Research from Water Tower Research, Water Tower Research

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.

Research from Water Tower Research

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Thematic (Sector/Industry)

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<h3>KEY HIGHLIGHTS</h3>
<div></div>
<ul>
<li>August is still shaping up nicely for deal flow, but there is muddy water.&nbsp;IBC deal activity this month continues to flow, with three new IBC announcements and ~$1 billion worth of deals to report since last week. This brings the total for August to 10 at $6.3 billion in combined value, and with plenty of time remaining to come close to, if not exceed, the 19 deals announced in May, the best month of a very tough 2022 so far. On the liability side, Mudrick Capital Acquisition Corp. II (MUDS) has been jilted for the second time in a year when its proposed IBC partner, jewelry retailer Blue Nile, decided to abandon MUDS for another suitor, Signet Jewelers (SIG), and just one year after MUDS’ pending IBC consumer products company, The Topps Company, was mutually terminated. On this occasion, MUDS will receive a termination fee from Blue Nile of up to $10 million. With a September 10 deadline looming, will MUDS persist and go through with its extension vote for which it had filed a proxy last month or decide to liquidate?</li>
<li>·&nbsp;Redemptions remain high.&nbsp;There were two more de-SPACings since last week, bringing the total number to six for the month. The de-SPACings of technology company D-Wave (QBTS) and pet services company Wag Labs (WAG) both predictably suffered high SPAC shareholder redemptions of 97% and 98%, respectively, with the average redemption rate for the month at 94%. Meanwhile, we can report another two priced IPOs, technology-focused Embrace Change Acquisition Corp. (EMCGU), which raised $65 million, and sector agnostic Hainan Manaslu (HMACU), which raised $60 million. August has brought four new SPACs to the market, so the IPO spigot appears to be turned back on, albeit on a slow drip after a completely dry July.</li>
<li>De-SPAC buyouts an accelerating trend.&nbsp;Our SPAC Talk focus this week considers M&amp;A activity in the struggling post-SPAC merger world. A notable trend in recent months is the prevalence of de-SPAC buyouts or, to be more descriptively accurate, takeunders. The odds remain high that we will see more takeunder activity and de-SPAC bankruptcies (to add to the three so far in 2022) going forward.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/291/581/original/image_70699673421660264818132.png?1660264822" class="editor-image img-responsive" data-smartkarma-image-id="291581"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN AUGUST 2022</h2>
<p>Figure 1: IPO Pricings/Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/291/582/original/image_10033413731660264846955.png?1660264854" class="editor-image img-responsive" data-smartkarma-image-id="291582"></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/000/291/583/original/image_73016728041660264885640.png?1660264889" class="editor-image img-responsive" data-smartkarma-image-id="291583"></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/000/291/584/original/image_71157361051660264906450.png?1660264911" class="editor-image img-responsive" data-smartkarma-image-id="291584"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<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/000/291/585/original/image_52904362061660264931612.png?1660264937" class="editor-image img-responsive" data-smartkarma-image-id="291585"></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/000/291/586/original/image_67447681671660264952915.png?1660264956" class="editor-image img-responsive" data-smartkarma-image-id="291586"></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/000/291/587/original/image_67820328781660264973677.png?1660264975" class="editor-image img-responsive" data-smartkarma-image-id="291587"></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/000/291/588/original/image_2660036491660264995186.png?1660265000" class="editor-image img-responsive" data-smartkarma-image-id="291588"></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/000/291/589/original/image_41589693101660265018668.png?1660265021" class="editor-image img-responsive" data-smartkarma-image-id="291589"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<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/000/291/590/original/image_555774034111660265053248.png?1660265059" class="editor-image img-responsive" data-smartkarma-image-id="291590"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>De-SPACs: Undertakers and Takeunders</h2>
<p>As we have repeatedly commented in our weekly publication on SPACs, de-SPACs have been long considered a distressed asset. As Figure 7 indicates, 91% of the 261 companies de-SPACed since the beginning of 2021 are trading below the SPAC redemption price (89% if we include those de-SPACed in 2020), with 62% trading at less than half that value (and a similar proportion going back to de-SPACs from the start of 2020).</p>
<p>Figure 10: De-SPAC Value Slump</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/291/591/original/image_336265747121660265095160.png?1660265098" class="editor-image img-responsive" data-smartkarma-image-id="291591"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>Through the de-SPAC valuation wreckage, we have seen a proliferation of going concern warnings this year and three de-SPAC bankruptcies declared so far this year—all occurring in June: commercial electric vehicle company Electric Last Mile Solutions, Inc. (ELMSQ), mobile retail store operator Enjoy Technology (ENJYQ), and UK-based biotech firm 4D Pharma (LBPS), which went into administration in the UK and was subsequently delisted from the NASDAQ on July 7. But while it might be reasonable to expect that the so-called financial world’s undertakers (i.e., investment bankers) can look forward to more corporate/debt restructuring work to come their way as more de-SPACs continue to struggle against the negative supply and demand side forces that are currently sweeping across the global economy (see&nbsp;<a href="https://www.watertowerresearch.com/content/spac-talk-de-spac-bankruptcy-risk-in-focus" target="_blank" rel="noopener">SPAC Talk: De-SPAC Bankruptcy Risk in Focus</a>), we are seeing an alternative for struggling de-SPACs, which is no doubt making a different group of investment bankers gleeful.</p>
<p>There have been nine de-SPAC buyouts or, to be more accurately descriptive in all but one case, takeunders over the past year (and six in 2022), which are listed in Figure 11. Excluding Amentum’s acquisition of PAE (whose buyout price was pitched minimally above the pre-merger SPAC redemption price), buyout prices are, on average, one-quarter of the pre-de-SPAC redemption value.</p>
<p>Figure 11: Takeunders of De-SPACs</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/291/592/original/image_391050044131660265123181.png?1660265129" class="editor-image img-responsive" data-smartkarma-image-id="291592"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>While three bankruptcies and nine de-SPAC buyouts combine to make up only 3.5% of the 335 companies that have been de-SPACed since the start of 2020, the odds are that we will see more bankruptcies and takeunders going forward. The trend in takeunder activity seems to have accelerated in recent months, with five occurring since May 2022.</p>
<h3>DISCLOSUoRES</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>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s 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, agents or affiliate 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


