Since my last article several weeks ago about SPAC stocks — SPAC standing for special purpose acquisition company — I decided to find five more stocks with agreed-on merger deals. Some of these stocks have very serious upside potential. We’re likely to see this on display once their combination with the target private company closes.
As I previously pointed out, one reason for this is very simple. The general investing public tends to wait to buy these stocks until after the combination. In some cases, investors are not aware that you can buy the SPAC stock first. In other cases, they are not aware of the newly public company until it starts trading under its own new symbol.
Therefore, an investor can get in on the bottom floor, so to speak. The potential for huge upside profits, once the combination goes into effect and the stock symbol changes, is very high.
However, as the list I am presenting below shows, sometimes there are hiccups. In one case there is a lot of drama and that is limiting the price from rising right now. But, as you will see, that in an of itself, presents a value buying opportunity.
So here are the five SPAC stocks with pre-merger deals:
Landcadia Holdings II (NASDAQ:LCA)
Far Point Acquisition Corp (NYSE:FPAC)
Software Acquisition Group (NASDAQ:SAQN)
Hennessey Capital Acquisition Corp IV (NASDAQ:HCAC)
Megalith Financial Acquisition Corp (NYSE:MFAC)
Let’s dive in and look at these.
5 SPAC Stocks With Merger Deals: Landcadia Holdings II (LCA)
Merger Target: Golden Nugget Online (Online Casino)
On June 28, Golden Nugget Online Gaming, a U.S. online real money casino owned by Tilman Fertitta, agreed to a reverse merger with Landacadia. This will be the second pure publicly traded online casino, after DraftKings (NASDAQ:DKNG).
DraftKings now has a $12.6 billion market capitalization. DKNG stock has risen to $35.59 from its pre-merger original $10 SPAC price. By the time it went public, the SPAC price had risen to between $17 and $19 per share. So, essentially, since going public the stock has doubled to its present price of over $35.
I suspect the same could happen with Golden Nugget Online Gaming. Its new symbol will be GNOG, once the deal closes sometime this quarter, although a date has yet been set.
One of the key differences is profitability. For example, GNOG just announced its Q2 showed $24.8 million in net revenue and $8.5 million in operating income. This was up 74% year-over-year. By contrast, DraftKings had higher revenue of $70.9 million but lost $160.4 million on an operating basis. So GNOG is much more profitable.
I suspect there will be more of these online casinos going public, as the Wall Street Journal recently wrote. This is especially since physical casinos are losing money head over heals.
However, it looks to me that LCA stock, later to be renamed GNOG, will be a winner. I believe, given its profitability, it will likely double or even more once the merger is approved and the new symbol starts trading.
Far Point Acquisition Corp (FPAC)
Merger Target: Global Blue (Online Payments)
Far Point Acquisition Corp is slated to combine with Global Blue Group, a Swiss-based payments company. But that deal was announced on Jan. 6, and the deal still has not closed. You also would not know that there even is a deal, since FPAC stock trades below its IPO price of $10 ($9.91, as of Aug. 21).
There has been considerable drama on the deal, as explained in a recent Barron’s article. A special meeting of shareholders is scheduled for Aug. 24 to vote on the deal. Right now, the stock price implies that the deal will not pass. If it does the new symbol on the NYSE will be GB.
Most investors should probably just wait and see what happens with GB stock. Sometimes these deals are better when everyone is on the same side, not working against each other. That seems to be the case here.
However, this could turn into an arbitrage play for astute value players at today’s price. The company has to consummate its Initial Business Combination by Sept. 14.
Otherwise, the $10 IPO money, plus interest, has to be returned to shareholders within 10 days after Sept. 14, after paying all its taxes due. That probably works out to about a 3.3% arbitrage play at today’s price.
Software Acquisition Group (SAQN)
Merger Target: CuriosityStream (Subscription Service: Documentaries)
This is another interesting SPAC merger deal. It was just announced on Aug. 11, and yet SAQN stock has not really moved. It is still trading below $10 ($9.98 as of Aug. 21). Once the deal closes in Q4, the new symbol will be CURI.
I find this interesting for another reason. The original founder of Discovery TV, John Hendricks, founded this “pure-play” non-legacy linear TV streaming company, as Deadline magazine framed it. It streams only factual programs like documentaries. CuriosityStream has 13 million subscribers.
