The action in the SPAC (Special Purpose Acquisition Company) market has come to a literal halt. A few weeks ago, any SPAC that would announce a deal would shoot up 20 to 30%. We also used to see big swings near merger. Now all the excitement has faded away. There are a few reasons for that.
- The space has gotten crowded. According to SPAC research, there are 370 blank check companies with over $118 billion in capital that are seeking deals in the private market. This means that they usually have to settle for less quality companies. SPACs usually have a 2-year time period in which to complete the deal. If not, they have to return the money to the shareholders. The reputation of the SPAC sponsors is at stake if they cannot complete a deal and of course their overhead costs in paperwork filing etc.
- The Securities and Exchange Commission issued accounting guidance that would classify SPAC warrants as liabilities instead of equity. Similar to call options, warrants give investors a right to buy a company’s shares in the future at a specified price. When share prices are rising, investors can profit quickly by exercising their warrants. While the SEC guidance doesn’t affect business operation, if it becomes law some SPACs will have to go back and restate their financial results to properly account for warrants, which could slow down their IPO process.
- The real meltdown in SPACs started with the CCIV lucid merger. Extreme hysteria drove up the CCIV price from $14 to $60. There were rumours everywhere that Lucid is the target, even though nothing was confirmed. But once the merger was announced the price fell in half overnight. Investors who bought the shares could not sell their positions until the market opened the next day.
SPAC Picking framework
When the excitement fades away and public attention is diverted, this is usually the time to find good bargains in the stock market. I have prepared a SPAC picking framework and the following are the 5 ground rules.
- The Merger deal should not yet be announced. So we will be focusing on pre-merger SPACs.
- The sponsors should be reputable and not just any other random individuals. Fyi, there has been a SPAC named “Just another SPAC” and “Do it again SPAC”.
- The stock price should be trading as close to Net Asset Value of $10 as possible. We are not looking for SPACs trading at 10 to 20% premium to NAV.
- The SPAC sponsors should be able to negotiate with mature companies. They should have the experience and the financial backing and reputation weightage.
- We will not hold the SPAC after the merger has been announced. No matter what, sell the stock and take the gains. There is no looking back and no FOMO emotions.
With that said, here is why I find the BTWN SPAC at an attractive price point.
Bridgetown Holdings Limited (BTWN)
Bridgetown Holdings (NASDAQ:BTWN) is a blank-check company that is actively looking to acquire other companies that it believes have tremendous business potential. The SPAC is backed by billionaire promoters Richard Li and Peter Thiel. Richard Li is the founder of the Pacific Century Group, a private investment group. His net worth in 2020 was estimated at $4.5 billion. Peter Thiel founded PayPal, has been an early investor in Facebook, and also founded Palantir, a big data analytics tool. His current net worth is estimated at $6.5 billion.
BTWN’s goal is to acquire companies in Southeast Asia. Richard Li brings powerful connections and business acumen in that market. Peter Thiel has a knack and vision of finding disruptors well before anyone else. We are essentially betting on the jockeys to see us through. BTWN has until October 2022 to complete the deal.
Southeast Asia market prospects
Southeast Asia’s Internet economy more than tripled between 2015 and 2019, and is projected to reach US$300 billion by 2025 (up from $US100 billion in 2019).
Southeast Asians are outpacing the world (even China) in embracing the mobile economy. Indonesia has the world’s highest mobile e-commerce penetration rate, while Thailand leads in mobile banking penetration, with 74% of the country’s Internet users accessing banking services via mobile devices.
Across the region, particularly in countries such as Indonesia, where approximately 60% of the 260 million Indonesians are under 40 years old, enormous opportunities exist to build new digital businesses in e-commerce and online entertainment.
Southeast Asia’s tech startup ecosystem has produced many tech unicorns over the last decade, including companies such as Grab, Bukalapak, GoJek, Lazada, and Tokopedia.
These unicorns have begun acquiring local startups in recent years, driving investment activity via venture arms and spurring further innovation within the ecosystem by setting up accelerators across the region. They have been joined by other tech unicorns from around the world who are now swooping in and looking to acquire exciting new startups whose valuations have yet to reach the levels typical of the US and Europe.
BTWN Merger rumours
Rumours surfaced in December 2020 that Tokopedia, the e-commerce giant of Indonesia could be the merger target. However there was no official confirmation of that. Gojek the ride hailing giant and Tokopedia are looking for a potential merger and listing on the Hong Kong and NYSE. So Tokopedia is likely not the target.
Again recently, the travel company Traveloka was stated as the target by Bloomberg. Online travel is a booming industry and reopening play after Covid restrictions. Traveloka is currently valued at $4.5 billion and backed by Singapore state wealth fund GIC, JD.com and Expedia. They are looking to expand into fintech. The company is planning to offer credit cards to customers. Sources estimate that it will be a $1 billion business. Traveloka is also going the Airbnb route of providing travel and lifestyle experiences.
Stock Price and Warrants strategy
BTWN stock took a hit with the Nasdaq selloff and for the first time, trading at a valuation close to its Net Asset Value. The warrants are also trading close to $2. This gives a good entry point. If nothing else, if you want to park your cash in the market with limited downside and some upside potential, BTWN is the way to go.
Fundamentally every sector of the market is currently overvalued. I think investors have been driven by fear in the SPAC market leading to the huge cooling off. There are no SPACs doing IPO for the past 2 weeks. Specifically, there are just a handful of SPACs looking for mergers outside the United States.
That puts BTWN at a good vantage point and I think the merger announcement will bring renewed interest in the stock price.
