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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>
<ul>
<li>Liquidations galore!&nbsp;We can report another three liquidation announcements since last week’s edition, all of which will be completed before the end of October. This brings the total number of scheduled liquidations for this month to 16 (of which 10 have been completed so far) and 39 YTD (of which 33 have been completed). We also have another nine SPACs—AUS, ASZ, BLTS, FVIV, FVT, IACC, LMACA, and NDAC—that have filed proxies for early liquidation. Additionally, technology-focused SPAC CITE, which was IPOed in January 2022, raising $230 million of proceeds, and has a relatively distant merger deadline of July 7, 2023, also recently filed that it intends to liquidate its trust in 1H23. This is an indication of how tough the SPAC market has become. After netting off all completed and announced liquidations (but not including those that have simply filed proxies for early liquidation), there are currently 525 live SPACs searching for targets, the lowest level for a year.</li>
<li>Deals galore!&nbsp;On the flipside, we will see another year’s best this month for new IBC deal announcements. So far, 20 new IBC transactions have been announced, matching September’s best monthly total. While October has seen a couple of announced deals worth more than $1 billon, the average deal size is $681 million, which is below the average of $785 million for the year and well below last year’s average of $2.3 billion.</li>
<li>A de-SPAC success story.&nbsp;The mood among de-SPAC investors has been glum for a long while, with most trading well below their SPAC IPO prices. Depressed de-SPAC valuations have encouraged a spate of post-de-SPACing M&amp;A activity, mostly in the form of takeunders. However, renewable natural gas producer LFG’s pending takeover by UK oil giant BP presents a rare lucrative exit strategy for some de-SPAC investors. As we discuss in this week’s SPAC Talk Focus, this represents more the exception than the rule.</li>
</ul>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/684/original/image_17959881921666375829203.png?1666375831" class="editor-image img-responsive" data-smartkarma-image-id="304684"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN OCTOBER 2022</h2>
<p>Figure 1: IPO Pricings/Completed Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/685/original/image_73162575931666375863477.png?1666375864" class="editor-image img-responsive" data-smartkarma-image-id="304685"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 2: IBC Announcements/Terminations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/686/original/image_44128047241666375907894.png?1666375909" class="editor-image img-responsive" data-smartkarma-image-id="304686"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 3: De-SPACings</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/687/original/image_82105542451666375939339.png?1666375940" class="editor-image img-responsive" data-smartkarma-image-id="304687"></figure>
<p>Source: WTR Research</p>
<h2>SPAC/DE-SPAC RETURNS</h2>
<p>Figure 4: Live IBCs (Initial Business Combinations)—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/688/original/image_74833978561666375967305.png?1666375968" class="editor-image img-responsive" data-smartkarma-image-id="304688"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 5: Top 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/689/original/image_12912336571666376050104.png?1666376051" class="editor-image img-responsive" data-smartkarma-image-id="304689"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 6: Bottom 5 Live IBCs by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/690/original/image_9990531581666376084128.png?1666376085" class="editor-image img-responsive" data-smartkarma-image-id="304690"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 7: De-SPACs—Key Stats</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/691/original/image_20748830491666376121419.png?1666376123" class="editor-image img-responsive" data-smartkarma-image-id="304691"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>Figure 8: Top 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/692/original/image_712089253101666376144009.png?1666376145" class="editor-image img-responsive" data-smartkarma-image-id="304692"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<p>BP has agreed to acquire de-SPAC Archaea Energy (LFG), a leading renewable natural gas producer, for $4.1 billion or $26/share in an all-cash transaction.</p>
<p>Figure 9: Bottom 5 De-SPAC Performers by Share Price</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/693/original/image_737712889111666376173350.png?1666376175" class="editor-image img-responsive" data-smartkarma-image-id="304693"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>A De-SPAC Success Story – More the Exception than the Rule</h2>
<p>Whenever you read an article or commentary on de-SPACs, it is overwhelmingly skewed to the negative and justifiably so. After all, as Figure 7 highlights, 93% of our universe of 275 IBCs de-SPACed since the start of 2021 currently trade below the SPAC redemption floor price of $10. Worst still, a large proportion of these de-SPACs are trading at less than half their SPAC redemption value, accounting for 74% of our de-SPAC universe. Approaching one-fifth are trading in the red zone of less than $1/share, many of which might be in financial distress.</p>
<p>Against these glum statistics, there are 18 de-SPACs that are trading above the $10 mark. However, these ‘Magnificent 18’ have received much less attention than they might arguably deserve.</p>
<p>Figure 10: The ‘Magnificent 18’ – The Beacons of Light Amid the De-SPAC Gloom</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/694/original/image_915769562121666376210448.png?1666376211" class="editor-image img-responsive" data-smartkarma-image-id="304694"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>However, one of these de-SPACs has certainly attracted greater attention recently. On October 17, 2022, Archaea Energy (NASDAQ: LFG), a leading biogas producer, announced that it had agreed to sell itself to UK oil &amp; gas giant BP for an enterprise value of $4.1 billion or $26/share in an all-cash transaction. The EV BP is agreeing to pay is almost 4x the initial $1.1 billion value attributed to LFG when its IBC with SPAC Rice Acquisition Corp. (RICE) was announced in April 2021.</p>
<p>Even before the BP bid, LFG, which merged in September 2021 with RICE, sponsored by the Rice brothers (who also own EQT, one of the world’s largest natural gas companies), consistently featured among the top five de-SPAC performers. Even then, the offer from BP was struck at a 54% premium to the pre-announcement closing price at a seemingly hefty multiple of ~23.5-26x the management guided EBITDA range for 2022 of $132.5-147.5 million presented with LFG’S 2Q22 earnings report in August. By the way, the midpoint of this guidance range ($140 million) is exactly in line with the projection given at the time of the IBC deal announcement made 16 months earlier in April 2021, which will make it a rare achievement among de-SPACs, many of whom have missed their initial financial targets soon after publishing them. BP does not seem to have any qualms about the integrity of LFG’s projections.</p>
<p>Figure 11: What! A De-SPAC (LFG) Hitting Its Targets?</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/695/original/image_648485828131666376248780.png?1666376250" class="editor-image img-responsive" data-smartkarma-image-id="304695"></figure>
<div class="content-remarks">
<p>Source: RICE/LFG Investor Presentation, April 2021</p>
</div>
<p>With the transaction expected to be completed by the end of 2022, LFG investors and particularly those who got in on the ground floor by participating in RICE’s SPAC IPO in October 2020, have been presented with a highly profitable exit strategy, not something that can be said of de-SPACs in general.</p>
<p>In addition to LFG, there have been 10 de-SPAC buyouts or, to be more accurately descriptive in all but one case, takeunders over the past year (Figure 12). Including Amentum’s acquisition of PAE (whose buyout price was pitched minimally above the pre-merger SPAC redemption price), buyout prices are, on average, one-third of pre-de-SPACing redemption value. LFG’s pending buyout is at 160% above RICE’s redemption value and is a departure from the takeunder trend.</p>
<p>Figure 12: De-SPAC Buyouts</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/696/original/image_859178376141666376281191.png?1666376283" class="editor-image img-responsive" data-smartkarma-image-id="304696"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>With respect to future M&amp;A activity involving de-SPACs, we expect takeunders to continue to be the predominant trend. But, for any further exceptions to this rule, perhaps look first among the other members of the ‘Magnificent 18’ for potential takeover candidates that might give some de-SPAC investors some reason to smile.</p>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

