Research from Water Tower Research, Water Tower Research

Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Thematic (Sector/Industry)

<h3>KEY HIGHLIGHTS</h3>
More SPAC IPO withdrawals/abandonment than new IPO filings:&nbsp;While January saw 24 new SPAC IPOs come to market, the first nine days of February have seen an additional eight SPAC IPOs completed, bringing the total to 32 to date. To put that number into perspective, the total tally of SPAC IPOs completed in the first two months of 2021 was 189. Perhaps even more revealing about the state of the SPAC IPO market is that amid concerns about the saturation therein, there have been more SPAC IPO registration withdrawals and abandonments (27) than new SPAC IPO registration filings (20). While there are currently 230 pending SPAC IPOs, that number has shrunk from 269 as of the end of 2021, in large part due to IPO registration withdrawals and abandonments (S-1s on file for more than nine months that had yet to become effective).
It is taking longer for SPACs to find targets:&nbsp;As of February 9, 2022 there were 595 SPAC IPOs still searching for merger targets. This number had risen from 575 at the beginning of the year. Moreover, our data indicate that it is taking twice as long for SPACs to find targets. In 2Q21 the average time between SPAC IPO and IBC (initial business combination) announcement was ~6 months. We calculate that the average time horizon is currently around 10 to 11 months.
Rising redemptions and contracting PIPEs take their toll on de-SPAC deals:&nbsp;Seventeen de-SPACs had been completed this year as of February 9, with 114 IBC deals still pending de-SPAC. So far, February has been a rough month for de-SPAC deals. The month has seen two SPAC IBC deals terminated (MACB/Syniverse Technologies and LGV/Heartflow) to add to the two January deal terminations (OCA/Kin Insurance and PACX/Acorns Grow), with all citing unfavorable market conditions. Rising redemption rates by SPAC IPO investors, currently averaging over 90%, and the reduced availability of PIPEs (discussed in more detail in our SPAC Talk Focus), threaten to derail even more de-SPAC deals.
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/893/original/image_643702948461644799602388.png?1644799603" class="editor-image img-responsive" data-smartkarma-image-id="256893"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/889/original/image_400592383421644799517983.png?1644799518" class="editor-image img-responsive" data-smartkarma-image-id="256889"></figure>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/890/original/image_768464919431644799531214.png?1644799532" class="editor-image img-responsive" data-smartkarma-image-id="256890"></figure>
Source: WTR Research
<h2>SPAC/DE-SPAC RETURNS</h2>
Table 1: Live IBCs (Initial Business Combinations)—Key Stats
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/891/original/image_411131953441644799564209.png?1644799565" class="editor-image img-responsive" data-smartkarma-image-id="256891"></figure>
Source: WTR Research
Table 2: Live IBCs &gt;15% Positive Return
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/894/original/image_147775411471644799625262.png?1644799627" class="editor-image img-responsive" data-smartkarma-image-id="256894"></figure>
Source: WTR Research
DWAC continues to sit comfortably at the top of the pile of the small list of positive performers, valuing the proposed de-SPAC at an EV/Revenue (pro forma 2025) multiple of between ~8X (full earnout) and 9.5X (no earnout).
Table 3: Live IBCs &gt;5% Negative Return
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/895/original/image_630957857481644799659516.png?1644799661" class="editor-image img-responsive" data-smartkarma-image-id="256895"></figure>
Source: WTR Research
Two observations with respect to differences from last week’s table: 1) The four pending de-SPACs (IVAN/SES, ENNV/ FSRD, MCMJ/LFLY, and CCAC/QNGY) listed in last week’s table have all since completed their de-SPACs, and 2) whereas last week these listed companies all had negative ROIs greater than 15%, this week, the worst performers are 2 SPACs with negative ROIs greater than 5% but less than 10%.
Table 4: De-SPACs—Key Stats
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/896/original/image_805461202491644799691902.png?1644799694" class="editor-image img-responsive" data-smartkarma-image-id="256896"></figure>
Source: WTR Research
In terms of top and bottom five performers, there is little change with respect to the names included since last week, but simply some alterations in the pecking order in both tables.
Table 5: Top 5 De-SPAC Performers
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/897/original/image_508345595501644799724129.png?1644799726" class="editor-image img-responsive" data-smartkarma-image-id="256897"></figure>
Source: WTR Research
Table 6: Bottom 5 De-SPAC Performers
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/898/original/image_61362774511644799749253.png?1644799751" class="editor-image img-responsive" data-smartkarma-image-id="256898"></figure>
Source: WTR Research
<h2>SPAC TALK FOCUS</h2>
<h2>The PIPE Down—A Look at SPACs and PIPEs</h2>
