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>IBC cancellations continue to pile up.&nbsp;Economic uncertainty amid a rising interest rate environment continues to put pressure on announced IBCs. The past week has added two more to the total. Aesther Healthcare (AEHA) terminated its deal with automotive component manufacturer United Gear &amp; Assembly, which was only announced in May 2022, while the collapse of the crypto market has forced Fortune Acquisition Corp. (FRLA) to cancel its IBC agreement with crypto mining operator VCV Power Sigma. These terminations bring the total to 32 so far this year (~$40 billion worth of deals), with 12 IBC cancellations coming in the last two months alone. By historical standards, the number of cancellations is unprecedented and is likely to continue to grow.</li>
<li>New deals are getting larger.&nbsp;It’s not been all one-way traffic on the deal front. Partially offsetting the additions on the liability side of the SPAC land balance sheet have been five new IBC announcements in July to date. The average transaction value per IBC has been on an uptrend since May 2022, but valuations are still below the ‘mega’ deals announced in 2021.</li>
<li>Find me a good de-SPAC!&nbsp;While it may seem that way, with 93% of IBCs de-SPACed since the start of 2021 trading under water, not all de-SPACs are created equal. There is, in fact, a small list of winners. Our SPAC Talk Focus this week highlights the names that have generated positive annualized shareholder returns and have outperformed the broader market and we also consider why these de-SPACs may have been favored in what has been a largely friendless asset class.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/287/435/original/image_53003570931658361749238.png?1658361751" class="editor-image img-responsive" data-smartkarma-image-id="287435"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC HAPPENINGS IN JULY 2022</h2>
<p>Figure 1: IPO Pricings/Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/287/436/original/image_24323360241658361789982.png?1658361791" class="editor-image img-responsive" data-smartkarma-image-id="287436"></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/000/287/437/original/image_65761698151658361812404.png?1658361815" class="editor-image img-responsive" data-smartkarma-image-id="287437"></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/000/287/438/original/image_68018582161658361835346.png?1658361837" class="editor-image img-responsive" data-smartkarma-image-id="287438"></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/000/287/439/original/image_74511989671658361947859.png?1658361950" class="editor-image img-responsive" data-smartkarma-image-id="287439"></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/000/287/440/original/image_30738763481658361970308.png?1658361972" class="editor-image img-responsive" data-smartkarma-image-id="287440"></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/000/287/441/original/image_40190787191658361994537.png?1658361997" class="editor-image img-responsive" data-smartkarma-image-id="287441"></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/000/287/442/original/image_632240121101658362016978.png?1658362020" class="editor-image img-responsive" data-smartkarma-image-id="287442"></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/000/287/443/original/image_690431650111658362041036.png?1658362042" class="editor-image img-responsive" data-smartkarma-image-id="287443"></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/000/287/444/original/image_896807069121658362062683.png?1658362065" class="editor-image img-responsive" data-smartkarma-image-id="287444"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>The Not-So-Secret Sauce of a Successful De-SPAC</h2>
<p>With 93% of the 252 IBCs de-SPACed since the start of 2021 trading underwater, i.e., below the SPAC redemption price of $10, and two-thirds below half that value, de-SPACs exhibiting positive returns since their respective SPAC IPOs are members of a distinguished minority club. We count 17 of them. So, what is their secret sauce?</p>
<p>Before we look for an answer, we have done a little surgery to this small universe of de-SPACs. Of the 17, one was listed this month, so we have excluded it from our list in Figure 10. We have also excluded another six—although they have generated positive absolute annualized shareholder returns, they have nevertheless underperformed the S&amp;P 500 since SPAC listing. That leaves 10 elite de-SPACs on our list. These 10 companies have generated average annualized shareholder returns of 22% since SPAC listing, which translates into an impressive 21% average outperformance relative to the S&amp;P 500.</p>
<p>If we were to measure shareholder returns from the date of de-SPACing, the record of annualized shareholder returns is far less impressive. Yes, the average absolute return is 89%, but this outcome is exaggerated by the performance of Symbotic (SYM), which was de-SPACed in early June 2022. Excluding SYM, average annualized shareholder returns are negative 7%, but in the context of the broader market, this is pretty good as the nine companies have, on average, outperformed the S&amp;P 500 by 7% since de-SPACing. Including SYM, six out of the 10 de-SPACs have outperformed the broader market since de-SPACing. Although it is a short list, there are success stories among de-SPACs.</p>
<p>Figure 10: The Class of Elite De-SPACs</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/287/445/original/image_540608390131658362092567.png?1658362095" class="editor-image img-responsive" data-smartkarma-image-id="287445"></figure>
<div class="content-remarks">
<p>Source: WTR Research, YCharts, Bloomberg</p>
</div>
<p>As for the secret sauce, well it’s not so secret—it’s good old revenue, cash profit, or visible pathway to profit and growth. Referencing the latest consensus revenue and EBITDA estimates for 2022 and 2023, most of these companies are generating or starting to deliver solid and fast-growing revenue and are currently delivering or moving toward profitability in the foreseeable future.</p>
<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 sector 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>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s 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, agents or affiliate 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


