(The post below is an excerpt from the weekly subscriber email sent out every Monday morning before the market open.)
Question: If a SPAC announces their acquisition on a summer Friday, in the back half of August, after 5:00PM and without a follow-up conference call, do you think the SPAC team is eager to talk to investors? The obvious answer is no, but that’s just what Avista Public Healthcare Acquisition Corp. did this past Friday afternoon, and with good reason.
Avista announced they had entered into a merger agreement with Organogenesis, a regenerative medicine company, for an anticipated initial enterprise value of approximately $673 million. However, how Avista structured this transaction is not going to make investors happy.
Before we get into the details, you should now that investors will not get hurt in this transaction. You will be able to redeem your shares. However, investors aren’t investing in SPACs to “not get hurt”. You can invest in a Money Market or T-Bills for that. SPAC investors are investing for a great return and unfortunately, the Avista deal is not going to provide that.
You can read the fine print on the announced deal here, but what you need to know is that Avista will be doing a PIPE with “affiliates of Avista,” for $92 million ($46 at merger agreement and $46 million at closing) at effectively, $7.04. Yes, you read that right. Due to that price, Avista expects full redemption of the Trust (obviously), but the real kicker is that the warrant strike is not being adjusted. So while at a $10.00 share price the warrants were $1.50 out-of-the-money ($11.50 strike), the warrants will now be ~$4.50 out-of-the-money (same strike of $11.50), making them far, far less valuable.
After reading the details, two things immediately come to mind:
One, if the Avista team ever wants to do another SPAC, they’re going to have to pay a LOT more for it. Any subsequent SPACs they attempt are probably going to require over-funding the trust or additional terms so that investors feel comfortable. It’s a case of, “Fool me once…”
The second thing that comes to mind is a term that was included in the Crescent Funding SPAC. If you remember, Crescent Funding Inc., filed for IPO back in January of 2018, but eventually withdrew their registration statement (most likely due to market conditions). However, the filing, which you can still find on SEC.gov, included a term for the warrants that stated Crescent would adjust the strike of the warrants in the event they:
“…issue additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of our initial business combination at an issue price or effective issue price of less than $9.50 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the Market Value, and the $18.00 per share redemption trigger price described above will be adjusted (to the nearest cent) to be equal to 180% of the Market Value.”
It’s a great term and the take away here is, if we continue to see more business combinations structured like Avista, you can be sure investors will demand it.