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

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h3>KEY HIGHLIGHTS</h3>
<ul>
<li>Do or die!&nbsp;We can confirm that as we approach the end of the month, October will be the best month of 2022 so far in terms of deal flow. The count stands at 24 new initial business combination (IBC) announcements. One of these new deals involves emerging Chinese EV automaker Chijet Motor Company, which is making a second attempt to merge with a SPAC. In July, Chijet struck a deal with Deep Medicine Acquisition Corp. (DMAQ) at an enterprise value of $2.55 billion but was promptly dumped by the SPAC in September. Chijet did not take long to find another merger partner, SPAC Jupiter Wellness Acquisition Corp. (JWAC), but at the lower valuation of $1.6 billion, with the potential for a further reduction. SPAC Talk Focus this week conjectures why there has been a surge in deal flow and liquidations of late, which suggests an air of desperation and despair.</li>
<li>Orlando’s SPAC world may be imploding?&nbsp;Speaking of liquidations, the count is up to 18 in October, 17 of which have been completed. Among them is Patrick Orlando’s SPAC Benessere Capital Acquisition Corp. (BENE), which recently terminated its deal with hydrogen fuel technology company eCombustible. Orlando liquidated his first SPAC, Yunhong International, last year. This may not be the end for Orlando, as his best-known SPAC, Digital World Acquisition Corp. (DWAC), is struggling to close its IBC with former President Trump’s social media platform. A fifth attempt to get DWAC shareholders to approve an extension of its merger deadline to September 8, 2023, will be made next week (November 3).</li>
<li>Other SPAC news.&nbsp;The SPAC IPO drought continues, with only four priced so far this month, in line with the number in each of the preceding two months. In the meantime, the pipeline of pending IPOs continues to thin with only 96 live S-1s as of writing. At the other end of the SPAC universe, we have seen five de-SPACings completed, the largest being lithium battery manufacturer Dragonfly Energy Holding Corp. (DFLI), which was initially valued at $1.3 billion.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/306/220/original/image_75511793321667004798801.png?1667004801" class="editor-image img-responsive" data-smartkarma-image-id="306220"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN OCTOBER 2022</h2>
<p>Figure 1: IPO Pricings/Completed Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/306/221/original/image_16757889631667004829548.png?1667004831" class="editor-image img-responsive" data-smartkarma-image-id="306221"></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/000/306/222/original/image_18552074041667004861453.png?1667004863" class="editor-image img-responsive" data-smartkarma-image-id="306222"></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/000/306/223/original/image_14751578851667004927802.png?1667004929" class="editor-image img-responsive" data-smartkarma-image-id="306223"></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/000/306/224/original/image_91867493161667004967338.png?1667004969" class="editor-image img-responsive" data-smartkarma-image-id="306224"></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/000/306/225/original/image_21323186971667005011224.png?1667005012" class="editor-image img-responsive" data-smartkarma-image-id="306225"></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/000/306/226/original/image_15669228381667005068874.png?1667005070" class="editor-image img-responsive" data-smartkarma-image-id="306226"></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/000/306/227/original/image_30002895891667005113080.png?1667005115" class="editor-image img-responsive" data-smartkarma-image-id="306227"></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/000/306/228/original/image_626864763101667005179424.png?1667005181" class="editor-image img-responsive" data-smartkarma-image-id="306228"></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/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/000/306/229/original/image_134578085111667005283053.png?1667005284" class="editor-image img-responsive" data-smartkarma-image-id="306229"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>Desperation and Despair</h2>
<p>October has turned out to be the best month of the year in terms of deal flow. With a few more days of the month left, 24 new IBCs have been announced so far. At the same time, October is the month with the highest number of SPAC liquidations on record, with the current monthly count at 18 or 44% of the YTD total of 42 SPACs that have completed or set a date for liquidation. Although these are starkly contrasting SPAC statistics, this is no coincidence as they share a common theme—the time pressure to do a deal or liquidate.</p>
<p>Following the 2020 and 2021 SPAC IPO boom, many SPACs are now facing make-or-break points of their life cycles. These SPACs do have the option to extend, but that is proving too expensive an option for 42 SPACs this year that have elected to liquidate. Since August, five SPACs have canceled scheduled extension votes to liquidate instead. There is also a list of SPACs with more distant deadlines that have filed proxies for early liquidation. There are currently about 20 SPACs that have either scheduled a vote date or indicated that they intend to liquidate early. As of writing, 22% of the 516 live SPACs searching for targets have deadlines coming up in less than three months and 70% in less than six months. The chances are that this list of SPACs will continue to grow.</p>
<p>Figure 10: Make-or-Break Time for SPACs Fast Approaching</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/306/230/original/image_678222439121667005347626.png?1667005348" class="editor-image img-responsive" data-smartkarma-image-id="306230"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>New IBC announcements have noticeably picked up from August. There have been 61 announcements since the start of August out of a total of 148 since the start of the year, representing more than 40% of the YTD’s total.</p>
<p>Figure 11: Deal Flow Picking Up Momentum</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/306/231/original/image_497567169131667005378674.png?1667005380" class="editor-image img-responsive" data-smartkarma-image-id="306231"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>It is interesting to note that almost 40% of the SPACs that entered into merger agreements over the past three months announced them within three months of their deadlines, a percentage that rises to ~60% for those within four months. Although pure conjecture on our part, the large number of deals involving SPACs with fast-approaching deadlines raises questions about the quality of those deals. In fact, we have several examples of this year’s deals that were terminated within just a few months of their announcement, at the behest of either the SPAC or the target. Another interesting note is that some of these deals are in sectors that are not the original focus of the SPAC.</p>
<p>Figure 12: Early Deal Remorse</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/306/232/original/image_825965882141667005409252.png?1667005411" class="editor-image img-responsive" data-smartkarma-image-id="306232"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>While there may be an air of desperation among SPACs to announce deals, it works both ways. There are many private capital–hungry companies yearning to come into the public domain for them to accept much lower valuations than were prevalent during the peak of the SPAC boom in early 2021 when money was seemingly no object. Last year, the average IBC valuation was $2.3 billion, peaking at $3.4 billion in July 2021. The average deal value has dropped by two-thirds to $786 million in 2022 so far and has declined further to $660 million for deals announced since the start of August.</p>
<p>Figure 13: Plummeting Deal Values</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/306/233/original/image_172941506151667005483314.png?1667005484" class="editor-image img-responsive" data-smartkarma-image-id="306233"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>While Figure 13 and the numbers quoted above speak for themselves, perhaps nothing better epitomizes the valuation crunch for emerging private companies than the following case. In July, SPAC Deep Medicine Corp. (DMAQ), somewhat curiously for a healthcare-focused SPAC, entered into a merger agreement with emerging Chinese EV automaker Chijet Motor Company, valuing the IBC at an enterprise value of $2.55 billion, one of the larger deals announced this year. In September, DMAQ terminated the IBC after due diligence. On October 26, Chijet announced that it had entered into a new merger agreement with another healthcare-focused SPAC, Jupiter Wellness Acquisition Corp. (JWAC), but with a substantially lower valuation of $1.6 billion, which could be reduced by a further $674 million after the closing of the transaction should Chijet fail to achieve certain financial performance or stock price metrics.</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