CuriosityStream has over 13 million subscribers in over 175 countries. It costs just $19.99 annually if you don’t buy it on Amazon (NASDAQ:AMZN) Prime, where it costs $2.99 per month. I decided to do this and so far it works great as an app that I stream to my TV via Chromecast, while I write articles on the computer for InvestorPlace.
I suspect the stock is very undervalued at today’s price. Let’s do some simple estimates. For example, 13 million people paying $19.99 annually is $260 million annually. At 10 times revenue that gives it a valuation of $2.6 billion. Now since SAQN stock today has a market value of just $186.5 million, it implies the stock could rise 14 times. Even at five times revenue, the stock would rise 7x.
This could be a real undiscovered gem in the SPAC stocks space.
Hennessey Capital Acquisition Corp IV (HCAC)
Source: buffaloboy / Shutterstock.com
Merger Target: Canoo (Electric Vehicle Manufacturer)
This is another recently announced SPAC deal, as of Aug. 18. Canoo is an electric vehicle maker. It projects 2024 revenue of $1.43 billion and its first profit at $188 million. Canoo expects to build 10,000 canoo vehicles in 2022, rising to 50,000 in 2024.
Right now there are 37.5 million HCAC shares outstanding, so at $10.44, the SPAC has a market value of just $391.7 million. However, there are 30 million warrants outstanding that have an exercise price of $10, and so they are not “in-the-money.” Once the deal closes, the new symbol will be CNOO. Barron’s seems to like Canoo, but the magazine did not put a value on it in a recent article.
Let’s see if we can estimate what will happen with the stock. First, we have to estimate its present market capitalization. I believe its present market cap is now $705 million, even though the warrants would bring in $300 million if exercised (i.e., not in a “cashless” exercise). The company has announced an additional $300 million from a private investment in public equity (PIPE) deal at $10 per share. This results in effectively about 87.5 million shares outstanding. That gives HCAC stock a $914 million market cap on a “see-through” basis.
Moreover, with its $600 million in capital raised, the effective market cap is about $1.514 million. Now we can estimate if this is an adequate valuation.
Probably not. Even if we gave the stock a 3 times revenue multiple, or $4.293 billion, and discounted it by 15% for 2 years, the market value should be $3.25 billion. That is 114% higher than today’s price.
In other words, HCAC stock is worth at least $22.38 per share, over twice its present price. At a higher revenue multiple, the stock is worth even more.
Megalith Financial Acquisition Corp (MFAC)
Merger Target: BankMobile Technologies (Digital Banking Company)
This is a smaller deal, but the merger was announced on Aug. 6 between MFAC and BankMobile. The latter is “one of the largest digital banking platforms in the country with over 2 million accounts.” BankMobile provides its “Banking-as-a-Service” (BaaS) to institutes of higher learning using its BankMobile Disbursements. It reaches more than five million students across the country.
The deal is valued at $140 million and will provide $20 million to the company. The key to understanding this deal is that BankMobile is not a bank. It is a technology platform. It is a division of Customers Bank, based in Western Pennsylvania with $17.9 billion in assets.
I find this arrangement very strange for investors. So far, it is not clear to me how much of this “division” of Customers Bank that the public will own. For example, who has the right to declare dividends — the board of BankMobile or the board of Customers Bank?
This is a very small deal. I believe that on a “see-through” basis, including the $20 million that will be raised, the market capitalization is about $97 million. This is based on MFAC’s present price of $10.28 per share.
Frankly, the deal is too small and too obscure for most investors. I also don’t see any value proposition here. I can’t find the bargain element which is essential for investment consideration.
In summary, I have put together a short table that summarizes most of the main elements of these SPAC stocks deals. You can see below that this table shows my estimates of their effective market values. And it also shows the potential upside — see the far right-hand column.
Click to EnlargeSource: Mark R. Hake, CFA
Most of these deals have a significant upside. In fact, I would urge you to study their documents carefully, since in some cases it might be worthwhile to buy the warrants or the units instead of the common stocks of the SPAC stocks. I will write about this sometime in the near future, describing the upside and risks.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide, which you can review here.
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