Why PIPEs are important in SPAC mergers:&nbsp;PIPE (private investment in public equity) deals are often arranged before SPACs publicly announce that they have entered into a definitive merger agreement with an IBC. The PIPE is a critical tool in a SPAC’s transformation from a blank-check vehicle into an operating public company as its sponsors usually need to raise more money than they receive in their SPAC IPO to complete the acquisition of its target operating company. The PIPE transaction usually occurs at the same time the SPAC completes its merger with the target company, providing the SPAC with much needed liquidity at closing.
PIPEs are recognized to be more cost-efficient and time-saving than secondary, registered offerings because the SEC accords them less regulatory oversight. A SPAC might obtain capital from a PIPE in as little as two to three weeks, much shorter than it would typically wait in a secondary, registered offering. After it sells the securities, the SPAC typically is able to register them within a month.
PIPE investors, the privileged class:&nbsp;Investors are often offered additional incentives to participate in the PIPE for a SPAC. They are typically offered SPAC shares at the IPO price or, more often, at a slight discount. They are also often granted lockup periods that expire before sponsor and target company shareholders. PIPE transactions sometimes include other special provisions to protect the PIPE investors such as: (1) consent rights for major corporate actions, (2) anti-dilution provisions, (3) conversion and redemption features, (4) preemptive rights, and (5) rights to nominate members of the board of directors.
PIPE financing has become tougher:&nbsp;There has been a strong correlation between the availability of PIPE financing and SPAC IBC deal announcements. Although 2021 was a record year for SPAC IBC deal announcements (283), as well as completed de-SPACs (195), this may disguise the fact that through most of 2021, SPACs and target businesses had encountered headwinds in announcing and completing de-SPAC transactions. In addition to rising redemption rates that have depleted SPAC trust cash piles, SPACs have had to confront a tightening PIPEs market after PIPE commitments peaked at an aggregate of $15 billion in February 2021, which also coincided with the peak number of SPAC IBC announcements of 44.
Figure 1: Positive Correlation Between SPAC IBC Deals &amp; PIPE Commitments
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/899/original/image_750881588521644799791572.png?1644799793" class="editor-image img-responsive" data-smartkarma-image-id="256899"></figure>
Source: SPAC Research
Although there was a pickup in PIPE commitments in December 2021, at $3 billion, this was largely down to the Digital World Acquisition Corp. (Nasdaq: DWAC)/Trump Media &amp; Technology Group deal which attracted a PIPE commitment of $1 billion alone—the IBC deal had been announced in October 2021, but the PIPE commitment was announced in early December. Nonetheless, even without DWAC, there was a pickup in SPAC IBC transaction announcements in December, and in PIPE commitments, albeit with the 30 transactions announced scrapping over $2 billion PIPEs at an average of less than $70 million per transaction, which includes some with zero commitments.
The size of PIPE commitments has continued in downtrend in the opening weeks of 2022. In January 2022, SPAC IBC deal announcements were 12 compared with 17 in January 2021, but PIPE commitments at $2.6 billion were only about one-third of the ~$7.5B commitments that came with the transactions announced in January last year. Back then, each announced deal included PIPE financing, with average PIPE proceeds committed of approximately 113% of the amount held in trust by the SPAC, and ~44% with a PIPE larger than the trust account. Conversely, our January 2022 data show that one-third of the announced deals come with no PIPE financing commitments, while the average PIPE proceeds committed was 92% of the amount held in trust by the SPAC. Only two transactions (~17% of the total announced) had PIPE commitments greater than the cash held in trust. Another interesting statistic to throw out is that in aggregate, PIPE commitments accounted for 8% of transaction Enterprise Value (EV) at announcement in January 2022 vs ~21% in January 2021.
There has been a very pedestrian start to February 2022, with only four transactions announced to date (as of February 9), with PIPE commitments averaging $25 million per transaction vs $133 million in January. So far this month, PIPEs only account for 3% of initial pro forma de-SPAC EVs. The contrast with last year’s February, a record month for SPAC IBC announcements and PIPE commitments, will likely be very stark.
Table 7: SPAC IBC Announcements and PIPE Commitments in 2022
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/256/900/original/image_414070683531644799831456.png?1644799834" class="editor-image img-responsive" data-smartkarma-image-id="256900"></figure>
Source: WTR Research
The ramifications of this trend are that sponsors are looking at alternative sources of funding and ways to attract PIPE funds. The greater use of debt financing and convertibles is starting to emerge, and these could become more common features of SPAC funding packages to facilitate de-SPAC transactions. There are also signs of increasing use of convertible and other securities in lieu of common equity in PIPE financing deals. In December 2021, ~30% of the announced de-SPAC deals and PIPE financing included convertible or other debt securities and/or warrants. The downside here is the potential for dilution for de-SPAC shareholders down the road.

