‘SPAC Winter’ Freezes Out Warrant Holders as Time Runs Out for Merger Deals

(Bloomberg) -- Warrants tied to blank-check stocks are signaling deep doubts about whether those companies will find something to buy, and little or no relief for investors after a year-long rout that has gutted their holdings.

Traders have been dumping warrants issued by all types of special-purpose acquisition companies, with prices collectively down about 80% from a year ago, according to data from Boardroom Alpha. This includes SPACs that found a business to acquire as well as those that are still looking, and comes on top of a brutal 40% drop for a key SPAC stock benchmark. 

The selloff is a sign that investors don’t expect SPACs can locate worthwhile merger partners -- or any partner at all -- to boost their shares enough to make the warrants valuable. The same goes for so-called de-SPACs that successfully merged with a target, said Julian Klymochko, who manages a blank check-focused fund at Accelerate Financial Technologies.

“Investors are ascribing very little value to warrants, and warrants for companies that have announced a deal are trading low because investors are assuming the de-SPAC will trade below $5,” Klymochko said. He sees the sector mired in a “SPAC winter,” with the market way over-saturated. “Supply has well overrun demand, yet they keep coming up with more,” he said.

Pre-deal warrants are trading at 44 cents on average, with warrants tied to firms that have announced mergers churning around 89 cents, the Boardroom Alpha data show. They typically start life around $1, according to industry watchers; prices had jumped along with the speculative fervor for blank-check offerings that has now cooled.

Shell Companies

SPACs are known as blank checks because they raise money from investors in an initial public offering with the goal of buying a private business that isn’t identified. The investors typically receive units containing a common share and a fraction of a warrant. The warrants, which entitle holders to buy more shares when the stock rises above a certain price, dangle the prospect of an extra windfall for anyone who bets on a new SPAC.

If the SPAC doesn’t find a target by a set deadline, give or take a brief extension, it must close shop and return the cash to investors. The warrants become worthless. That’s what will happen at Burgundy Technology Acquisition Corp., the blank-check backed by Leo Apotheker after the former chief executive of Hewlett-Packard Co. said this month it couldn’t find a suitable company to buy.

When warrant prices plunge, they’re signaling investors expect a similar outcome -- that no deal will emerge, that deals won’t close -- or that they’ll trade poorly upon completion. By contrast, stock prices for expiring SPACs tend to trade near their offering price on expectations of a full refund when the company disbands.

Mixed Bag 

At Americas Technology Acquisition Corp., warrants have spiraled down nearly 80% in the past year to 20 cents this week. It’s no wonder, with holders entitled to buy shares at $11.50, the stock stuck around $10.17 and the SPAC facing a March deadline to find and complete a deal. It has already used one of its two allowable extensions.

SPACs that did buy a company are no sure thing, either. Shares of Beachbody Co., the fitness business that went public in a tie-up with a SPAC led by former Walt Disney Co. executives and Shaquille O’Neal, plunged more than 80% from a June debut. That dragged the warrants down more than 90%.

Wall Street veterans aren’t immune, with warrants underwater for a Cantor Fitzgerald SPAC led by the firm’s chief executive, Howard Lutnick. CF Acquisition Corp. VIII is still empty-handed after roughly 11 months; the shares hover near $10 with the warrants trading recently for 52 cents. They had spiked to $1.61 in November. 

This doesn’t mean warrants never work out. One of Lutnick’s earlier efforts, CF Acquisition Corp. VI, is merging with video platform Rumble Inc. The stock soared 48% since April, and the warrants skyrocketed 500%, fueled by reports that Rumble offered to pay controversial podcast host Joe Rogan $100 million to move his show from Spotify.

A Cantor representative declined to comment. Beachbody and Americas Technology didn’t respond to messages; efforts to reach Apotheker and his SPAC weren’t successful. 

Show Me 

The IPOX SPAC Index shed more than one-third of its value over the past year while the De-SPAC Index, which tracks 25 firms that closed deals, is down over 60%.

After losses like those, investors are in a show-me mood. They’re pricing in less speculation and leverage, said Enrique Abeyta, editor of Empire Financial Research. “Warrants now are a play on whether you’re finding a good or a bad stock,” he said.

Fewer people are interested in doing that lately, according to Kristi Marvin, CEO of SPACInsider. “Last year you had sector investors, fundamental investors, momentum investors and those are all gone now,” Marvin said. “If you don’t have those, you’re left with arb investors, and they care more about the share than they do the warrant.” 

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