- Several SPAC mergers could be abandoned this year, with these three at particular risk.
- Riley Principal 150 Merger Corp (NASDAQ:BRPM): FaZe Clan’s poor liquidity and missed targets could make investors develop cold feet as the SPAC merger deal progresses.
- Digital World Acquisition Corp (NASDAQ:DWAC): Former President Donald Trump-related Truth Social platform’s launch faced challenges, regulatory risks could foil its SPAC merger with Digital World Acquisition Corp.
- Dune Acquisition Corp’s (NASDAQ:DUNE): Merger with TradeZero Holding may be voted “against” by Dune SPAC stockholders.
Banking giant Citigroup (NYSE:C) is pausing work on new special purpose acquisition companies (SPACS) as the Securities and Exchange Commission (SEC) tightens rules. Underwriters are pressing the brakes on new issuances, however, the blank-check companies’ challenges in 2022 don’t end there. Even some highly anticipated SPAC mergers may be at risk of being scrapped.
The well-reported demise of SPAC deal formations could be gathering pace as stock market valuations take a growth breather. Several highly anticipated SPAC mergers may never see the light of day — some due to purported fraud, poor financial performance and failure to execute expected milestones.
On a positive note, the highly anticipated merger between premium electric vehicle maker Polestar Automotive and the Gores Guggenheim Inc. (NASDAQ:GGPI), a SPAC, had its termination dates extended in April from May 27, 2022, to June 24 this year. Parties have more time to tie any loose ends on the deal for it to sail through.
The rate at which prior announced merger deals with blank check companies (SPACs) getting scrapped is ever increasing since last year.
Forbes reported on some 17 SPAC mergers valued at $37.2 billion that were terminated during the second half of 2021, compared to four flops worth $720 million during the six months prior. For comparison, only seven SPAC deals were terminated in 2020.
SPAC merger deal cancellations gathered pace in 2022. Investors are increasingly walking away and withdrawing their support for SPACs. Historical poor performance after completed deals, reports of accounting shenanigans, and tightening regulation by the Securities and Exchange Commission amid several regulatory probes are magnifying some problems with blank check firm acquisition deals.
Below are three long-awaited SPAC mergers at risk of being scrapped. Let’s take a closer look.
| BRPM | Riley Principal 150 Merger Corp. | $9.83 |
| DWAC | Digital World Acqusition Corp. | $38.40 |
| DUNE | Dune Acquisition Corporation | $9.95 |
FaZe Clan and Riley Principal 150 Merger Corp (BRPM)
Esports and gaming powerhouse FaZe Clan’s widely anticipated merger with a special purpose acquisition company B. Riley Principal 150 Merger Corp (NASDAQ:BRPM) could be at risk of falling away. The issue has to do with valuation, and other material disclosures made recently.
FaZe Clan entered into a $1 billion merger agreement with BRMP on Oct. 24 last year. The merger was supposed to close during the first quarter of this year. We are now deep into the second quarter of 2022, and the SPAC merger could be at risk of being scrapped.
The highly anticipated SPAC merger transaction’s valuation was premised on Faze Clan’s financial projections for $50 million in revenue, $10 million in gross earnings, and a $19 million adjusted EBITDA loss for the year 2021. However, actual results included $52.85 million in revenue, an $11.3 million gross profit, $36.9 million in net losses, and a staggering $28.7 million Adjusted EBITDA loss. Revenue and gross profits outperformed, but an SEC-mandated change in Adjusted EBITDA accounting created problems.
In an updated prospectus filed by BRPM on April 29, it’s notable that FaZe Clan is illiquid. Most noteworthy, increasing losses cast “substantial doubt about (its) ability to continue as a going concern,” management recently disclosed. The company could face bankruptcy if the merger is delayed. The SPAC’s investors will vote to approve or foil the deal at a date to be announced.
It’s highly likely that investors may walk away from the seemingly distressed asset. If the transaction goes ahead, a substantial number of investors may redeem their shares and leave FaZe Clan with little cash to pursue growth initiatives.
BRPM stock has declined by nearly 14% from its Oct. 26 price to below redemption value.
Trump Media & Technology Group and Digital World Acqusition Corp (DWAC)
After being kicked off major social media sites, former President Donald Trump is linked to a new rival social platform Truth Social. The Trump Media & Technology Group (TMTG), the company behind Truth Social, announced on Oct. 20, 2021, its proposed merger with the Digital World Acquisition Corp (NASDAQ:DWAC).
Truth Social’s launch hasn’t been rosy, but as a typical tech start-up, investors may forgive its execution missteps as they focus on its capacity to attract millions of “truth” seeking subscribers. Recent revelations concerning the exodus of key personnel can form a sound basis for a bearish thesis. However, it’s regulatory issues that may stifle the TMTG’s SPAC merger with DWAC.
The TMTG’s merger with the DWAC SPAC is under investigation by the SEC and the Financial Industry Regulatory Authority (FINRA). In a recent report, short-seller Kerrisdale Capital Management is convinced the regulator could block the deal as a loud message to a SPAC capital market that has shown a tendency to mislead investors.
“DWAC’s ability to close its merger with TMTG is materially threatened along two distinct but inextricably linked regulatory paths: the need to file and have deemed effective an S-4 registration statement regarding the proposed merger with TMTG, and the active SEC investigation into material misstatements contained in DWAC’s S-1” Kerrisdale Capital states in its report in April.
An average SEC investigation lasts for three years, a 2019 study revealed. And a SPAC’s lifespan is usually two years. It’s possible that regulatory risks could materialize and derail the merger.
DWAC stock price has declined 52% since March this year.
TradeZero and Dune Acquisition Corp (DUNE)
The bad blood between brokerage firm TradeZero Holding Corp’s management and the backers of the Dune Acquisition Corp (NASDAQ:DUNE) has reached boiling point, and the SPAC merger may fall away.
Dune Acquisition entered into a $560 million merger agreement with TradeZero Holding Corp in October 2021. However, Dune later filed a lawsuit against TradeZero in April alleging that the brokerage firm duped Dune into signing the deal.
Following the filed lawsuit, the Dune SPAC’s Board of Directors unanimously determined on Tuesday that the merger isn’t advisable or fair to or in the best interests of Dune and its stockholders. Naturally, the board recommends shareholders vote against the merger.
I wonder if there could be any compelling reasons for investors to vote otherwise.
DUNE stock price of $9.96 per share was at a discount to fund redemption price of $10 at the time of writing.
On the date of publication, Brian Paradza did not hold (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.