IBC cancellations continue to pile up.&nbsp;Economic uncertainty amid a rising interest rate environment continues to put pressure on announced IBCs. The past week has added two more to the total. Aesther Healthcare (AEHA) terminated its deal with automotive component manufacturer United Gear &amp; Assembly, which was only announced in May 2022, while the collapse of the crypto market has forced Fortune Acquisition Corp. (FRLA) to cancel its IBC agreement with crypto mining operator VCV Power Sigma. These terminations bring the total to 32 so far this year (~$40 billion worth of deals), with 12 IBC cancellations coming in the last two months alone. By historical standards, the number of cancellations is unprecedented and is likely to continue to grow.
New deals are getting larger.&nbsp;It’s not been all one-way traffic on the deal front. Partially offsetting the additions on the liability side of the SPAC land balance sheet have been five new IBC announcements in July to date. The average transaction value per IBC has been on an uptrend since May 2022, but valuations are still below the ‘mega’ deals announced in 2021.
Find me a good de-SPAC!&nbsp;While it may seem that way, with 93% of IBCs de-SPACed since the start of 2021 trading under water, not all de-SPACs are created equal. There is, in fact, a small list of winners. Our SPAC Talk Focus this week highlights the names that have generated positive annualized shareholder returns and have outperformed the broader market and we also consider why these de-SPACs may have been favored in what has been a largely friendless asset class.

SPAC STATISTICS


Source: WTR Research

SPAC HAPPENINGS IN JULY 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 Not-So-Secret Sauce of a Successful De-SPAC
With 93% of the 252 IBCs de-SPACed since the start of 2021 trading underwater, i.e., below the SPAC redemption price of $10, and two-thirds below half that value, de-SPACs exhibiting positive returns since their respective SPAC IPOs are members of a distinguished minority club. We count 17 of them. So, what is their secret sauce?
Before we look for an answer, we have done a little surgery to this small universe of de-SPACs. Of the 17, one was listed this month, so we have excluded it from our list in Figure 10. We have also excluded another six—although they have generated positive absolute annualized shareholder returns, they have nevertheless underperformed the S&amp;P 500 since SPAC listing. That leaves 10 elite de-SPACs on our list. These 10 companies have generated average annualized shareholder returns of 22% since SPAC listing, which translates into an impressive 21% average outperformance relative to the S&amp;P 500.
If we were to measure shareholder returns from the date of de-SPACing, the record of annualized shareholder returns is far less impressive. Yes, the average absolute return is 89%, but this outcome is exaggerated by the performance of Symbotic (SYM), which was de-SPACed in early June 2022. Excluding SYM, average annualized shareholder returns are negative 7%, but in the context of the broader market, this is pretty good as the nine companies have, on average, outperformed the S&amp;P 500 by 7% since de-SPACing. Including SYM, six out of the 10 de-SPACs have outperformed the broader market since de-SPACing. Although it is a short list, there are success stories among de-SPACs.
Figure 10: The Class of Elite De-SPACs


Source: WTR Research, YCharts, Bloomberg

As for the secret sauce, well it’s not so secret—it’s good old revenue, cash profit, or visible pathway to profit and growth. Referencing the latest consensus revenue and EBITDA estimates for 2022 and 2023, most of these companies are generating or starting to deliver solid and fast-growing revenue and are currently delivering or moving toward profitability in the foreseeable future.
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 sector 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.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.  The manner of WTR’s 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, agents or affiliate 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: The Not-So-Secret Sauce of a Successful De-SPAC