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)

<h2>KEY HIGHLIGHTS</h2>
<div></div>
<ul>
<li>Glorious August.&nbsp;By 2022 standards, August has started on fire in SPAC land. The first four days alone have seen seven new IBCs announced, with a total value of $5.3 billion versus 11 announced deals worth $8 billion for July. Add to that, four de-SPACings were completed involving three technology companies and one healthcare de-SPAC, with an aggregate deal value worth $3.7 billion. We can also report two SPAC IPO pricings, which have been rare in recent times. On August 4, automotive-focused SPAC Mobiv Acquisition Corp. (NASDAQ: MOBV) raised $87 million from its IPO. This is the first SPAC IPO to be completed since June 24 and was quickly followed by technology-focused Pono Capital Two (NASDAQ: PTWOU) on August 5, which raised $100 million.</li>
<li>But it’s not all smelling like roses in SPAC land.&nbsp;As a warning against being lulled into a false sense of confidence that we may be hitting the bottom in SPAC land, redemptions remain high (~90%), while the number of liquidations continues to mount. Three more SPACs have announced they will return cash from their trust funds to shareholders later this month. This brings the total to 15 liquidations YTD, a number that is expected to rise before 2022 ends. Although no IBC terminations have been added to the record 33 that have occurred so far this year, stock and crypto trading platform TradeStation has served notice to SPAC Quantum FinTech Acquisition Corp. (NYSE: QFTA) it is setting to call off their proposed merger, setting up the prospect of a court battle reminiscent of the ongoing legal battle between Dune Acquisition Corp. (NASDAQ: DUNE) and its financial trading platform TradeZero.</li>
<li>We’re alright Jack, say the arbs.&nbsp;Our SPAC Talk Focus returns to the topic of SPAC arbitrage, which continues to be the most lucrative investment strategy in SPAC land, even more attractive as it is a low-risk strategy akin to buying a short-maturing US treasury bill at a discount. SPAC yields indicate that this is still a money-making business for arbs.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/290/413/original/image_99170151691659742526989.png?1659742529" class="editor-image img-responsive" data-smartkarma-image-id="290413"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN AUGUST 2022</h2>
<p>Figure 1: IPO Pricings/Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/290/414/original/image_375022405101659742553097.png?1659742554" class="editor-image img-responsive" data-smartkarma-image-id="290414"></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/000/290/415/original/image_766469282111659742576215.png?1659742577" class="editor-image img-responsive" data-smartkarma-image-id="290415"></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/000/290/416/original/image_413838363121659742597317.png?1659742599" class="editor-image img-responsive" data-smartkarma-image-id="290416"></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/000/290/417/original/image_477255206131659742623437.png?1659742625" class="editor-image img-responsive" data-smartkarma-image-id="290417"></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/000/290/418/original/image_495146325141659742643629.png?1659742645" class="editor-image img-responsive" data-smartkarma-image-id="290418"></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/000/290/419/original/image_203854941151659742676603.png?1659742679" class="editor-image img-responsive" data-smartkarma-image-id="290419"></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/000/290/420/original/image_792953670161659742697546.png?1659742699" class="editor-image img-responsive" data-smartkarma-image-id="290420"></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/000/290/421/original/image_393501592171659742727981.png?1659742730" class="editor-image img-responsive" data-smartkarma-image-id="290421"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<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/000/290/422/original/image_108126963181659742750674.png?1659742753" class="editor-image img-responsive" data-smartkarma-image-id="290422"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>The Bear Market and SPACs, and Why Some Investors Don’t Mind</h2>
<p>It’s a tale of two markets. While the de-SPAC market has crumbled over the past 12 months (although we did see a sharp bounce in July 2022), pre-merger SPACs ETFs have performed pretty much in line with the wider market as represented by the SPY (S&amp;P 500) ETF and far better than the technology-oriented QQQ (NASDAQ) ETF. Through 2022, which has been characterized by an extended period of high market volatility, pre-merger SPAC investors have been protected by their low beta exposure.</p>
<p>Figure 10: Various SPAC ETF Performances</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/290/423/original/image_375956907191659742780144.png?1659742782" class="editor-image img-responsive" data-smartkarma-image-id="290423"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>There is a bear market in SPACs, which is most emphatically reflected by an IPO market that has dried up because of the oversupply of SPACs searching for a limited pool of viable deals. Given the economic headwinds threatening the global economy, namely the twin evils of inflation and recession, this limited pool appears to be getting smaller—we’ve already seen a record 35 IBC cancellations so far this year, with that very likely to grow before 2022 is out. The number of targetless SPACs has been steadily falling, but, with 572 live SPACs still searching, the decline is seemingly not fast enough. The inevitable consequence is to expect more SPAC liquidations on top of the 14 this year that have already occurred or are about to be completed in the coming weeks. All this amounts to a perfect storm in the positive sense for SPAC investors and arbs.</p>
<p>Even if a SPAC finds a target that ends in a de-SPACing, SPAC holders can always elect to redeem trust value with the added benefit of a shorter holding period and higher IRR ahead of a de-SPACing. Moreover, there is potentially easy money to be made by the arbs as the capital raised by SPACs is held in trust and invested in short-term US Treasury Bills, so buying a SPAC trading at a discount to trust value is like buying a Treasury Bill at a discount with the certainty of being paid full face value on redemption. In Figure 11, we highlight prevailing average yields (excluding the impact of warrants) generated by SPACs with and without IBCs, indicating that there is still money on the table for arbs.</p>
<p>Figure 11: Comparative Yields—SPACs vs. US Treasuries</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/290/424/original/image_142560288201659742806757.png?1659742809" class="editor-image img-responsive" data-smartkarma-image-id="290424"></figure>
<div class="content-remarks">
<p>Source: WTR, SPAC Informer</p>
</div>
<p>In Figure 12, we set out the leading SPAC yields. For full disclosure, the table is not a list of recommendations, but is simply for information purposes.</p>
<p>Figure 12: Leading SPAC Yields</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/290/425/original/image_652174220211659742833301.png?1659742835" class="editor-image img-responsive" data-smartkarma-image-id="290425"></figure>
<div class="content-remarks">
<p>Source: WTR, SPAC Informer</p>
</div>
<h2>DISCLOSURES</h2>
<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


