What to do when SPACs (e.g . GRAF and SHLL) offer cash redemptions prior to their IPO’s?
by bunion132 | September 24, 2020 11:53 am
Earlier this week, GRAF (the SPAC for Velodyne Lidar) and SHLL (the SPAC for Hyllion) both offered cash redemptions in lieu of holding shares for the companies they plan to merge with. GRAF offered only $10.24/share, or about half of the current price. SHLL did even worse, offering $10.16/share, or roughly one-fourth of the current price.
My brokerage house either could not or is not allowed to advise on what action to take regarding the huge reduction in share price and could only accept my refusal to participate in the redemption. So I’m hoping Gumshoers are willing to share their (truthful) opinions on what they think is really happening with these SPACs[1] or have answers to the following questions:
1) Why would GRAF & SHLL dumb-down the price that low?
2) Is this an indication that their merger agreements are not proceeding well prior to their IPO[2]’s?
3) Both stocks continue to decline. Is it better to cut the losses now or wait for the IPO’s (if they happen)?
- SPACs: https://www.stockgumshoe.com/tag/spacs/
- IPO: https://www.stockgumshoe.com/tag/ipo/
Source URL: https://www.stockgumshoe.com/2020/09/microblog-what-to-do-when-spacs-e-g-graf-and-shll-offer-cash-redemptions-prior-to-their-ipos/
Hi bunion… good question, but there’s a feature of SPACs that means these particular redemption offers don’t really mean anything.
A SPAC, or blank check company, raises capital from investors at $10 a share in its IPO, and part of the deal — the reason that investors are willing to let their capital be tied up like that — is that they not only get to vote on any deal that might be proposed… but they also get to redeem their shares if they don’t like the deal or want to pull out for any reason. The redemption price is set by the prospectus for the SPAC, but it’s generally “$10 plus interest” as each investor’s share of the trust account that the SPAC raised and has been sitting on as they look for a deal to deploy that capital. They don’t generally get to offer less than that, and there’s no reason to offer more even if they were allowed to (they don’t really want to redeem the shares).
So offering that redemption at roughly $10 per share is not a “signal” about the prospects for the stock. It’s required.
The one signal you might find during this time period, with SPAC mergers pending but not yet finalized, is if a lot of investors do decide to redeem their shares — though in that case, the SPAC price will probably also be much closer to the real $10 value. SPACs can be a little odd around redemption time, with wacky trading, and that’s exacerbated if it happens to be a SPAC that had a lot of redemptions (meaning, a lot of SPAC holder didn’t like the deal and didn’t want to participate)… that’s because the folks who first created and promoted the SPAC might then account for almost all of the shareholder base, and they’re often locked up and not permitted to trade during the conversion period because they have inside info, so if a lot of folks redeem that means the float, the number of shares that are actually available to trade, can be really small… that’s part of what happened with Phunware (PHUN) back in early 2019, for example, it was a relatively unappealing deal for most cautious investors but it did have a blockchain “story” attached so a few folks bid it up… and most of the SPAC backers redeemed their shares, so when the deal went through there weren’t many shares available to trade, and the stock went from $10 to $300 and back to $10 in a matter of a few months.
And, of course, it’s the real underlying value of a business that matters in the end — and that one happened to be pretty low, in most folks’ estimation, so the stock is now down below $1. Keep that in mind as there are so many SPACs chasing deals right now… some of those deals are going to be made out of desperation, and they won’t all be great ones.
As to whether Velodyne or Hyllion end up being worth the prices investors are paying, well, we’ll have to wait a few years to learn that — these are bid up by investors because of enthusiasm for that IPO deal, which is why they trade at 2X or 4X the value that the SPAC managers assessed as being rational when they made their merger offer. Sometimes that works, just like sometimes an IPO that doubles on IPO day ends up quickly growing into that valuation… sometimes it’s just an expression of investor over-optimism and it leads to tears. I noted a few weeks ago that I think GRAF is worth watching, along with the competitor Luminar (merging with GMHI), but have not become comfortable enough to speculate on either one. I’ve never looked at Hyllion/Tortoise Acquisition.
Thank you, Travis, for the SPAC.101 lesson! You may have the pro-rated pay of 5 Customer Service and 2 Reorg Reps that pertains to SPAC knowledge as there is no way they could have answered my questions with such depth. Your check is in the mail (to arrive sometime when this pandemic is over, assuming there’s still such a thing as a post office.)
In all fairness, the customer reps may not be able to provide you the information even if they want since this would be financial advice. Now if you have a financial advisor there that would be different.
SPACs are a total different creature from regular stocks – the interaction between the warrants and stocks, the unit split off etc. If you are planning to go deep into SPACs, to get the most out of it, you might want to do a bit more reading. Reddit has a pretty good subreddit with good discussion and a couple of great FAQs. But even at there the regulars are lamenting that there’s been an inflow of people who see the profits from SPACs but not knowing the risks involved or understand how the whole thing works, e.g. not even bother reading the S-1s or warrant terms before investing. Anyway – here’s one https://www.reddit.com/r/SPACs/comments/iz1u85/new_investors_please_read_shareholder_votes_you/
How does one get in for 10.24/10.16 a share for GRAFand or/SHLL? Please shed. Some light….Ricky Ebeyta wants 2k for the ticker and we only have until September 28th?????
You can’t. Those are the redemption prices, you can only buy them at whatever price someone will sell to you — which is the current market price on the exchange, roughly speaking.
I am very appreciative Travis. I want to build a portfolio in these times. Especially now more then ever. We had our first child last year a baby boy . I am 43 and have watched other sidelines for too long. I have spent my life working hard on my hands and knees setting Tile as my profession. It has got me here today. However with having the opportunity to take time off due to Covid. I feel as though My mind set has changed biologically. In the past I tried a few investments through a Broker. …. NG
I am willing to try and advance some savings for a future now having a Son. Working with my hands I am comfortable with. I want my money to work for me. I have had good insight on FB Google Tesla etc..just never pulled the trigger.
I would love to have one stock to bet on big and never set a Tile again just need the right pick and timing. I know its around the corner trying to hone in and this thread really helps the average man…..Juat wanted to say Thanks
Way off topic but what are your thoughts on PEIX? I FOUND they are in the sanitizer biz now and building a new plant True? Thinking of jumping onboard
Have not looked into that one in a long time, but I can’t imagine that going into the sanitizer business would be much of a long term help on the financial side. That’s not a hard product to make, and a lot of new capacity has already been created, which would tend to depress prices.
If there is ever a sustainable margin advantage in that product it will be because of a recognized and trusted brand — PEIX doesn’t own such a brand, as far as I know, and they’re expensive to build.