Analysis: U.S. companies are snubbing PSPCs amid concerns they can’t deliver

A man wears a mask as he walks near the New York Stock Exchange (NYSE) in the financial district of New York, United States, March 2, 2020. REUTERS / Brendan McDermid

Ad technology company Simplifi Holdings was on target to go public last month at a valuation of nearly $ 2 billion when some investors hesitated.

The Fort Worth, Texas-based company was looking to raise around $ 300 million in funding for its merger with D and Z Media Acquisition Corp (DNZ.N), a Special Purpose Acquisition Company (SPAC) run by the media entrepreneur Betty Liu.

Despite assurances from Goldman Sachs Group Inc (GS.N) bankers that they could increase the required private investment in public stocks (PIPEs), many large mutual funds and hedge funds adopted the deal due to fears it might be overvalued, according to people. familiar with the situation.

Simplifi and Goldman Sachs declined to comment. D and Z Media did not immediately respond to a request for comment.

Simplifi is among dozens of companies that negotiators have called off or reconsidered plans to go public through mergers with PSPCs in recent weeks. They fear that PIPE investors are no longer rushing to what until recently was one of Wall Street’s hottest trends.

The main SPAC exchange-traded fund, the Defiance Next Gen SPAC Derived ETF, has lost 28.1% of its value in the past three months, after hitting a high of $ 35.08 in February.

Investors fear that PSPCs have taken many companies, often loss-making or even no income, on the stock exchange at too high valuations. The euphoria among the retail investors who helped fuel the PSPC boom has subsided, as many of them suffer losses after the reversal of share reversals.

“PIPE investors have really slowed down in recent weeks and are focusing on more quality opportunities,” said Amir Emami, Global Co-Director of PSPC Coverage at RBC Capital Markets.

The apprehension of PIPE investors is notable given that the terms of their investment allow them to buy back the SPAC shares they receive at their original value, thus minimizing the risks.

PIPE investors are also allowed to sell their shares in as little as 30 days after a merger with a PSPC closes, so their position reflects doubt as to whether there is any money left. win in these trades with a quick turnaround.

About 30 companies have agreed to merge with PSPCs since the start of April, up from 69 during the February-March period when the PSPC boom peaked, according to data provider Refinitiv.

Many investment bankers and lawyers are now warning companies that PSPCs may not be able to deliver the frothy valuations they promise. If a PSPC’s shares plunge after a deal is announced, investors have the right to buy back the shares for their original value, which cancels the merger and leaves the private company without a deal to go public.

“Most of the announced PSPC mergers are trading below $ 10 a share shortly thereafter, so there is a very real possibility that people will buy back their shares and slaughter them,” said Tad Freese, partner of Latham & Watkins LLP.

About 60% of the 146 PSPC mergers announced since the start of the year are currently trading below their PSPC’s initial public offering price, indicating high buyouts, according to data compiled by the IPO expert in Jay Ritter scholarship, professor at the University. from Florida.

IN SEARCH OF ALTERNATIVES

PSPCs are more expensive than IPOs for private companies as a way to go public. This is mainly due to the lucrative compensation of the executives of PSPC, who are paid in PSPC shares, leaving less of the private company to its original shareholders.

Nonetheless, companies have made deals with PSPCs because they can use them as a platform to make wacky projections to stock investors about financial growth, a practice limited by regulation in the traditional IPO process. PSPCs also allow companies to go public in as little as three months, compared to a traditional IPO process which can take more than six months due to the scrutiny of the Securities and Exchange Commission of United States.

Today, the slowdown in PSPC is pushing some companies to consider alternatives.

BlueSnap, a Massachusetts-based digital payments startup, is considering a private funding round after some PIPE investors lost confidence in the possibility of a quick PSPC deal, people familiar with the matter said.

BlueSnap declined to comment.

California jewelry designer Brilliant Earth, which sells conflict-free jewelry, is considering an IPO following unsuccessful talks to go public via a SPAC deal earlier this year, sources say.

Brilliant Earth did not immediately respond to a request for comment.

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