Do or die!&nbsp;We can confirm that as we approach the end of the month, October will be the best month of 2022 so far in terms of deal flow. The count stands at 24 new initial business combination (IBC) announcements. One of these new deals involves emerging Chinese EV automaker Chijet Motor Company, which is making a second attempt to merge with a SPAC. In July, Chijet struck a deal with Deep Medicine Acquisition Corp. (DMAQ) at an enterprise value of $2.55 billion but was promptly dumped by the SPAC in September. Chijet did not take long to find another merger partner, SPAC Jupiter Wellness Acquisition Corp. (JWAC), but at the lower valuation of $1.6 billion, with the potential for a further reduction. SPAC Talk Focus this week conjectures why there has been a surge in deal flow and liquidations of late, which suggests an air of desperation and despair.
Orlando’s SPAC world may be imploding?&nbsp;Speaking of liquidations, the count is up to 18 in October, 17 of which have been completed. Among them is Patrick Orlando’s SPAC Benessere Capital Acquisition Corp. (BENE), which recently terminated its deal with hydrogen fuel technology company eCombustible. Orlando liquidated his first SPAC, Yunhong International, last year. This may not be the end for Orlando, as his best-known SPAC, Digital World Acquisition Corp. (DWAC), is struggling to close its IBC with former President Trump’s social media platform. A fifth attempt to get DWAC shareholders to approve an extension of its merger deadline to September 8, 2023, will be made next week (November 3).
Other SPAC news.&nbsp;The SPAC IPO drought continues, with only four priced so far this month, in line with the number in each of the preceding two months. In the meantime, the pipeline of pending IPOs continues to thin with only 96 live S-1s as of writing. At the other end of the SPAC universe, we have seen five de-SPACings completed, the largest being lithium battery manufacturer Dragonfly Energy Holding Corp. (DFLI), which was initially valued at $1.3 billion.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN OCTOBER 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/share in an all-cash transaction.
Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
Desperation and Despair
October has turned out to be the best month of the year in terms of deal flow. With a few more days of the month left, 24 new IBCs have been announced so far. At the same time, October is the month with the highest number of SPAC liquidations on record, with the current monthly count at 18 or 44% of the YTD total of 42 SPACs that have completed or set a date for liquidation. Although these are starkly contrasting SPAC statistics, this is no coincidence as they share a common theme—the time pressure to do a deal or liquidate.
Following the 2020 and 2021 SPAC IPO boom, many SPACs are now facing make-or-break points of their life cycles. These SPACs do have the option to extend, but that is proving too expensive an option for 42 SPACs this year that have elected to liquidate. Since August, five SPACs have canceled scheduled extension votes to liquidate instead. There is also a list of SPACs with more distant deadlines that have filed proxies for early liquidation. There are currently about 20 SPACs that have either scheduled a vote date or indicated that they intend to liquidate early. As of writing, 22% of the 516 live SPACs searching for targets have deadlines coming up in less than three months and 70% in less than six months. The chances are that this list of SPACs will continue to grow.
Figure 10: Make-or-Break Time for SPACs Fast Approaching


