When you buy stock of a special purpose acquisition company (SPAC), you’re buying into the company that’s going public. In the case of TPG Pace Beneficial Finance Corp (NYSE:TPGY) stock, the target is EVBox, the largest EV charging company in Europe.
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However, as shareholders of TPGY stock are discovering, there’s no such thing as a sure thing when it comes to SPACs.
After climbing as high as $31.57 a share in early February, TPGY stock has dropped more than 60%. It will open this morning at around $12.15.
That’s the kind of volatility you get from a meme stock.
Of course, there is a difference that current bag holders of TPG Pace Beneficial should keep in mind: at least with a SPAC stock you know your floor.
Let the Buyer Beware
Investing in a SPAC stock is one of the riskier ways to invest. Prior to an announced merger, many investors are “betting on the jockey” (i.e. the sponsor of the SPAC).
Those sponsors with a proven reputation of bringing successful companies public may attract premium prices. However, early investors generally can buy into a SPAC for around $10 per share.
All bets are off once a merger target is announced. In fact, a SPAC may rise well above its introductory price because of interest in the company that the SPAC is bringing public.
That was the case when TPG Pace Beneficial announced it was bringing EVBox public.
TPGY stock has not held its initial gains unfortunately and is now trading just a couple of dollars above the psychologically significant $10 mark.
Will the Merger Go Through?
A big reason that TPGY stock is dropping is concern that the merger may get called off. In mid-May TPG filed an 8-K form part of which warned there was a chance uncertainty would keep the deal from getting done at all.
The issue seems to center around the ability of EVBox to produce audited financial statements. It’s apparently going to take longer than expected. In fact, the company said it could now take until early September to get the merger approved.
If the issue is a question of crossing t’s and dotting i’s then it seems likely that both sides will remain committed to the deal.
However, TPGY stock is down nearly 50% from the beginning of the year. Not all of that can be explained by the delay in a merger.
So Why Is TPGY Stock Dropping?
Unlike some targets of SPAC deals, EVBox is a company that is generating sizable revenue with a strong outlook for future growth. As ChargePoint (NYSE:CHPT) and Blink Charging (NASDAQ:BLNK) demonstrate, this is a sector that has room for more than one company.
But there are questions about this narrative. The first is in the adoption of electric vehicles in the United States. EVBox is a Dutch company and, as Josh Enomoto describes, it’s almost fiscally irresponsible not to own an EV in the Netherlands.
It’s possible that the United States could start providing generous incentives for individuals to buy electric vehicles. However, it seems that even the most punch-drunk congressional representative is beginning to grasp the reality of our bloated federal budget.
It would seem unlikely that the Biden administration will be able to pass its entire $6 trillion budget.
The $2 trillion infrastructure plan that includes funding for EV charging stations will likely get pared down. All of this is to say that there may not be the will to pass generous subsidies.
Even if they did, the United States does not have nearly the supply to match such a demand. Which is not to say it won’t, but there will have to be a charging infrastructure in place to facilitate that demand anyway.
Now Is Not the Time to Buy
There is a third explanation. With the prevalence of SPAC announcements in 2020, a popular trade has emerged. Investors buy into the SPAC company before the merger announcement and sell after the announcement is made.
That being said, I believe that the investors who had the most to gain already took profits before TPGY stock dropped in May.
At this point, if you’re still holding the stock, you at least know that the stock won’t dip much below $10 and may gain momentum if a deal is confirmed.
But without clarity that the merger will go through, there’s no reason to enter a new position at this time.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.
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