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

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h3>KEY HIGHLIGHTS</h3>
<div></div>
<ul>
<li>The best of times, the worst of times.&nbsp;October was the best month of the year so far in terms of deal flow. While the average deal size is getting smaller, 26 new IBCs were announced, with an aggregate value of more than $16 billion. The latter figure is the second-highest figure YTD, behind January’s ~$21 billion from just 12 deals. At the same, October served up a monthly record of 18 SPAC liquidations, with ~$6 billion returned to public shareholders. The momentum in new deal flow and liquidations has continued into November, with four new IBCs announced and three liquidations completed within the first three days of the month. It would be no surprise to us if November turns out to be a busy month for new deal flow and liquidation announcements, with more than 100 SPACs facing merger deadline dates within the next three months. Eleven companies have set early liquidation votes in November. There will be more early liquidation votes further down the line, including three untethered SPACs belonging to serial sponsor, Gores Group.</li>
<li>IPO pipeline continues to wither.&nbsp;There has really not been much to report on the SPAC IPO front in recent months. Since the end of May, only 15 IPOs have been priced, which adds to an average of less than one per week. At the same time, new S-1 filings have slowed to a trickle. There have been 72 new SPAC IPO registrations YTD, while withdrawals of S-1 filings stand at more than double that number at 163. That the leaves 96 in the waiting room versus 314 at the peak at the end of July 2021. There are still 509 SPACs still searching for targets, which is about 100 below the peak number of 610 at the end of March 2022.</li>
<li>Stats behind the de-SPAC value destruction.&nbsp;Our SPAC Talk Focus presents statistics that highlight the de-SPAC predicament that appears sector agnostic. But, among them, there are de-SPAC winners—those that are generating positive ROIs, which currently make up 7% of the 343 de-SPACs created since the start of 2020.</li>
</ul>
<h2>SPAC STATISTICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/307/705/original/image_20683576621667601297285.png?1667601299" class="editor-image img-responsive" data-smartkarma-image-id="307705"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<h2>SPAC HAPPENINGS IN OCTOBER/NOVEMBER 2022</h2>
<p>Figure 1: IPO Pricings/Completed Liquidations</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/307/706/original/image_10460159031667601326964.png?1667601328" class="editor-image img-responsive" data-smartkarma-image-id="307706"></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/000/307/707/original/image_92674657841667601351400.png?1667601352" class="editor-image img-responsive" data-smartkarma-image-id="307707"></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/000/307/708/original/image_80239351667601374765.png?1667601376" class="editor-image img-responsive" data-smartkarma-image-id="307708"></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/000/307/709/original/image_99746704961667601402171.png?1667601403" class="editor-image img-responsive" data-smartkarma-image-id="307709"></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/000/307/710/original/image_62880115171667601431701.png?1667601433" class="editor-image img-responsive" data-smartkarma-image-id="307710"></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/000/307/711/original/image_47675885581667601455792.png?1667601457" class="editor-image img-responsive" data-smartkarma-image-id="307711"></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/000/307/712/original/image_9439537091667601478503.png?1667601480" class="editor-image img-responsive" data-smartkarma-image-id="307712"></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/000/307/713/original/image_218490602101667601503243.png?1667601504" class="editor-image img-responsive" data-smartkarma-image-id="307713"></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 per 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/000/307/714/original/image_808843419111667601536661.png?1667601538" class="editor-image img-responsive" data-smartkarma-image-id="307714"></figure>
<div class="content-remarks">
<p>Source: WTR Research</p>
</div>
<h2>SPAC TALK FOCUS</h2>
<h2>The Stats Behind the De-SPAC Value Destruction</h2>
<p>There are currently 343 live de-SPACs that have been created since the start of 2020. De-SPACs are represented in multiple sectors. But because of the nature of these companies, 55% of these 343 de-SPACs operate in the healthcare, (mainly biotech), technology, and automotive (predominantly electric vehicle-related) sectors.</p>
<p>Figure 10: De-SPAC Asset Category Represented in Multiple Sectors</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/307/715/original/image_332199773121667601565256.png?1667601566" class="editor-image img-responsive" data-smartkarma-image-id="307715"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>The de-SPAC bloodbath has been well noted on these pages and elsewhere. More than 90% of the companies de-SPACed since the start of 2020 continue to trade below their SPAC stock redemption prices. As of writing, de-SPACs are trading at an average price of $4.23 or a negative ROI of 58% since their SPAC IPOs. The value destruction endured by de-SPACs permeates across all the sectors in which the asset category is represented. Many de-SPACs are considered growth companies that are at an early stage of development, pre-revenue, and profitless. Many are likely to remain so for several years, which is not a recipe for investor interest in the current challenging economic environment characterized by rapidly rising interests and looming recession.</p>
<p>Below we present statistics that highlight the de-SPAC predicament. De-SPACs are generating overall negative ROIs in all sectors. From a sector perspective, the best of a bad bunch is represented by the energy and materials sectors, where negative ROIs are less than 25%.</p>
<p>Figure 11: De-SPAC Value Destruction by Sector</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/307/716/original/image_354255765131667601593233.png?1667601595" class="editor-image img-responsive" data-smartkarma-image-id="307716"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<p>Drilling down further, there are 30 de-SPACs from a variety of sectors that are generating positive ROIs, averaging 44% as of writing. The vast majority of these are generating revenue and more than half are currently at least EBITDA positive. There are representatives from most sectors, with the largest contingent, six, coming from the energy sector. Three of the top four performing de-SPACs, which have generated ROIs of more than 100%, come from the currently buoyant materials and energy sectors. All three of these companies generate revenue and are profitable. Biotech Cerevel (CERE), the second best-performing de-SPAC, is a drug developer focused on diseases of the central nervous system, with three lead drug candidates under development. It was spun out of Pfizer’s (PFE) neuroscience division and merged with SPAC. Arya Sciences Acquisition Corp. II (AYRB) in October 2020. Pfizer continues to hold a 25% stake, which may help to explain why CERE, with no revenues, has been able to raise money and maintain a high market valuation.</p>
<p>Figure 12: The De-SPAC Winners</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/307/717/original/image_794886203141667601621035.png?1667601623" class="editor-image img-responsive" data-smartkarma-image-id="307717"></figure>
<div class="content-remarks">
<p>Source: WTR</p>
</div>
<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