Source: WTR

New IBC announcements have noticeably picked up from August. There have been 61 announcements since the start of August out of a total of 148 since the start of the year, representing more than 40% of the YTD’s total.
Figure 11: Deal Flow Picking Up Momentum


Source: WTR

It is interesting to note that almost 40% of the SPACs that entered into merger agreements over the past three months announced them within three months of their deadlines, a percentage that rises to ~60% for those within four months. Although pure conjecture on our part, the large number of deals involving SPACs with fast-approaching deadlines raises questions about the quality of those deals. In fact, we have several examples of this year’s deals that were terminated within just a few months of their announcement, at the behest of either the SPAC or the target. Another interesting note is that some of these deals are in sectors that are not the original focus of the SPAC.
Figure 12: Early Deal Remorse


Source: WTR

While there may be an air of desperation among SPACs to announce deals, it works both ways. There are many private capital–hungry companies yearning to come into the public domain for them to accept much lower valuations than were prevalent during the peak of the SPAC boom in early 2021 when money was seemingly no object. Last year, the average IBC valuation was $2.3 billion, peaking at $3.4 billion in July 2021. The average deal value has dropped by two-thirds to $786 million in 2022 so far and has declined further to $660 million for deals announced since the start of August.
Figure 13: Plummeting Deal Values


Source: WTR

While Figure 13 and the numbers quoted above speak for themselves, perhaps nothing better epitomizes the valuation crunch for emerging private companies than the following case. In July, SPAC Deep Medicine Corp. (DMAQ), somewhat curiously for a healthcare-focused SPAC, entered into a merger agreement with emerging Chinese EV automaker Chijet Motor Company, valuing the IBC at an enterprise value of $2.55 billion, one of the larger deals announced this year. In September, DMAQ terminated the IBC after due diligence. On October 26, Chijet announced that it had entered into a new merger agreement with another healthcare-focused SPAC, Jupiter Wellness Acquisition Corp. (JWAC), but with a substantially lower valuation of $1.6 billion, which could be reduced by a further $674 million after the closing of the transaction should Chijet fail to achieve certain financial performance or stock price metrics.
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: Desperation and Despair