“We think the stock is being manipulated. It’s a blank check company.”
“Oh, OK.”
Those words were very common around NASD Regulation when I worked there after graduating law school.
To many investors, blank check company was synonymous with pump and dump.
Early blank check companies were penny stocks traded on the Over the Counter exchange. They didn’t meet listing requirements for the major exchanges, and were traded in the backwaters of Wall Street. Think Boiler Room, the Ben Affleck movie.
The SPAC Pulled Blank Check Companies into the Mainstream
The SPAC, or Special Purpose Acquisition Company, was the next step in the evolution of the blank check company.
But, the evolutionary process wasn’t completed in one large leap, there have been many steps along the way.
While the blank check company was code for “likely fraud”, early SPACs became known as “maybe good for a trade, but a bad investment.”
SPAC managers and founders have a distinct advantage over holders of SPAC common stock. They own their shares, which is usually a substantial percentage of the overall shares outstanding, at basically zero.
If the SPAC can complete a merger, management has a very high probability of making a lot of money, whether the stock subsequently does well after the merger or not.
This is not to say that all SPACs did badly. But more often than not, SPAC investors would see their $10 shares tank shortly after a merger was completed.
But that’s not the end of the story.
The New SPAC is an Underrated Investment Opportunity
The past few years have represented a renaissance in the world of SPACs. 2018 saw over $10 billion raised for SPAC acquisitions.
SPACs were legitimized, and brought to the attention of many investors who had previously never known what they were, when NYSE Chief Tom Farley left his post in 2018 and wound up leading a SPAC, Far Point Acquisition.
But, more important than the money being raised, and the ex-CEOs getting richer, is the fact that SPACs are becoming legitimate investment vehicles.
SPACs are beginning to close acquisitions and actually move up, sometimes immediately after the closing of the deal, and even before the deal closes.
I’ve gone more in depth with a few of these in The Warrant Observer, but here are some examples. and a potential mover.
OneSpaWorld (OSW, OSWWF)
Haymaker Acquisition (HYAC, HYACW) held its shareholder vote in early March and closed on its acquisition of OneSpaWorld. (Haymaker was a SPAC I identified to subscribers of StockWarrantsHQ Elite last year.)
OneSpaWorld provides spa services to the cruise industry and announced good news post announcement of its acquisition by Haymaker, but prior to the vote closing the acquisition.
I published a post about the company and how you could take advantage of the positive information before the closing and highlighted this to Warrant Watch List subscribers here.
The stock, OSW, (if checking a chart you’ll need to combine charts for HYAC and OSW) is up 26% since March 1, and the warrant is up 104%.
The point being that Haymaker Acquisition purchased a real company in OneSpaWorld. The company is growing and winning contracts, and rewarding investors.
Waitr Holdings (WTRH, and formerly WTRHW)
Waitr Holdings, which I went in depth on in the first issue of The Warrant Observer, was acquired by Landcadia Holdings. Waitr has trade up as much as 44% after the deal closed, though it has pulled back recently.
The warrants traded up 33% after the deal closed (a week after we pointed the shares out to readers) and the company announced a sweetened tender offer. Warrant holders took advantage of the tender and the warrants no longer trade.
Again, Landcadia purchased a growing company in a hot sector, that many (including me) speculate may be the subject of a takeover by a larger player in the not too distant future.
One Madison Corporation (PACK, PACKW)
One Madison announced they would be acquiring Ranpak in December, 2018. This post is the first time I’m commenting on One Madison.
First, where are we in the process. The company has announced the acquisition, but it has not yet been voted on by shareholders.
Second, is Ranpak a real and growing business? You can deep dive into the investor presentation, but at first glance, yes. The two main drivers of the business are e-commerce (Ranpak makes packaging and packaging machines) and the “circular economy”.
Ranpak heavily markets the fact that it uses paper, recyclable, and biodegradable material for its packaging. So you have a play on shipping with a green recycling kicker.
Third, and perhaps most interesting, are the signals that management is already sending prior to the investor vote. Management has already converted private placement warrants into common stock. AND, they are buying back public warrants and retiring them.
This is pretty big. The effect has been to drive the warrant price higher prior to the acquisition closing. This will both reduce the common float and reduce pressure on the common from arbitrage.
Investable SPACs
These are just a few examples of more and more SPACs I’m finding that represent opportunities in what used to be a minefield for investors. Even Virgin Galactic recently went public via a SPAC.
The technical aspect of the SPACs, which essentially holds the stock in place until the shareholder vote, combined with a growing number of SPAC deals featuring real companies with high growth prospects, should have investors taking a hard look at the SPAC universe.
From what I’ve seen, that’s not happening yet. At least for now, this appears to be one place you can still get in ahead of the crowd.
If you’d like to learn more about making money in SPACs and other warrants, join the gang here: