Happy Thanksgiving to our US readers. While you are basting turkeys, the rest of us will be waiting on some Turkey based news, namely whether the country’s central bank will continue to cut interest rates when it meets today, despite inflation soaring past 85%. Is mainstream economic theory wrong or is Turkey stuffed?

The lowdown

• 👷🏾 Worker unrest at Chinese Foxconn plant where iPhones are made.

• 🇨🇭 Credit Suisse shareholders approve 4 billion Swiss franc capital raise as part of restructuring plan.

• 🏦 Fed minutes show strong support for slowing the pace of rate hikes.

Flex your finance muscle 💸💪

We are going deep on SPACs today.

First, what a Special Purpose Acquisition Company is (in case you have just woken from a coma or don’t work in finance). We will then consider redemption rights and how these can drive odd outcomes.

The basics

There are two phases. Firstly, raising capital from public investors in an Initial Public Offering (IPO) and secondly, using this capital to invest in a private operating business. That business becomes a public company in what is referred to as the initial business combination (IBC).

During the IPO, the promoter raises funds from investors to list the SPAC and to acquire the private company. This is typically done at $10 per share. At this stage, investors do not know what the target company will be – they are effectively writing a blank cheque and trusting that the promoter can identify a suitable business to purchase.

Here is a handy SPAC crib sheet.

SPAC redemption rights

Prior to the IBC, investors in the IPO will vote on the proposed transaction. If the required number of investors are in favor, the transaction will proceed. Investors can choose to redeem their shares and receive $10 per share back if they do not want to invest in the proposed IBC.

A shareholder may vote in favor of the IBC and still choose to redeem their shares prior to the transaction. But why would they do this?

Warrants, of course. In addition to the IPO shares, investors receive warrants that they continue to hold even if shares are redeemed.

The warrants give an investor the option (but not the obligation) to purchase shares at a ‘strike price’. If the strike price is $12 and post IBC, the SPAC is trading at $15, an investor can redeem the warrant for a $3 profit. So there is a strong incentive to approve the deal even if you choose to redeem your shares due to warrants.

Problems can arise where the ‘minimum cash condition’ is not met – that is the minimum amount of capital that needs to be raised for the deal to proceed. If 100% of investors vote in favor of an IBC but 70% of investors choose to redeem their shares, then the SPAC may not raise enough capital to effect the transaction. This is not always fatal (more on this below.)

Featured stories

Babylon Health shares sickly after SPAC

Babylon is a UK based healthcare provider that listed on the NSYE by way of a SPAC in 2021.

The IBC was approved yet 90% of shareholders elected to redeem their shares. You might think that in a situation like this, the minimum cash condition would not be met, and the SPAC would not proceed. To get around this, the company used a ‘Private Investment in Public Equity’ ($). A PIPE is basically an agreement between sophisticated investors to put in more cash. (We will discuss why a promoter is incentivised to proceed with a transaction on Monday.)

This left the company with only $275 million of the expected $575 million. The share price has tumbled from the IPO price of $10 to 52 cents. It’s safe to say that the warrants are currently out of the money.

Another SPAC that recently IBC’d is Grindr (which we spoke about on Monday). The stock initially experienced an IPO pop (or rather IBC pop) reaching $71.51, but has since returned to the $10 level.

The content we're consuming today

• The New York Times: As Dinosaur Fossils Fetch Millions, There’s Many a Bone to Pick ($).

Off-balance sheet items

• The transfer value of teams at the FIFA World Cup in 2022. Doing some quick math, Germany has the highest transfer value per goal, at €1 trillion, and Iran has the lowest transfer value per goal, at €36.5 million. It’s still very early in the competition though and some teams have not played or scored.

The bottom line