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>The haves....&nbsp;The momentum of new deals continues to flow strongly. Ten new IBC deals have been announced so far in October, with a combined transaction value of $8 billion at an average of ~$800 million per IBC, which is in line with the YTD average, but a pick-up on the past several months. The average deal size for the month was helped by Horizon Acquisition Corp’s (HZON) proposed $3.1 billion combination with private jet company Flexjet. This is one of the larger deals out of the 134 new deals announced in 2022.</li>
<li>...And the have nots.&nbsp;Since last week’s edition, we have had four additional liquidation announcements to report. This brings the total number of trusts to be liquidated in October to 13, which makes up 36% of the year’s total of 36 to date. So far, four have been completed. We have also had five SPACs filing proxies this month for early liquidation, including Bill Foley’s Austerlitz I (AUS) and Austerlitz II (ASZ), Orion Acquisition Corp. (OHPA), and two Fortress Investment Group SPACs: Fortress Value Acquisition Corp. III (FVT) and IV (FVIV). All of these have scheduled merger deadlines in 1Q23 and cite the high redemptions SPACs are experiencing with extension votes, the pending 1% excise tax, which takes effect in 2023, and the improbability of consummating IBCs before their merger deadlines as reasons for their proxies. The acceleration in liquidations is also helping to accelerate the correction in the imbalance of the SPAC market, which is also seeing a dwindling pipeline of prospective SPAC IPOs.</li>
<li>More IBC deals under threat?&nbsp;It’s one thing to announce deals, it seems to be quite another thing to close deals, especially in the current environment. So far this year, we have already reported 46 IBC deals that have been canceled, a figure that it is beyond anything we have seen historically in SPAC land. We can say with high confidence that the number of IBC deal cancellations will most likely not stop at 46 by the year-end. This week’s SPAC Talk Focus considers potential deal cancelation candidates among the current crop of 129 live deals.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/303/013/original/image_10763103221665706320040.png?1665706325" class="editor-image img-responsive" data-smartkarma-image-id="303013"></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/000/303/014/original/image_3868451231665706347403.png?1665706348" class="editor-image img-responsive" data-smartkarma-image-id="303014"></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/000/303/015/original/image_25113145341665706371489.png?1665706372" class="editor-image img-responsive" data-smartkarma-image-id="303015"></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/000/303/016/original/image_58473025051665706395444.png?1665706396" class="editor-image img-responsive" data-smartkarma-image-id="303016"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h3>SPAC/DE-SPAC RETURNS</h3>
<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/000/303/017/original/image_4106865761665706431470.png?1665706433" class="editor-image img-responsive" data-smartkarma-image-id="303017"></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/000/303/018/original/image_61295426071665706456752.png?1665706458" class="editor-image img-responsive" data-smartkarma-image-id="303018"></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/000/303/019/original/image_27533016381665706480604.png?1665706482" class="editor-image img-responsive" data-smartkarma-image-id="303019"></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/000/303/020/original/image_85068726691665706519693.png?1665706521" class="editor-image img-responsive" data-smartkarma-image-id="303020"></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/000/303/021/original/image_794675051101665706544973.png?1665706547" class="editor-image img-responsive" data-smartkarma-image-id="303021"></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/000/303/022/original/image_828679198111665706571012.png?1665706573" class="editor-image img-responsive" data-smartkarma-image-id="303022"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>Which IBC Deals Could Be Under Threat?</h2>
<p>SPAC IBC deal cancelations in 2022 currently numbers 46, which is way above any other year gone by. We will confidently say that this number will certainly be higher come the end of the year.</p>
<p>Figure 10: SPAC IBC Deal Cancelations in 2022 – The Roll Call So Far</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/303/023/original/image_263675971121665706603234.png?1665706606" class="editor-image img-responsive" data-smartkarma-image-id="303023"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>There may be different reasons why any particular deal falls apart. These could be company or sector specific, but the most common reason given is&nbsp;“unfavorable market conditions”.&nbsp;This is another way of saying that valuations agreed to at the time merger deal was struck are too high in the prevailing conditions.</p>
<p>So, looking ahead, which live deals might be considered under threat in the current environment?</p>
