Cashing blank checks: Why the bold favor SPACs

Cashing blank checks: Why the bold favor SPACs
IPOs are excluded from US securities regulations which shield companies against investor lawsuits for making financial estimates they do not meet. (Reuters)
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Updated 28 April 2021

Cashing blank checks: Why the bold favor SPACs

Cashing blank checks: Why the bold favor SPACs
  • Amid a broader selloff, XL Fleet’s shares are now down more than 50%

NEW YORK: Dimitri Kazarinoff started his first ever earnings call as XL Fleet Corp. chief executive last month with a uturn.

When the maker of electrified powertrains for vans and pickup trucks agreed on $1 billion merger with a special purpose acquisition company (SPAC) in September, it made a financial forecast rarely seen in an initial public offering (IPO).

XL Fleet predicted that its revenue would more than triple in 2021 to $75.3 million.

However, on XL Fleet’s March 31 earnings call Kazarinoff said that the COVID-19 pandemic and a microchip shortage had weighed on fleet orders and its ability to fulfill them, which would mean it missing the revenue forecast.

Amid a broader SPAC selloff, XL Fleet’s shares are now down more than 50 percent since the completion of its merger with the SPAC, Pivotal Investment Corporation II, in December.

XL Fleet said that it had not foreseen the supply chain challenges when it gave its forecast last September, and that the “fluid” situation prevented it from issuing formal 2021 guidance once it became a publicly listed company.

Confident financial projections are common in SPAC deals and have been a decisive factor in attracting firms regarded as more risky, often loss-making and years away from even having any sales, over IPOs as a route to going public, industry insiders said and a Reuters review of data compiled by Jay Ritter, a professor at the University of Florida, confirms.

This is because IPOs are excluded from US securities regulations which shield companies against investor lawsuits for making financial estimates they do not meet.

SPACs are given this protection, so lawsuits against companies going public have to clear a higher hurdle of showing malfeasance or negligence in the making of the projections. Companies have taken advantage, opting for SPACs even though the lucrative stock compensation of SPAC managers leaves their existing shareholders with less equity, making them almost three times as costly than IPOs, investors and investment bankers say.

Three out of four firms that went public between 2020 and early 2021 through a SPAC merger were unprofitable, compared to 61 percent through an IPO, compiled by IPO expert Ritter shows.

“Some companies cannot sell their story based on valuation multiples all the way out to 2025 or 2027, it would bring their valuation down,” Vik Mittal, a portfolio manager at Glazer Capital and one of the biggest US SPAC investors, said.

The wild projections of some SPAC deals have turned them into darlings of amateur traders, who scour social media platforms such as Reddit for “meme” stocks to pile on.

But these stock rallies are usually fleeting; companies that went public through SPACs from January 2019 to June 2020 have negative mean returns of 12.3 percent six months after their merger, and negative 34.9 percent returns after one year, research led by Professor Michael Klausner at Stanford University shows.

Their 12-month return is 47.1 percent lower than the IPO index, Klausner’s data shows.

“Some of the companies that go public through SPACs are early and pre-revenue. They probably wouldn’t have been able to go public through an IPO, which doesn’t provide safe harbor for projections that are shared with investors,” said Anna Pinedo, a capital markets partner at law firm Mayer Brown.

Regulators have started to notice.

A US Securities and Exchange Commission official said this month that the ability of companies to freely publish performance projections during their SPAC deals was “overstated at best.”

An SEC spokesman declined to comment on whether the financial regulator was considering changes to the safe harbor provision in its rules that allows companies that go public through SPACs to make projections.

Nevertheless, several successful companies, including sports betting company DraftKings Inc. and potato-chip maker Utz Brands Inc, have gone public through SPACs, and have seen their shares continue to rise many months after their deal.

Some pick a SPAC because the frothy market for blank-check acquisition firms, which have raised more already this year than the entirety of 2020, can give them a higher valuation.

And companies get this valuation in advance, removing one of the big uncertainties of the IPO process.


