As the number of SPAC IPOs plummets and retail investor appetite wanes over tighter regulatory oversight, a question arises whether Southeast Asia’s tech giant Grab, which plans to go public via a merger with Nasdaq-listed Altimeter Growth Corp, has missed the momentum.
The answer goes beyond a simple yes or no.
A special purpose acquisition company (SPAC), which has served as an alternative route to traditional IPO since the 1990s, suddenly became a hot-ticket item last year as monetary easing and rising government spending across the globe fuelled market liquidity during the COVID-19 pandemic.
Throughout 2020, 248 SPACs went public and raised $83.4 billion in total proceeds, each with the sole purpose of absorbing or merging with a private company and taking it public. The full-year record was topped in just three months this year as 292 SPACs debuted and raised $87.9 billion in the first quarter.
The SPAC craze, however, appeared to have played itself out last month as the US Securities and Exchange Commission unveiled new accounting guidance that suggested SPAC warrants should be classified as liabilities instead of equity investments. Only 10 SPACs went public in April, down from the highest-ever monthly record of 109 in March.
The SEC guidance followed a string of warnings from its executives against risks stemming from potentially misleading projections on the future performance of acquisition targets. In a statement issued early last month, SEC’s acting corporate finance director John Coates said the regulator “will continue to be vigilant about SPAC and private target disclosure.”
Before the SEC intervention, industry executives had sounded the alarm on SPACs. In early March, JP Morgan warned investors that SPAC activities resembled a peak rather than the middle of a boom cycle. Berkshire Hathaway vice-chairman Charlie Munger also weighed in, saying the stock market would be better off without SPACs, calling them a moral failing.
“Crazes, by definition, end. This one will end. Since I think the pricing of SPACs is irrational, I am inclined to think this is the beginning of the end,” said Michael Klausner, a professor of business and law at Stanford University who recently co-authored a paper on the subject, A Sober Look at SPACs.
Klausner argues that there have been many bad SPAC deals in the past and more of these deals are coming.
“The incentives of sponsors are misaligned, and the dilution embedded in SPACs creates a bias in favour of poor performance for SPAC shareholders,” said Klausner.
A study of Refinitiv data by the Financial Times shows how SPACs that acquired businesses worth more than $1 billion since the start of 2020 have seen their share prices slide by an average of 39% as of last week relative to their peak. Only 3 out of 41 SPACs managed to stay within a 5% range, while 18 have more than halved and several were down by more than 80%.
Last week’s share performance appears to reflect a historical trend. SPACs that debuted between the start of 2015 through the end of the third quarter of 2020 delivered an average loss of 9.6% and a median return of -29.1% compared to an average after-market return of 47.1% for traditional IPOs for the given period, according to a Renaissance Capital report.
Benjamin Kwasnick, the founder of SPAC database provider SPAC Research, cautioned against measuring the space by taking broad averages across de-SPACs when the underperformers are often concentrated among SPACs that experienced high redemptions.
The public, he said, had historically been good at picking good performers at the redemption deadline.
“It doesn’t seem reasonable to me to take averages across a data set with some deals that had a large float, 0% redemptions, and traded up from $10 to $60, and other deals with 99% redemptions that resulted in a minuscule public float and then traded down to $2”.
Commenting on the likely impact of the recent crackdown by SEC, Kwasnick said the period where people were buying a stock just because it was a SPAC deal is over. However, there is still plenty of room for good sponsors to find deals that can trade well if they stand on their own merit, he said.
A game reset
The regulatory developments in the US have stirred some anxieties among tech founders in Southeast Asia, an emerging SPAC hunting ground that is poised to produce the world’s largest SPAC deal when the $40 billion Grab-Altimeter merger goes through as planned in July.
Apart from Grab, Indonesia’s travel tech unicorn Traveloka has also announced plans to list in the US this year using SPAC. It is unclear, however, whether the company has found a sponsor. Other fellow unicorns that have been approached by SPACs include Bukalapak and Tokopedia, two major players in Indonesia’s e-commerce space.
“We have fielded dozens of phone calls and had a lot of meetings with our founder friends who are asking this exact question,” said Billy Naveed, Chief Strategy Officer at Smile Group, when asked whether the developments have triggered local startups to rethink their public listing strategy.