Liquidations galore!&nbsp;We can report another three liquidation announcements since last week’s edition, all of which will be completed before the end of October. This brings the total number of scheduled liquidations for this month to 16 (of which 10 have been completed so far) and 39 YTD (of which 33 have been completed). We also have another nine SPACs—AUS, ASZ, BLTS, FVIV, FVT, IACC, LMACA, and NDAC—that have filed proxies for early liquidation. Additionally, technology-focused SPAC CITE, which was IPOed in January 2022, raising $230 million of proceeds, and has a relatively distant merger deadline of July 7, 2023, also recently filed that it intends to liquidate its trust in 1H23. This is an indication of how tough the SPAC market has become. After netting off all completed and announced liquidations (but not including those that have simply filed proxies for early liquidation), there are currently 525 live SPACs searching for targets, the lowest level for a year.
Deals galore!&nbsp;On the flipside, we will see another year’s best this month for new IBC deal announcements. So far, 20 new IBC transactions have been announced, matching September’s best monthly total. While October has seen a couple of announced deals worth more than $1 billon, the average deal size is $681 million, which is below the average of $785 million for the year and well below last year’s average of $2.3 billion.
A de-SPAC success story.&nbsp;The mood among de-SPAC investors has been glum for a long while, with most trading well below their SPAC IPO prices. Depressed de-SPAC valuations have encouraged a spate of post-de-SPACing M&amp;A activity, mostly in the form of takeunders. However, renewable natural gas producer LFG’s pending takeover by UK oil giant BP presents a rare lucrative exit strategy for some de-SPAC investors. As we discuss in this week’s SPAC Talk Focus, this represents more the exception than the rule.



