Singapore SPAC IPOs - Phillip Securities 2022-01-14: Free Lunch For The Few

VERTEX TECH SPAC U (SGX:VTA) NOVO TELLUS ALPHA SPAC U (SGX:NTU) PEGASUS ASIA SPAC U (SGX:PGU)

Singapore SPAC IPOs - Free Lunch For The Few

Three special purpose acquisition companies (SPACs) will be launched on the SGX -
The IPO offers are an attractive free lunch for investors. SPAC shares are 100% redeemable at S$5 offer price with free warrants thrown in with the shares. The public or retail offer is only 1.5 – 2.0% of the total issued shares.
Apart from SPAC-ulating on the newsflow, we are cautious on SPACs post-IPO until valuations and ownership structures of the target company are determined.

IPO investors in SPACs are essentially buying zero coupon capital-guaranteed bonds with free warrants (or convertible bonds). Put in simple terms, they can get back all their IPO subscription money (i.e. S$5 per unit) and yet enjoy free warrants.
The opportunity cost is theoretically interest income foregone on a 2-year fixed deposit. Investors buying into the SPACs post-IPOs will be immediately disadvantaged even if they purchase at the initial issue price of S$5. The free warrants lower the cost for IPO investors.

We would prefer to wait until details of the target company are disclosed before deciding on investing in a SPAC. Investors must monitor both the valuations and shareholding structures. Valuations for the target company may be priced to perfection, or at best fairly valued. The target company will likely be issued shares in the SPAC in exchange for the acquisition. This may create a large share overhang if there is an insufficient lock-up period.

Among the three SPACs, the Vertex SPAC (VTAC) structure stands out:
1. Larger in size. Vertex SPAC has raised a larger cash sum of S$200mil. The other two SPACs are S$150mil respectively. A larger cash hoard should enable the SPAC to acquire a much larger and hopefully more attractive technology target company since scale is a competitive advantage.
2. Fewer warrants. Vertex SPAC units come with a 0.3 warrants each. The remaining 0.2 warrants are issued to shareholders that vote for the acquisition. The other two SPACs provide 0.5 warrant each, a much larger “free ride”.
3. Time and price-based vesting (or lock-up) of promote shares. 49% of the sponsor promote shares can be exercised only 12 months after the acquisition. The remaining 51% of the promote shares vest only (or can be disposed of ) at S$6.0 (17% [refers to the proportion of total founder shares]), $7.0 (17%) and $8.0 (17%). Pegasus Asia SPAC has price vesting at S$5.75 (25%) and S$6.50 (25%). Novo Tellus SPAC (NTAA) has no price vesting.

At the point of listing, the SPACs will issue units. Each unit is entitled to one share and 0.3 warrants (for Vertex SPAC) or 0.5 warrants (for Pegasus Asia SPAC/Novo Tellus SPAC). Both shares and warrants are separated for trading from the 45th day of listing.
Sponsor promote (or founder) Class B shares is the virtually free equity given to the sponsor as compensation for completing the acquisition.
Investors can redeem the $5 per share for cash if the acquisition (or business combination) is completed or after 24 months. Ironically, they can vote for the acquisition and still redeem their shares.
At-risk capital is used to fund the operations, offering expenses and other costs of the SPACs. The capital is raised via private placement warrants to the sponsor. These warrants are each priced at S$0.50 (for Vertex SPAC/Novo Tellus SPAC) and S$0.02 (for Pegasus Asia SPAC). It is not entirely clear how they were priced, but the S$0.50 is a good reference price for trading.
See

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2022-01-14

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