Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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<h3>KEY HIGHLIGHTS</h3>
<ul>
<li>The SPAC boom’s alter ego.&nbsp;The liquidation surge in 2022 can be described as the reverse mirror of the SPAC boom of 2020/21. Twenty-two more liquidations were completed in the first nine days of December, which together with the six liquidations slated for completion before the end of December, brings the total to 84 for the year. There are still 28 accelerated liquidation votes scheduled between now and December 27 to consider, which we think makes it a racing certainty that by the time we sing Auld Lang Syne and welcome 2023, more than 100 SPACs will have been liquidated in 2022. Liquidated SPACs have thus far returned ~$27 billion to investors, a figure that is double the ~$13 billion cash raised by 83 SPAC IPOs from investors this year. It seems inevitable that more cash will be coming the way of SPAC investors by the time the holiday season begins.</li>
<li>Deals are still getting done and undone.&nbsp;While SPAC liquidations continue to dominate the headlines in SPAC land, deals are still getting done. The first nine days of December have seen nine new IBC deals. As we have been noting, there has been a sharp drop in deal size since the start of the year. There was an outlier among the latest batch, with SPAC AAC’s merger with X-Energy, a developer of small modular nuclear reactors and fuel technology, valued at $2.2 billion. The average deal size of the rest is just $370 million. Three deal cancelations have also been announced this month, the largest being a $9 billion transaction involving crypto group Circle and SPAC CND, led by ex-Barclays Chief Bob Diamond, which will be liquidated next week.</li>
<li>De-SPACs are barely floating. There has been no real change in the de-SPAC environment. Share price values remain crushed and redemption rates remain high, which have kept floats low and, in some cases, exceptionally low. We drill down further in our SPAC Talk Focus this week.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/910/original/image_956524836241670632746514.png?1670632748" class="editor-image img-responsive" data-smartkarma-image-id="314910"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN DECEMBER 2022</h2>
<p>Figure 1: IPO Pricings/Completed Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/911/original/image_58084552251670632796179.png?1670632797" class="editor-image img-responsive" data-smartkarma-image-id="314911"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 2: IBC Announcements/Terminations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/912/original/image_770510106261670632825429.png?1670632827" class="editor-image img-responsive" data-smartkarma-image-id="314912"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/913/original/image_965973286271670632850764.png?1670632852" class="editor-image img-responsive" data-smartkarma-image-id="314913"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Figure 4: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/915/original/image_566908316281670632879949.png?1670632881" class="editor-image img-responsive" data-smartkarma-image-id="314915"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 5: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/916/original/image_581375115291670632902459.png?1670632904" class="editor-image img-responsive" data-smartkarma-image-id="314916"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 6: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/917/original/image_619604659301670632925433.png?1670632927" class="editor-image img-responsive" data-smartkarma-image-id="314917"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/918/original/image_101310023311670632952206.png?1670632953" class="editor-image img-responsive" data-smartkarma-image-id="314918"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 8: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/919/original/image_147221521321670632976669.png?1670632978" class="editor-image img-responsive" data-smartkarma-image-id="314919"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>BP has agreed to acquire de-SPAC Archaea Energy (LFG), a leading renewable natural gas producer for $4.1 billion or $26 per share in an all-cash transaction.</p>
<p>Figure 9: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/920/original/image_244578692331670633030926.png?1670633032" class="editor-image img-responsive" data-smartkarma-image-id="314920"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>De-SPACs Are Barely Floating</h2>
<p>Not much has changed in the de-SPAC world. Share price valuations remain crushed. As the first and currently only traded pure-play de-SPAC ETF in the market, we use the AXS De-SPAC ETF (NASDAQ: DSPC) as a performance proxy for the de-SPAC category. DSPC has lost 71% of its value this year and is trading at its lowest ever level as of December 8, 2022. DSPC has significantly underperformed the broader market as represented by the SPDR S&amp;P 500 ETF (SPY) which is down 16%, as well as the NASDAQ ETF represented by the Invesco QQQ Trust (QQQ), which is down 28%.</p>
<p>Figure 10: De-SPAC Performance</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/314/921/original/image_973711542341670633063791.png?1670633065" class="editor-image img-responsive" data-smartkarma-image-id="314921"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>Based on our database of de-SPACs, which includes companies de-SPACed since the start of 2021, a universe of 293 de-SPACs, the average value per share as of December 8, 2022, is $3.66 per de-SPAC, which is 63% below the SPAC IPO price. For many of these de-SPACs, particularly among the 94 that have been de-SPACed so far in 2022, the redemption prices will have been higher than the SPAC IPO price, suggesting significant losses to public Class A SPAC IPO investors who kept their equity through the de-SPACing process and beyond. Fortunately, there were not many of those investors given the high level of redemptions rates that have occurred ahead of most of the de-SPACings, particularly since the beginning of 2022. The closing prices of the SPACs ahead of de-SPACing averages $10.95, indicating a loss in value of 67%. An overall grim picture indeed for most.</p>
<p>As we have highlighted in previous editions, there are some winning de-SPACs that are trading above $10. As of today, our list carries 18 such names or 6% of our de-SPAC universe. The average return on those names is decent at 31% from SPAC IPO and 15% immediately before de-SPACing. However, those who invested near their highs post de-SPACing are down on average by 37%.</p>
<p>As mentioned above, redemptions by public SPAC investors have been running at a high rate, particularly through this year. Of the 94 de-SPACs completed so far this year, 30% of have seen public investors redeem more than 95% of the public shares. This percentage jumps to 53% for de-SPACs with redemption rates above 90% and about 75% at above 80%. The corollary to high redemptions is a low float and exceptionally low in more than half the 2022 de-SPACs of less than 15%. While free float can improve over time as sponsor and PIPE investors release shares after lock-up periods expire, nevertheless, this raises the question regarding how many de-SPACs are investable by institutional investors given the low floats and leaving aside the most important question of whether they are worth investing in the first place.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