The best of times, the worst of times.&nbsp;October was the best month of the year so far in terms of deal flow. While the average deal size is getting smaller, 26 new IBCs were announced, with an aggregate value of more than $16 billion. The latter figure is the second-highest figure YTD, behind January’s ~$21 billion from just 12 deals. At the same, October served up a monthly record of 18 SPAC liquidations, with ~$6 billion returned to public shareholders. The momentum in new deal flow and liquidations has continued into November, with four new IBCs announced and three liquidations completed within the first three days of the month. It would be no surprise to us if November turns out to be a busy month for new deal flow and liquidation announcements, with more than 100 SPACs facing merger deadline dates within the next three months. Eleven companies have set early liquidation votes in November. There will be more early liquidation votes further down the line, including three untethered SPACs belonging to serial sponsor, Gores Group.
IPO pipeline continues to wither.&nbsp;There has really not been much to report on the SPAC IPO front in recent months. Since the end of May, only 15 IPOs have been priced, which adds to an average of less than one per week. At the same time, new S-1 filings have slowed to a trickle. There have been 72 new SPAC IPO registrations YTD, while withdrawals of S-1 filings stand at more than double that number at 163. That the leaves 96 in the waiting room versus 314 at the peak at the end of July 2021. There are still 509 SPACs still searching for targets, which is about 100 below the peak number of 610 at the end of March 2022.
Stats behind the de-SPAC value destruction.&nbsp;Our SPAC Talk Focus presents statistics that highlight the de-SPAC predicament that appears sector agnostic. But, among them, there are de-SPAC winners—those that are generating positive ROIs, which currently make up 7% of the 343 de-SPACs created since the start of 2020.

SPAC STATISTICS


Source: WTR

SPAC HAPPENINGS IN OCTOBER/NOVEMBER 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 per share in an all-cash transaction.
Figure 9: Bottom 5 De-SPAC Performers by Share Price


Source: WTR Research

SPAC TALK FOCUS
The Stats Behind the De-SPAC Value Destruction
There are currently 343 live de-SPACs that have been created since the start of 2020. De-SPACs are represented in multiple sectors. But because of the nature of these companies, 55% of these 343 de-SPACs operate in the healthcare, (mainly biotech), technology, and automotive (predominantly electric vehicle-related) sectors.
Figure 10: De-SPAC Asset Category Represented in Multiple Sectors


Source: WTR

The de-SPAC bloodbath has been well noted on these pages and elsewhere. More than 90% of the companies de-SPACed since the start of 2020 continue to trade below their SPAC stock redemption prices. As of writing, de-SPACs are trading at an average price of $4.23 or a negative ROI of 58% since their SPAC IPOs. The value destruction endured by de-SPACs permeates across all the sectors in which the asset category is represented. Many de-SPACs are considered growth companies that are at an early stage of development, pre-revenue, and profitless. Many are likely to remain so for several years, which is not a recipe for investor interest in the current challenging economic environment characterized by rapidly rising interests and looming recession.
Below we present statistics that highlight the de-SPAC predicament. De-SPACs are generating overall negative ROIs in all sectors. From a sector perspective, the best of a bad bunch is represented by the energy and materials sectors, where negative ROIs are less than 25%.
Figure 11: De-SPAC Value Destruction by Sector


Source: WTR

Drilling down further, there are 30 de-SPACs from a variety of sectors that are generating positive ROIs, averaging 44% as of writing. The vast majority of these are generating revenue and more than half are currently at least EBITDA positive. There are representatives from most sectors, with the largest contingent, six, coming from the energy sector. Three of the top four performing de-SPACs, which have generated ROIs of more than 100%, come from the currently buoyant materials and energy sectors. All three of these companies generate revenue and are profitable. Biotech Cerevel (CERE), the second best-performing de-SPAC, is a drug developer focused on diseases of the central nervous system, with three lead drug candidates under development. It was spun out of Pfizer’s (PFE) neuroscience division and merged with SPAC. Arya Sciences Acquisition Corp. II (AYRB) in October 2020. Pfizer continues to hold a 25% stake, which may help to explain why CERE, with no revenues, has been able to raise money and maintain a high market valuation.
Figure 12: The De-SPAC Winners


Source: WTR

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.

Digital Health Acquisition Corp (DHAC US)

SPAC Talk: The Stats Behind the De-SPAC Value Destruction