Social Capital Hedosophia Holdings Corp. IV (NYSE:IPOD) is a blank check company with no merger deal but trades a huge premium. IPOD stock trades like a special purpose acquisition company that already has a merger deal.
The problem is it doesn’t. But the stock, now at $17.50, trades at a 75.5% premium to its IPO price of $10.
Investors have bid up IPOD stock based on the success so far of other SPAC deals run by Social Capital Hedosophia. Several articles have come out describing this phenomenon, including a recent one in Seeking Alpha.
Social Capital’s Track Record
For example, that article focuses on the track record of the major owner of Social Capital, Chamath Palihapitiya. He brought Virgin Galactic (NYSE:SPCE) public in the first Social Capital SPAC. The stock is now trading over $30 and represents a gain of 300% to the IPO investors in that SPAC (named IPOA).
The second Palihapitiya SPAC merger deal with real estate buying company Opendoor Technologies (NASDAQ:OPEN) can also be seen as a success. It now trades for over $29 and represents a gain of $19 over the $10 IPO price of IPOB.
The third Social Capital SPAC, IPOC was a merger with Clover Health Investments (NASDAQ:CLOV). It just recently completed its reverse merger. The stock now trades for $13.50 and can be seen as a moderate success.
Nevertheless, the market seems to believe that IPOD stock, with no merger sight unseen, will be a success. This is despite the fact that Social Capital has only said it will focus on technology. In fact, at the same time, the company also raised money for two other blank check stocks with the tickers IPOE and IPOF.
As it stands, Social Capital IV has raised $461 million. However, there are now 57.5 million Class A and Class B shares outstanding, as of Oct. 14, according to its post-IPO balance sheet filing with the SEC. That implies that it is now worth only $8.01 per share (i.e., $461 million divided by 57.5 million shares).
Nevertheless, investors still have the right to hand their shares in for $10 per share plus interest, once a merger deal is announced. Therefore, at $17.50 the market seems to think that any resulting merger deal will be sufficiently impressive to the market that its price will rise above this level.
This is almost by definition, the nature of speculation. There is very little basis for this price.
The Problem With PIPE Deals
Moreover, consider that Social Capital is likely to raise further capital with a traditional PIPE deal (private investment in public equity) once the merger deal is announced.
The problem is the PIPE investors have traditionally gotten in at $10 per share for their investments. So, why in the world should public investors hand the PIPE investors this guaranteed profit of at least 75.50% (i.e., $17.50 divided by $10)? This makes no sense to me.
For example, Landcandia Holdings II just closed its SPAC merger with Golden Nugget Online Gaming (NASDAQ:GNOG) without doing a PIPE deal. They decided to wait until after the merger closed recently to raise additional capital.
I wrote about this in a recent article on GNOG stock. That way the PIPE investors do not get special treatment above the post-SPAC IPO investors. Moreover, as a result, the SPAC investors end up owning more of the company post-merger than having the PIPE investors.
Therefore, it troubles me that Social Capital has consistently given PIPE investors this advantage in their deals. It is one more reason why IPOD stock does not deserve this high a premium.
What To Do With IPOD Stock
Needless to say, I am not a fan of buying IPOD stock at this elevated price. Sure, maybe Social Capital’s deal might deserve some sort of premium. But not as 75% premium, and certainly not with an advantage for the PIPE investors.
Therefore, I suggest that most investors should wait either for the IPOD stock to fall or for a merger deal to be announced. At least at that point, one can avoid the terrible mistake of buying simply motivated by speculative fever.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.