<p>Perhaps a good place to start for a first sweep would be the deals that are taking longer to consummate. More than 60% of the deal cancelations that have occurred this year involve deals announced more than six months prior. The caveat here is that we have seen a few deals being canceled only two or three months after the announcement (see Figure 10). We have also seen a few recent de-SPACings that were completed more than a year after they had entered into definitive merger agreements. However, this tends to be the exception rather than the rule. The average timeline between announcement and consummation for de-SPACings this year is less than seven months.</p>
<p>Of the current crop of 129 live IBC deals that have yet to be consummated, 20 were announced 10 months prior or longer. These are highlighted in Figure 11.</p>
<p>Figure 11: Potential Deal Cancelation Candidates?</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/303/024/original/image_246447284131665706646383.png?1665706648" class="editor-image img-responsive" data-smartkarma-image-id="303024"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>The list includes DWAC’s prospective IBC with Trump Media &amp; Technology. The SPAC has thus far been unsuccessful in garnering the required 65% of shareholder votes needed to approve the year-long extension it seeks, forcing it to adjourn the shareholder meeting four times to date. The fifth attempt to get the necessary votes is scheduled for November 3, 2022, and there is certainly no guarantee that the SPAC will achieve a different outcome. In the meantime, the SPAC has unilaterally extended its merger deadline to December 8, 2022, at a $2.875 million cost to the sponsor. This is the first of two three-month extensions available to the SPAC. Should the sponsor elect to exercise the second available extension option, it will cost the sponsor an additional $2.875 million. We would rate the risk of deal cancelation high, not least because of the scrutiny it is facing from the SEC and FINRA as well as some lawmakers.</p>
<p>The list also includes nine deals involving financial companies, mainly comprising fintech and crypto-based business models, which have borne the brunt of the market sell-off. The mean valuation of the 20 companies in our list is $1.6 billion, which is twice as much as the average transaction value of all the deals agreed to this year. SPAC land’s oldest announced IBC deal yet to complete (17 months) between SPAC Aurora Acquisition Corp. (AURC) and digital homebuying marketplace company Better is also currently the largest valued deal at $6.7 billion, struck at around the peak of the SPAC boom in 2021. This year has been a very challenging year for Better, which has significantly underperformed the expectations set at the time of the deal announcement. Despite having since undergone several tweaks to the merger agreement, as well as a management shake-up, the valuation, perhaps surprisingly, remains unadjusted. For now, the transactional parties remain committed to completing the combination and have extended the deal’s outside date to March 8, 2023. However, with the US housing market cooling amid soaring interest rates and with Better embroiled in legal action filed by a former executive claiming the company misrepresented its business and prospects to secure the Aurora deal, there may be further troubles ahead that could yet derail this deal.</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 haves....&nbsp;The momentum of new deals continues to flow strongly. Ten new IBC deals have been announced so far in October, with a combined transaction value of $8 billion at an average of ~$800 million per IBC, which is in line with the YTD average, but a pick-up on the past several months. The average deal size for the month was helped by Horizon Acquisition Corp’s (HZON) proposed $3.1 billion combination with private jet company Flexjet. This is one of the larger deals out of the 134 new deals announced in 2022.
...And the have nots.&nbsp;Since last week’s edition, we have had four additional liquidation announcements to report. This brings the total number of trusts to be liquidated in October to 13, which makes up 36% of the year’s total of 36 to date. So far, four have been completed. We have also had five SPACs filing proxies this month for early liquidation, including Bill Foley’s Austerlitz I (AUS) and Austerlitz II (ASZ), Orion Acquisition Corp. (OHPA), and two Fortress Investment Group SPACs: Fortress Value Acquisition Corp. III (FVT) and IV (FVIV). All of these have scheduled merger deadlines in 1Q23 and cite the high redemptions SPACs are experiencing with extension votes, the pending 1% excise tax, which takes effect in 2023, and the improbability of consummating IBCs before their merger deadlines as reasons for their proxies. The acceleration in liquidations is also helping to accelerate the correction in the imbalance of the SPAC market, which is also seeing a dwindling pipeline of prospective SPAC IPOs.
More IBC deals under threat?&nbsp;It’s one thing to announce deals, it seems to be quite another thing to close deals, especially in the current environment. So far this year, we have already reported 46 IBC deals that have been canceled, a figure that it is beyond anything we have seen historically in SPAC land. We can say with high confidence that the number of IBC deal cancellations will most likely not stop at 46 by the year-end. This week’s SPAC Talk Focus considers potential deal cancelation candidates among the current crop of 129 live deals.