The sudden reclassification of warrants from equity to liability will cost SPACs time and money by forcing them to analyse the value of the warrants every quarter rather than at the start of the SPAC. Those that have gone public will have to resubmit their SEC-mandated quarterly and annual financial performance before they can execute their merger deal.
As the regulatory bar has become higher, startups, as well as sponsors, need to work harder, but good SPAC sponsors and great companies would continue to do well, said Naveed, who has extensive experience advising SPACs, which include IPOA, the first SPAC of billionaire Chamath Palihapitiya.
“Once the SEC clarifies its position on warrants and how SPAC targets can discuss forecasts, then the market will restart. But the future will look different to the past. The way this likely shakes out is that sponsors will have to demonstrate the value they add, be more long-term focussed and startups will have to be more conservative in their forecasts. We think this is a great thing for the long-term health of the asset class. High-quality SPAC sponsors who partner with great companies will win in the long run.”
Vertex Holdings CEO Chua Kee Lock believes the recent excitement surrounding SPACs had caused the vehicle to be adulterated such that it became a quick way for some sponsors and investors to make fast cash.
“As institutions begin to implement stricter guidelines to regulate SPACs, we foresee that SPACs will return to its original intention of providing companies with an alternative method of fundraising,” Kee Lock said.
Grab is good to go
While the SPAC mania may have ended, investor appetite for the Grab-Altimeter merger appears to be intact.
Some SPACs have done well in the past and more companies will do well—something that has supported the recent rise of SPAC in the first place, said Klausner.
“Grab-Altimeter has the advantage of a large PIPE, which reduces dilution on a per-share basis. Less dilution means that the company has to climb out of a smaller hole to provide positive returns to SPAC shareholders,” said Klausner.
Ahead of the merger, more than three dozen firms joined a private investment in public equity (PIPE) deal worth more than $4 billion in Grab. Some of the big names include BlackRock, Counterpoint Global, Fidelity International, Janus Henderson Investors, Mubadala, and Temasek Holdings.
After the merger announcement on April 13, Altimeter’s share price has dropped close to 18% so far. Despite the drop, the stock is still trading above the amount of cash in trust per share, indicating that investors still like the deal, according to Kwasnick.
“If it were to trade down to cash in trust then you could reasonably guess that investors no longer like the deal and might redeem their shares instead of holding on for shares of the newco,” he added.
Kee Lock, whose company is one of the first institutional investors in Grab, said that a traditional IPO would have been the alternative for Grab. The merger with SPAC should allow Grab to raise the needed cash quickly either via stock or bond to continue its growth, he added.
“The Grab-Altimeter SPAC deal also sends an important signal to investors confirming Southeast Asia’s potential as a viable and attractive market capable of supporting global winners.”
How Grab’s stock will perform post-merger is anyone’s guess. As the company projects to continue making losses at least until 2023, investors are likely to monitor the company’s quarterly revenue performance and how it fights to maintain market share.
The delivery segment is Grab’s largest revenue contributor, generating about half of its consolidated revenues in 2020, and expected to remain so well until 2023. The fact that Grab’s delivery revenue grew from practically nothing in 2018 to $800 million in 2020 suggests that competitors may be able to grow at an equally rapid pace, depending on their capacity for cash burn.
Rising competition in this segment should become a key focus for Grab.
Southeast Asia’s largest e-commerce player Shopee, the subsidiary of the region’s most valuable company Sea Ltd., recently expanded into food delivery in some of the region’s capital cities, offering discounts of up to 50% on food purchase and free delivery to customers.
Separately, the merger plan between arch-rival Gojek and Indonesian e-commerce player Tokopedia will almost certainly lead to Grab losing its position as the preferred delivery partner on Tokopedia’s platform. Losing strategic alliances in Southeast Asia’s largest market could potentially be damaging to Grab.
On a positive note, the merger with Altimeter will add roughly $4 billion to Grab’s war chest, which already includes $3.5 billion in cash as of December and an additional $2 billion term loan facility that it secured earlier this year. This will put Grab on a strong footing against its regional competitors.