KEY HIGHLIGHTS
More SPAC IPO withdrawals/abandonment than new IPO filings:&nbsp;While January saw 24 new SPAC IPOs come to market, the first nine days of February have seen an additional eight SPAC IPOs completed, bringing the total to 32 to date. To put that number into perspective, the total tally of SPAC IPOs completed in the first two months of 2021 was 189. Perhaps even more revealing about the state of the SPAC IPO market is that amid concerns about the saturation therein, there have been more SPAC IPO registration withdrawals and abandonments (27) than new SPAC IPO registration filings (20). While there are currently 230 pending SPAC IPOs, that number has shrunk from 269 as of the end of 2021, in large part due to IPO registration withdrawals and abandonments (S-1s on file for more than nine months that had yet to become effective).
It is taking longer for SPACs to find targets:&nbsp;As of February 9, 2022 there were 595 SPAC IPOs still searching for merger targets. This number had risen from 575 at the beginning of the year. Moreover, our data indicate that it is taking twice as long for SPACs to find targets. In 2Q21 the average time between SPAC IPO and IBC (initial business combination) announcement was ~6 months. We calculate that the average time horizon is currently around 10 to 11 months.
Rising redemptions and contracting PIPEs take their toll on de-SPAC deals:&nbsp;Seventeen de-SPACs had been completed this year as of February 9, with 114 IBC deals still pending de-SPAC. So far, February has been a rough month for de-SPAC deals. The month has seen two SPAC IBC deals terminated (MACB/Syniverse Technologies and LGV/Heartflow) to add to the two January deal terminations (OCA/Kin Insurance and PACX/Acorns Grow), with all citing unfavorable market conditions. Rising redemption rates by SPAC IPO investors, currently averaging over 90%, and the reduced availability of PIPEs (discussed in more detail in our SPAC Talk Focus), threaten to derail even more de-SPAC deals.
SPAC STATISTICS



Source: WTR Research
SPAC/DE-SPAC RETURNS
Table 1: Live IBCs (Initial Business Combinations)—Key Stats

Source: WTR Research
Table 2: Live IBCs &gt;15% Positive Return

Source: WTR Research
DWAC continues to sit comfortably at the top of the pile of the small list of positive performers, valuing the proposed de-SPAC at an EV/Revenue (pro forma 2025) multiple of between ~8X (full earnout) and 9.5X (no earnout).
Table 3: Live IBCs &gt;5% Negative Return

Source: WTR Research
Two observations with respect to differences from last week’s table: 1) The four pending de-SPACs (IVAN/SES, ENNV/ FSRD, MCMJ/LFLY, and CCAC/QNGY) listed in last week’s table have all since completed their de-SPACs, and 2) whereas last week these listed companies all had negative ROIs greater than 15%, this week, the worst performers are 2 SPACs with negative ROIs greater than 5% but less than 10%.
Table 4: De-SPACs—Key Stats

Source: WTR Research
In terms of top and bottom five performers, there is little change with respect to the names included since last week, but simply some alterations in the pecking order in both tables.
Table 5: Top 5 De-SPAC Performers