Glorious August.&nbsp;By 2022 standards, August has started on fire in SPAC land. The first four days alone have seen seven new IBCs announced, with a total value of $5.3 billion versus 11 announced deals worth $8 billion for July. Add to that, four de-SPACings were completed involving three technology companies and one healthcare de-SPAC, with an aggregate deal value worth $3.7 billion. We can also report two SPAC IPO pricings, which have been rare in recent times. On August 4, automotive-focused SPAC Mobiv Acquisition Corp. (NASDAQ: MOBV) raised $87 million from its IPO. This is the first SPAC IPO to be completed since June 24 and was quickly followed by technology-focused Pono Capital Two (NASDAQ: PTWOU) on August 5, which raised $100 million.
But it’s not all smelling like roses in SPAC land.&nbsp;As a warning against being lulled into a false sense of confidence that we may be hitting the bottom in SPAC land, redemptions remain high (~90%), while the number of liquidations continues to mount. Three more SPACs have announced they will return cash from their trust funds to shareholders later this month. This brings the total to 15 liquidations YTD, a number that is expected to rise before 2022 ends. Although no IBC terminations have been added to the record 33 that have occurred so far this year, stock and crypto trading platform TradeStation has served notice to SPAC Quantum FinTech Acquisition Corp. (NYSE: QFTA) it is setting to call off their proposed merger, setting up the prospect of a court battle reminiscent of the ongoing legal battle between Dune Acquisition Corp. (NASDAQ: DUNE) and its financial trading platform TradeZero.
We’re alright Jack, say the arbs.&nbsp;Our SPAC Talk Focus returns to the topic of SPAC arbitrage, which continues to be the most lucrative investment strategy in SPAC land, even more attractive as it is a low-risk strategy akin to buying a short-maturing US treasury bill at a discount. SPAC yields indicate that this is still a money-making business for arbs.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN AUGUST 2022
Figure 1: IPO Pricings/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

Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
The Bear Market and SPACs, and Why Some Investors Don’t Mind
It’s a tale of two markets. While the de-SPAC market has crumbled over the past 12 months (although we did see a sharp bounce in July 2022), pre-merger SPACs ETFs have performed pretty much in line with the wider market as represented by the SPY (S&amp;P 500) ETF and far better than the technology-oriented QQQ (NASDAQ) ETF. Through 2022, which has been characterized by an extended period of high market volatility, pre-merger SPAC investors have been protected by their low beta exposure.
Figure 10: Various SPAC ETF Performances


Source: WTR

There is a bear market in SPACs, which is most emphatically reflected by an IPO market that has dried up because of the oversupply of SPACs searching for a limited pool of viable deals. Given the economic headwinds threatening the global economy, namely the twin evils of inflation and recession, this limited pool appears to be getting smaller—we’ve already seen a record 35 IBC cancellations so far this year, with that very likely to grow before 2022 is out. The number of targetless SPACs has been steadily falling, but, with 572 live SPACs still searching, the decline is seemingly not fast enough. The inevitable consequence is to expect more SPAC liquidations on top of the 14 this year that have already occurred or are about to be completed in the coming weeks. All this amounts to a perfect storm in the positive sense for SPAC investors and arbs.
Even if a SPAC finds a target that ends in a de-SPACing, SPAC holders can always elect to redeem trust value with the added benefit of a shorter holding period and higher IRR ahead of a de-SPACing. Moreover, there is potentially easy money to be made by the arbs as the capital raised by SPACs is held in trust and invested in short-term US Treasury Bills, so buying a SPAC trading at a discount to trust value is like buying a Treasury Bill at a discount with the certainty of being paid full face value on redemption. In Figure 11, we highlight prevailing average yields (excluding the impact of warrants) generated by SPACs with and without IBCs, indicating that there is still money on the table for arbs.
Figure 11: Comparative Yields—SPACs vs. US Treasuries


Source: WTR, SPAC Informer

In Figure 12, we set out the leading SPAC yields. For full disclosure, the table is not a list of recommendations, but is simply for information purposes.
Figure 12: Leading SPAC Yields


Source: WTR, SPAC Informer

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: SPAC Arbitrage Is the Best Game in Town