Saudi Cura gets $4mn Series-A financing from ELM and Wa’ed

Saudi Cura gets $4mn Series-A financing from ELM and Wa’ed
Updated 15 sec ago

Saudi Cura gets $4mn Series-A financing from ELM and Wa’ed

Saudi Cura gets $4mn Series-A financing from ELM and Wa’ed

RIYADH: Cura, a Saudi telehealth startup announces a SR15 million Series-A investment from ELM and Wa’ed, the entrepreneurship arm of Saudi Aramco, according to a statement today.

 


SABIC stock hits 7-year high

SABIC stock hits 7-year high
Image: Shutterstock
Updated 9 min 32 sec ago

SABIC stock hits 7-year high

SABIC stock hits 7-year high

Saudi Basic Industries Corporation (SABIC) recorded its highest price on Sunday since September 2014, at SR 134.60, according to Argaam. 

The stock is currently trading up just under 1 percent, with trading exceeding 500,000 shares so far. 

Today’s rise has pushed the stock up a staggering 120 percent since March 2020. 

The Saudi company operates in the petrochemical, fertilizer, iron, steel and aluminum industries with Saudi Aramco the largest investor, with a share of 70 percent. 


FTSE adds ADNOC Drilling to three of its global equity indices

FTSE adds ADNOC Drilling to three of its global equity indices
Image: Shutterstock
Updated 52 min 27 sec ago

FTSE adds ADNOC Drilling to three of its global equity indices

FTSE adds ADNOC Drilling to three of its global equity indices

Index publisher FTSE Russell has added ADNOC Drilling to three of its global equity indices.


ADNOC Drilling has been added to the FTSE Global Large Cap Index, the FTSE Emerging Index, and the FTSE All-World Index, according to a statement from ADNOC Drilling.


The index publisher, against whose indexes funds benchmark trillions of dollars of assets, earlier announced the same to clients on October 4.


ADNOC Drilling is a unit of Abu Dhabi National Oil Co. Baker Hughes retains a 5 percent share in the company.


ADNOC Drilling went public earlier this month via a $1.1 billion initial public offering through the sale of a 11 percent share in the company to investors.


Saudi Arabia issues penalties in crack down on electronic employment platforms

Saudi Arabia issues penalties in crack down on electronic employment platforms
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Updated 17 October 2021

Saudi Arabia issues penalties in crack down on electronic employment platforms

Saudi Arabia issues penalties in crack down on electronic employment platforms
  • Penalties can be doubled according to the frequency of violations

Saudi Arabia issued penalties in a move to regulate employment in electronic employment platforms as demand for mobile and web applications is booming in the Kingdom.

The Ministry of Human Resources and Human Development issued four penalties for violations on electronic platforms that range between SR5,000 ($1333) and SR50,000 ($13,333), Okaz paper reported.

The violations include the platforms enabling non-Saudi workers to work directly through the platform, platforms not verifying that the worker does not work on behalf of other people, platforms with incorrect data for workers, and those that have not supplied the requested data and information to the ministry.

Penalties can be doubled according to the frequency of violations.

The Minister, Ahmed Alrajhi, had previously obligated electronic platforms to limit direct interactions to Saudi nationals only and not to deal directly with non-Saudi workers except through the operating establishments.


Saudi food group Savola completes $260m acquisition of UAE’s Bayara

Saudi food group Savola completes $260m acquisition of UAE’s Bayara
Updated 17 October 2021

Saudi food group Savola completes $260m acquisition of UAE’s Bayara

Saudi food group Savola completes $260m acquisition of UAE’s Bayara
  • The transaction, paid in cash according to a stock exchange filing, was part of a five-year strategy to expand Savola’s regional operations.

DUBAI: Saudi Arabia’s Savola Group has completed the full acquisition of Emirati snack maker Bayara Holding, in a deal worth SR975 million ($260 million).

The transaction, paid in cash according to a stock exchange filing, was part of a five-year strategy to expand Savola’s regional operations.

Bayara is a major manufacturer and distributor of branded snacks in the UAE and the Kingdom.