Source: WTR Research
Table 6: Bottom 5 De-SPAC Performers

Source: WTR Research
SPAC TALK FOCUS
The PIPE Down—A Look at SPACs and PIPEs
Why PIPEs are important in SPAC mergers:&nbsp;PIPE (private investment in public equity) deals are often arranged before SPACs publicly announce that they have entered into a definitive merger agreement with an IBC. The PIPE is a critical tool in a SPAC’s transformation from a blank-check vehicle into an operating public company as its sponsors usually need to raise more money than they receive in their SPAC IPO to complete the acquisition of its target operating company. The PIPE transaction usually occurs at the same time the SPAC completes its merger with the target company, providing the SPAC with much needed liquidity at closing.
PIPEs are recognized to be more cost-efficient and time-saving than secondary, registered offerings because the SEC accords them less regulatory oversight. A SPAC might obtain capital from a PIPE in as little as two to three weeks, much shorter than it would typically wait in a secondary, registered offering. After it sells the securities, the SPAC typically is able to register them within a month.
PIPE investors, the privileged class:&nbsp;Investors are often offered additional incentives to participate in the PIPE for a SPAC. They are typically offered SPAC shares at the IPO price or, more often, at a slight discount. They are also often granted lockup periods that expire before sponsor and target company shareholders. PIPE transactions sometimes include other special provisions to protect the PIPE investors such as: (1) consent rights for major corporate actions, (2) anti-dilution provisions, (3) conversion and redemption features, (4) preemptive rights, and (5) rights to nominate members of the board of directors.
PIPE financing has become tougher:&nbsp;There has been a strong correlation between the availability of PIPE financing and SPAC IBC deal announcements. Although 2021 was a record year for SPAC IBC deal announcements (283), as well as completed de-SPACs (195), this may disguise the fact that through most of 2021, SPACs and target businesses had encountered headwinds in announcing and completing de-SPAC transactions. In addition to rising redemption rates that have depleted SPAC trust cash piles, SPACs have had to confront a tightening PIPEs market after PIPE commitments peaked at an aggregate of $15 billion in February 2021, which also coincided with the peak number of SPAC IBC announcements of 44.
Figure 1: Positive Correlation Between SPAC IBC Deals &amp; PIPE Commitments

Source: SPAC Research
Although there was a pickup in PIPE commitments in December 2021, at $3 billion, this was largely down to the Digital World Acquisition Corp. (Nasdaq: DWAC)/Trump Media &amp; Technology Group deal which attracted a PIPE commitment of $1 billion alone—the IBC deal had been announced in October 2021, but the PIPE commitment was announced in early December. Nonetheless, even without DWAC, there was a pickup in SPAC IBC transaction announcements in December, and in PIPE commitments, albeit with the 30 transactions announced scrapping over $2 billion PIPEs at an average of less than $70 million per transaction, which includes some with zero commitments.
The size of PIPE commitments has continued in downtrend in the opening weeks of 2022. In January 2022, SPAC IBC deal announcements were 12 compared with 17 in January 2021, but PIPE commitments at $2.6 billion were only about one-third of the ~$7.5B commitments that came with the transactions announced in January last year. Back then, each announced deal included PIPE financing, with average PIPE proceeds committed of approximately 113% of the amount held in trust by the SPAC, and ~44% with a PIPE larger than the trust account. Conversely, our January 2022 data show that one-third of the announced deals come with no PIPE financing commitments, while the average PIPE proceeds committed was 92% of the amount held in trust by the SPAC. Only two transactions (~17% of the total announced) had PIPE commitments greater than the cash held in trust. Another interesting statistic to throw out is that in aggregate, PIPE commitments accounted for 8% of transaction Enterprise Value (EV) at announcement in January 2022 vs ~21% in January 2021.
There has been a very pedestrian start to February 2022, with only four transactions announced to date (as of February 9), with PIPE commitments averaging $25 million per transaction vs $133 million in January. So far this month, PIPEs only account for 3% of initial pro forma de-SPAC EVs. The contrast with last year’s February, a record month for SPAC IBC announcements and PIPE commitments, will likely be very stark.
Table 7: SPAC IBC Announcements and PIPE Commitments in 2022

Source: WTR Research
The ramifications of this trend are that sponsors are looking at alternative sources of funding and ways to attract PIPE funds. The greater use of debt financing and convertibles is starting to emerge, and these could become more common features of SPAC funding packages to facilitate de-SPAC transactions. There are also signs of increasing use of convertible and other securities in lieu of common equity in PIPE financing deals. In December 2021, ~30% of the announced de-SPAC deals and PIPE financing included convertible or other debt securities and/or warrants. The downside here is the potential for dilution for de-SPAC shareholders down the road.

United States

Capstar Special Purpose Acquisition Corp. operates as a blank check company. The Company aims to acquire one and more businesses and assets, via a merger, capital stock exchange, asset acquisition, stock purchase, and reorganization. Capstar Special Purpose Acquisition serves customers in the State of Texas.

Capstar Special Purpose Acquisition (CPSR US)

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Capstar Special Purpose Acquisition (CPSR US)

SPAC TALK: SPACs and the PIPE Dream

KEY HIGHLIGHTS More SPAC IPO withdrawals/abandonment than new IPO filings: While January saw 24 new SPAC IPOs come to market, the first nine days...

Water Tower Research

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)