The SPAC boom’s alter ego.&nbsp;The liquidation surge in 2022 can be described as the reverse mirror of the SPAC boom of 2020/21. Twenty-two more liquidations were completed in the first nine days of December, which together with the six liquidations slated for completion before the end of December, brings the total to 84 for the year. There are still 28 accelerated liquidation votes scheduled between now and December 27 to consider, which we think makes it a racing certainty that by the time we sing Auld Lang Syne and welcome 2023, more than 100 SPACs will have been liquidated in 2022. Liquidated SPACs have thus far returned ~$27 billion to investors, a figure that is double the ~$13 billion cash raised by 83 SPAC IPOs from investors this year. It seems inevitable that more cash will be coming the way of SPAC investors by the time the holiday season begins.
Deals are still getting done and undone.&nbsp;While SPAC liquidations continue to dominate the headlines in SPAC land, deals are still getting done. The first nine days of December have seen nine new IBC deals. As we have been noting, there has been a sharp drop in deal size since the start of the year. There was an outlier among the latest batch, with SPAC AAC’s merger with X-Energy, a developer of small modular nuclear reactors and fuel technology, valued at $2.2 billion. The average deal size of the rest is just $370 million. Three deal cancelations have also been announced this month, the largest being a $9 billion transaction involving crypto group Circle and SPAC CND, led by ex-Barclays Chief Bob Diamond, which will be liquidated next week.
De-SPACs are barely floating. There has been no real change in the de-SPAC environment. Share price values remain crushed and redemption rates remain high, which have kept floats low and, in some cases, exceptionally low. We drill down further in our SPAC Talk Focus this week.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN DECEMBER 2022
Figure 1: IPO Pricings/Completed Liquidations


Source: WTR Research

Figure 2: IBC Announcements/Terminations


Source: WTR Research

Figure 3: De-SPACings


Source: WTR Research

SPAC/DE-SPAC RETURNS
Figure 4: Live IBCs (Initial Business Combinations)—Key Stats


Source: WTR Research

Figure 5: Top 5 Live IBCs by Share Price


Source: WTR Research

Figure 6: Bottom 5 Live IBCs by Share Price


Source: WTR Research

Figure 7: De-SPACs—Key Stats


Source: WTR Research

Figure 8: Top 5 De-SPAC Performers by Share Price


Source: WTR Research

BP has agreed to acquire de-SPAC Archaea Energy (LFG), a leading renewable natural gas producer for $4.1 billion or $26 per share in an all-cash transaction.
Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
De-SPACs Are Barely Floating
Not much has changed in the de-SPAC world. Share price valuations remain crushed. As the first and currently only traded pure-play de-SPAC ETF in the market, we use the AXS De-SPAC ETF (NASDAQ: DSPC) as a performance proxy for the de-SPAC category. DSPC has lost 71% of its value this year and is trading at its lowest ever level as of December 8, 2022. DSPC has significantly underperformed the broader market as represented by the SPDR S&amp;P 500 ETF (SPY) which is down 16%, as well as the NASDAQ ETF represented by the Invesco QQQ Trust (QQQ), which is down 28%.
Figure 10: De-SPAC Performance


Source: WTR

Based on our database of de-SPACs, which includes companies de-SPACed since the start of 2021, a universe of 293 de-SPACs, the average value per share as of December 8, 2022, is $3.66 per de-SPAC, which is 63% below the SPAC IPO price. For many of these de-SPACs, particularly among the 94 that have been de-SPACed so far in 2022, the redemption prices will have been higher than the SPAC IPO price, suggesting significant losses to public Class A SPAC IPO investors who kept their equity through the de-SPACing process and beyond. Fortunately, there were not many of those investors given the high level of redemptions rates that have occurred ahead of most of the de-SPACings, particularly since the beginning of 2022. The closing prices of the SPACs ahead of de-SPACing averages $10.95, indicating a loss in value of 67%. An overall grim picture indeed for most.
As we have highlighted in previous editions, there are some winning de-SPACs that are trading above $10. As of today, our list carries 18 such names or 6% of our de-SPAC universe. The average return on those names is decent at 31% from SPAC IPO and 15% immediately before de-SPACing. However, those who invested near their highs post de-SPACing are down on average by 37%.
As mentioned above, redemptions by public SPAC investors have been running at a high rate, particularly through this year. Of the 94 de-SPACs completed so far this year, 30% of have seen public investors redeem more than 95% of the public shares. This percentage jumps to 53% for de-SPACs with redemption rates above 90% and about 75% at above 80%. The corollary to high redemptions is a low float and exceptionally low in more than half the 2022 de-SPACs of less than 15%. While free float can improve over time as sponsor and PIPE investors release shares after lock-up periods expire, nevertheless, this raises the question regarding how many de-SPACs are investable by institutional investors given the low floats and leaving aside the most important question of whether they are worth investing in the first place.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: De-SPACs Are Barely Floating