasons for the amount becoming lesser.

If the current SPACs on SGX are all trading below $5, does that mean it’s an arbitrage opportunity that comes with a free option, since investors can also choose to invest in the merged company if they feel the investment is attractive?

For example, as of 19 July 2022, VTAC is trading at about $4.65. So an investor can purchase the SPAC at $4.65, wait till the SPAC announces an acquisition or has to be liquidated if it exceeds the maximum timeframe of 36 months, and decide at that point in time if they wish to redeem their SPAC unit (for $5.00?) or invest in the merged company.

A look over at the U.S. and we see a similar pattern. To account for the uncertainty of when an investor can redeem their SPAC shares for cash, SPACs tend to trade at a slight discount compared to their offer price.

In December 2021, 890 5th Avenue Partners, a SPAC that eventually merged with Buzzfeed, announced that its share price closed at $9.91 per share and that stockholders who elected to redeem their shares will receive approximately $10.00 per share. And if you think buying shares at $9.91 and getting $10.00 is a good deal, you are not alone. The Buzzfeed SPAC saw a redemption rate of 94.4% and the company (Buzzfeed) only managed to raise $16 million from the SPAC IPO.

Obviously, in this instance, investors preferred the cash ($10.00) rather than the Buzzfeed shares.

Are Undervalued SPACs Too Good To Be True?

There is a saying if something looks too good to be true, it probably is.

So what could be the reason that the current SPACs on SGX are all trading at below $4.70 currently? (Note: Pegasus SPAC last done is $4.90 but that is achieved on very low volume on just 200 shares on 15 and 18 July. Prior to that, the SPAC was trading at $4.64).

For a start, as pointed out earlier, the SPAC warrants have been detached.

The second reason is the lack of liquidity. If you purchase 1,000 shares of SPAC now at $4,650, you can only redeem it for approximately $5,000 (less any costs incurred) in the event of a merger or a liquidation (after 24 to 36 months). And given how the secondary market for SPAC on the exchange is trading at thin volume, any seller would likely have to accept a lower than $5.00 price to sell their SPAC units.

Market interest rate is likely to be a factor as well. Since SPACs have about 24 to 36 months to complete an acquisition or be required to liquidate and return their funds to investors, this becomes a time period where an investor can’t easily access their money to invest elsewhere.

Assuming an investor has $4,700. If the investor chooses to invest in the Singapore Savings Bonds (SSB) today over a 2-year period, they would receive an average interest rate of 2.42% or a total of $227.48. This adds up to $4,927.48, very close to the $5,000 they could receive if they redeem their SPAC units for cash in the future – with no uncertainty on when they can get the money, or how much exactly they will receive.

When you compare it this way, the SPAC being priced at about a 5% discount to $5 may not seem as attractive anymore.

Read Also: Complete Guide To Buying Singapore Savings Bonds (SSB)

Of course, we must also recognise that the key selling point of the SPAC isn’t just the ability to redeem but the chance to be an early investor in a newly listed company. SPAC investors get in on the IPO action early and are automatically guaranteed shares in the newly merged company as long as they choose not to redeem their SPAC shares.

Read Also: 8 Things You Need To Know Before Investing In A SPAC Listing On The Singapore Exchange (SGX)

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