Source: WTR

SPAC HAPPENINGS IN OCTOBER 2022
Figure 1: IPO Pricings/Completed Liquidations


Source: WTR Research

Figure 2: IBC Announcements/Terminations


Source: WTR Research

Figure 3: De-SPACings

Source: WTR Research
SPAC/DE-SPAC RETURNS
Figure 4: Live IBCs (Initial Business Combinations)—Key Stats


Source: WTR Research

Figure 5: Top 5 Live IBCs by Share Price


Source: WTR Research

Figure 6: Bottom 5 Live IBCs by Share Price


Source: WTR Research

Figure 7: De-SPACs—Key Stats


Source: WTR Research

Figure 8: Top 5 De-SPAC Performers by Share Price


Source: WTR Research

BP has agreed to acquire de-SPAC Archaea Energy (LFG), a leading renewable natural gas producer, for $4.1 billion or $26/share in an all-cash transaction.
Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
A De-SPAC Success Story – More the Exception than the Rule
Whenever you read an article or commentary on de-SPACs, it is overwhelmingly skewed to the negative and justifiably so. After all, as Figure 7 highlights, 93% of our universe of 275 IBCs de-SPACed since the start of 2021 currently trade below the SPAC redemption floor price of $10. Worst still, a large proportion of these de-SPACs are trading at less than half their SPAC redemption value, accounting for 74% of our de-SPAC universe. Approaching one-fifth are trading in the red zone of less than $1/share, many of which might be in financial distress.
Against these glum statistics, there are 18 de-SPACs that are trading above the $10 mark. However, these ‘Magnificent 18’ have received much less attention than they might arguably deserve.
Figure 10: The ‘Magnificent 18’ – The Beacons of Light Amid the De-SPAC Gloom


Source: WTR

However, one of these de-SPACs has certainly attracted greater attention recently. On October 17, 2022, Archaea Energy (NASDAQ: LFG), a leading biogas producer, announced that it had agreed to sell itself to UK oil &amp; gas giant BP for an enterprise value of $4.1 billion or $26/share in an all-cash transaction. The EV BP is agreeing to pay is almost 4x the initial $1.1 billion value attributed to LFG when its IBC with SPAC Rice Acquisition Corp. (RICE) was announced in April 2021.
Even before the BP bid, LFG, which merged in September 2021 with RICE, sponsored by the Rice brothers (who also own EQT, one of the world’s largest natural gas companies), consistently featured among the top five de-SPAC performers. Even then, the offer from BP was struck at a 54% premium to the pre-announcement closing price at a seemingly hefty multiple of ~23.5-26x the management guided EBITDA range for 2022 of $132.5-147.5 million presented with LFG’S 2Q22 earnings report in August. By the way, the midpoint of this guidance range ($140 million) is exactly in line with the projection given at the time of the IBC deal announcement made 16 months earlier in April 2021, which will make it a rare achievement among de-SPACs, many of whom have missed their initial financial targets soon after publishing them. BP does not seem to have any qualms about the integrity of LFG’s projections.
Figure 11: What! A De-SPAC (LFG) Hitting Its Targets?


Source: RICE/LFG Investor Presentation, April 2021

With the transaction expected to be completed by the end of 2022, LFG investors and particularly those who got in on the ground floor by participating in RICE’s SPAC IPO in October 2020, have been presented with a highly profitable exit strategy, not something that can be said of de-SPACs in general.
In addition to LFG, there have been 10 de-SPAC buyouts or, to be more accurately descriptive in all but one case, takeunders over the past year (Figure 12). Including Amentum’s acquisition of PAE (whose buyout price was pitched minimally above the pre-merger SPAC redemption price), buyout prices are, on average, one-third of pre-de-SPACing redemption value. LFG’s pending buyout is at 160% above RICE’s redemption value and is a departure from the takeunder trend.
Figure 12: De-SPAC Buyouts


Source: WTR

With respect to future M&amp;A activity involving de-SPACs, we expect takeunders to continue to be the predominant trend. But, for any further exceptions to this rule, perhaps look first among the other members of the ‘Magnificent 18’ for potential takeover candidates that might give some de-SPAC investors some reason to smile.
DISCLOSURES

Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: A De-SPAC Success Story – More the Exception than the Rule

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ClimateRock operates as a blank check company. The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, and similar business combination with one and more businesses.

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SPAC Talk: A De-SPAC Success Story – More the Exception than the Rule

KEY HIGHLIGHTS Liquidations galore! We can report another three liquidation announcements since last week’s edition, all of which will be...

Water Tower Research

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