In a reverse Mayflower move, America’s latest creed is landing in Europe. The SPAC fever is oozing into other capital markets, and in a similar fashion than when it started in the US, complex and novel structures tend to be mispriced.
The SPAC structure
With a novel vehicle it is important to read the Prospectus and understand it.
The offering consists on 25,000,000 Units. However, those units won’t trade like we are used to in the US, those units will get immediately separated and the common shares and the offering (IPO) warrants will trade separately on the Euronext Amsterdam. Even stranger is that the trading will start before the settlement of the offering, meaning there is a period when trading will be subject to the successful settlement. Here you have the timetable:
The common shares traded on Friday the 12th as well on Monday and Tuesday are taking place conditioned to everything going alright and Settlement closing without issues.
I personally found this provision really weird and I wonder if this is a form of allowing allocators to sell some commons in order to pay the Settlement with those proceeds, but anyhow, it is not material for the rest of the case.
How many warrants?
Every Unit will have the right to 1/8th of a warrant when Settlement takes place. So if you were lucky enough to be be allocated units, you will end up with a common share per Unit and a warrant for every 8 Units. Both will trade separately, although there has not been any warrant trading yet, only commons.
This is fairly common for a SPAC structure, units include from 1 warrant to none, being the most common 1/3th of a warrant.
That is not everything for the first european SPAC though, in a situation I haven’t seen in the US, every common share will be allocated 1/8th of a warrant 2 days AFTER a business combination has taken place.
These are a kind of phantom warrants, they don’t exist until they do, so this is a promise of a warrant if the SPAC is successful to find a deal. I am betting the market has no idea how to price this.
When we have a listing for warrants (the IPO warrants of course) we will be able to price these phantom warrants from a range of 0€ to whatever price the warrants trade at. I will come back to this later.
Aside from this weird phantom warrant, the warrants are fairly standard:
Right to purchase a common share at €11.50
Five year span.
Callable at €18 (20 trading days of the last 30). This is the same as NEBU/LPRO had, and many other US SPACs have.
How much does the Sponsor get paid?
The Sponsor is getting a good chunk of money out of this SPAC if they find a successful deal.
Founder shares are 25%!! of the shares offered: 6,250,000 founder shares vs 25,000,000 Units offered. This is a lot, and even in the US the number of founder shares rarely exceeds 20% of the units. Furthermore, many companies ask for founder shares forfeiture to agree to a business combination.
In the traditional SPAC structure the Sponsor gets the sweet deal of the founder shares in exchange of assuming all the costs of IPO and finding a deal. Not that it is not happening here, but the Sponsors are financing the costs by way of buying 4,166,666 Founder Warrants at €1.5. Meaning that they pay for the for costs but get more money if the shares trade above €13 euros after the deal - The Founder Warrants are pretty much normal warrants, but they can (and will) be exercised on a cashless basis, meaning more free shares if the deal is a success.
These advantageous conditions get partly offset by what is called a Cornerstone Investment, which means that the Sponsor is buying 1,500,000 Units at the offering price. This is great, as it means real skin in the game, but 6.25M > 1.5M.
Are they at least taking us to dinner?
The Sponsor is Infestos, a firm that manages the wealth of Bernard Ten Doeschot, who made his fortune by selling his stake in Norit to Doughty Hanson & Co. in 2007. The team of Infestos is full of former members of Norit too.
It is hard to find information about the firm’s track record, we can see participations on some companies. Only listed holding - already exited, so former holding - is Alfen Beheer BV, a developer of smart electrical grids, charging stations for electric vehicles and energy storage systems.
Yes, you guessed right, it has gone up quite a bit.
In their own words Infestos intends to acquire:
Frank van Roij, Managing Director of ESG Core Investments:
“With ESG Core Investments we aim to unlock a unique opportunity to facilitate the route to the public markets for a European pure-play ESG company. Through our IPO we have lined-up a broad and international institutional investor base with a strong interest in the ESG arena. We see many attractive opportunities in this space in North-Western Europe, where the energy transition is in full swing, also supported by the European Green Deal.”
Hans Slootweg, Managing Director of ESG Core Investments:
“We see many companies in Europe with a clear ESG focus in the core of their business.As a hands-on Team we are well connected in this market and we aim to acquire a majority stake in a company that is preferably headquartered in North-Western Europe and enjoys a strong competitive position within its industry, based on unique technology and experiencing strong growth. Through our broader Infestos Team we believe we are well positioned to support a company in its transition from private to public markets and in subsequent value creation, following a similar approach as we have done in the case of Alfen.”
It is called ESG Core FFS.
In the US we would see a energy/ESG focused SPAC play trade with a premium to NAV. My last article about SPACs featured Climate Change Crisis Real Impact I Acquisition Corporation. I scorned a bit to the name, but I should’ve bought the crap out of it as it started trading at a premium in December/January and it jumped to $20 when it announced a deal with EVgo.
Even Seven Oaks Acquisiton Corp, which has an ESG focus and is led by investment bankers instead of a team with a track record on the space trades at a growing premium. (I show the units which offer 1/2 of a warrant). This one is probably a good place to park your cash.
What is the price implying?
At the closing price of €10.06 for ESG (the commons), we are getting a common share with a NAV of €10 plus a warrant if the business combination closes.
One caveat though, this is Europe, and time value of money is negative. The escrow funds pay a (small) negative interest for the privilege of existing, unlike in the US.
Sure, you are paying €10.06 for a NAV of €10 today, but that will become €9.96 in one year and €9.9102 at the end of the SPAC.
Let’s assume now that it takes 1 year to close a business combination, then the implied price of the warrant is (10.06-9.96)*8 = €0.8. I doubt the warrants will trade that cheap.
Let’s say combination never happens, ie: warrants are worthless anyhow. Then you’d be paying (10.06-9.91) = €1.2. That is more like it, but hardly expensive.
Given how picky we eurpeans are about the sponsor getting free money, dismissing optionality and that the comments I could find about ESG Core was Dutchmen making fun of people buying this structure, I totally expect the SPAC to trade lower. We are so boring there won’t be scarcity value.
At a certain point it becomes a nice money parking vehicle, with optionality from a deal and in euros, since the SPAC arbitrage was a phenomenon in the US, euro investors didn’t have the chance to participate without assuming currency risk.
Of course, the deal might not ever happen, they may bring a turd public (although I wouldn’t care as long as the price pops) and if the ESG mania dies off then you end up with a lot less optionality. I personally doubt the ESG mania ends soon, although valuations are from expensive to bubbly, but where else is the new money going to go?
“The Company’s expectations regarding the market momentum for sustainable companies and related growth may not materialize to the extent it expects, or at all” is listed as a risk, so they know what game is getting played here.
Thanks for reading.