August is still shaping up nicely for deal flow, but there is muddy water.&nbsp;IBC deal activity this month continues to flow, with three new IBC announcements and ~$1 billion worth of deals to report since last week. This brings the total for August to 10 at $6.3 billion in combined value, and with plenty of time remaining to come close to, if not exceed, the 19 deals announced in May, the best month of a very tough 2022 so far. On the liability side, Mudrick Capital Acquisition Corp. II (MUDS) has been jilted for the second time in a year when its proposed IBC partner, jewelry retailer Blue Nile, decided to abandon MUDS for another suitor, Signet Jewelers (SIG), and just one year after MUDS’ pending IBC consumer products company, The Topps Company, was mutually terminated. On this occasion, MUDS will receive a termination fee from Blue Nile of up to $10 million. With a September 10 deadline looming, will MUDS persist and go through with its extension vote for which it had filed a proxy last month or decide to liquidate?
·&nbsp;Redemptions remain high.&nbsp;There were two more de-SPACings since last week, bringing the total number to six for the month. The de-SPACings of technology company D-Wave (QBTS) and pet services company Wag Labs (WAG) both predictably suffered high SPAC shareholder redemptions of 97% and 98%, respectively, with the average redemption rate for the month at 94%. Meanwhile, we can report another two priced IPOs, technology-focused Embrace Change Acquisition Corp. (EMCGU), which raised $65 million, and sector agnostic Hainan Manaslu (HMACU), which raised $60 million. August has brought four new SPACs to the market, so the IPO spigot appears to be turned back on, albeit on a slow drip after a completely dry July.
De-SPAC buyouts an accelerating trend.&nbsp;Our SPAC Talk focus this week considers M&amp;A activity in the struggling post-SPAC merger world. A notable trend in recent months is the prevalence of de-SPAC buyouts or, to be more descriptively accurate, takeunders. The odds remain high that we will see more takeunder activity and de-SPAC bankruptcies (to add to the three so far in 2022) going forward.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN AUGUST 2022
Figure 1: IPO Pricings/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

Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
De-SPACs: Undertakers and Takeunders
As we have repeatedly commented in our weekly publication on SPACs, de-SPACs have been long considered a distressed asset. As Figure 7 indicates, 91% of the 261 companies de-SPACed since the beginning of 2021 are trading below the SPAC redemption price (89% if we include those de-SPACed in 2020), with 62% trading at less than half that value (and a similar proportion going back to de-SPACs from the start of 2020).
Figure 10: De-SPAC Value Slump


Source: WTR

Through the de-SPAC valuation wreckage, we have seen a proliferation of going concern warnings this year and three de-SPAC bankruptcies declared so far this year—all occurring in June: commercial electric vehicle company Electric Last Mile Solutions, Inc. (ELMSQ), mobile retail store operator Enjoy Technology (ENJYQ), and UK-based biotech firm 4D Pharma (LBPS), which went into administration in the UK and was subsequently delisted from the NASDAQ on July 7. But while it might be reasonable to expect that the so-called financial world’s undertakers (i.e., investment bankers) can look forward to more corporate/debt restructuring work to come their way as more de-SPACs continue to struggle against the negative supply and demand side forces that are currently sweeping across the global economy (see&nbsp;SPAC Talk: De-SPAC Bankruptcy Risk in Focus), we are seeing an alternative for struggling de-SPACs, which is no doubt making a different group of investment bankers gleeful.
There have been nine de-SPAC buyouts or, to be more accurately descriptive in all but one case, takeunders over the past year (and six in 2022), which are listed in Figure 11. Excluding Amentum’s acquisition of PAE (whose buyout price was pitched minimally above the pre-merger SPAC redemption price), buyout prices are, on average, one-quarter of the pre-de-SPAC redemption value.
Figure 11: Takeunders of De-SPACs


Source: WTR

While three bankruptcies and nine de-SPAC buyouts combine to make up only 3.5% of the 335 companies that have been de-SPACed since the start of 2020, the odds are that we will see more bankruptcies and takeunders going forward. The trend in takeunder activity seems to have accelerated in recent months, with five occurring since May 2022.
DISCLOSUoRES

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.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.  The manner of WTR’s 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, agents or affiliate 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: De-SPACs, Undertakers, and Takeunders