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

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


Source: WTR Research

SPAC TALK FOCUS
Which IBC Deals Could Be Under Threat?
SPAC IBC deal cancelations in 2022 currently numbers 46, which is way above any other year gone by. We will confidently say that this number will certainly be higher come the end of the year.
Figure 10: SPAC IBC Deal Cancelations in 2022 – The Roll Call So Far


Source: WTR

There may be different reasons why any particular deal falls apart. These could be company or sector specific, but the most common reason given is&nbsp;“unfavorable market conditions”.&nbsp;This is another way of saying that valuations agreed to at the time merger deal was struck are too high in the prevailing conditions.
So, looking ahead, which live deals might be considered under threat in the current environment?
Perhaps a good place to start for a first sweep would be the deals that are taking longer to consummate. More than 60% of the deal cancelations that have occurred this year involve deals announced more than six months prior. The caveat here is that we have seen a few deals being canceled only two or three months after the announcement (see Figure 10). We have also seen a few recent de-SPACings that were completed more than a year after they had entered into definitive merger agreements. However, this tends to be the exception rather than the rule. The average timeline between announcement and consummation for de-SPACings this year is less than seven months.
Of the current crop of 129 live IBC deals that have yet to be consummated, 20 were announced 10 months prior or longer. These are highlighted in Figure 11.
Figure 11: Potential Deal Cancelation Candidates?


Source: WTR

The list includes DWAC’s prospective IBC with Trump Media &amp; Technology. The SPAC has thus far been unsuccessful in garnering the required 65% of shareholder votes needed to approve the year-long extension it seeks, forcing it to adjourn the shareholder meeting four times to date. The fifth attempt to get the necessary votes is scheduled for November 3, 2022, and there is certainly no guarantee that the SPAC will achieve a different outcome. In the meantime, the SPAC has unilaterally extended its merger deadline to December 8, 2022, at a $2.875 million cost to the sponsor. This is the first of two three-month extensions available to the SPAC. Should the sponsor elect to exercise the second available extension option, it will cost the sponsor an additional $2.875 million. We would rate the risk of deal cancelation high, not least because of the scrutiny it is facing from the SEC and FINRA as well as some lawmakers.
The list also includes nine deals involving financial companies, mainly comprising fintech and crypto-based business models, which have borne the brunt of the market sell-off. The mean valuation of the 20 companies in our list is $1.6 billion, which is twice as much as the average transaction value of all the deals agreed to this year. SPAC land’s oldest announced IBC deal yet to complete (17 months) between SPAC Aurora Acquisition Corp. (AURC) and digital homebuying marketplace company Better is also currently the largest valued deal at $6.7 billion, struck at around the peak of the SPAC boom in 2021. This year has been a very challenging year for Better, which has significantly underperformed the expectations set at the time of the deal announcement. Despite having since undergone several tweaks to the merger agreement, as well as a management shake-up, the valuation, perhaps surprisingly, remains unadjusted. For now, the transactional parties remain committed to completing the combination and have extended the deal’s outside date to March 8, 2023. However, with the US housing market cooling amid soaring interest rates and with Better embroiled in legal action filed by a former executive claiming the company misrepresented its business and prospects to secure the Aurora deal, there may be further troubles ahead that could yet derail this deal.
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: Which IBC Deals Could Be Under Threat?