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Grab the de-spacs with excess cash

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam2/23/2023 05:57 PM GMT+08  • 4 min read
Grab the de-spacs with excess cash
With its space exploration capabilities, Astra Space is at the cutting edge; but its share price has cratered following its de-spac / Photo: Astra Space
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Winning a lottery can turn out to be a setback. This was the sorry fate of Abraham Shakespeare, a manual worker in Florida, who won the lottery in 2006.

It was unclear whether Shakespeare was a descendant of the man who wrote Hamlet. However, Shakespeare’s fate was tragic.

In November 2006, his life changed beyond recognition. He bought a lottery ticket while on the highway to Miami. It turned out to be the winning Lotto ticket worth US$30 million.

Shakespeare moved out of tenement housing to a luxury apartment. Shakespeare’s bank account had risen exponentially in value. The number of people who claimed to be Shakespeare’s friends also rose!

Hangers-on joined Shakespeare in spending sprees. Even strangers wanted Rolex watches from him.

By April 2009, Shakespeare’s fortune had evaporated. He suddenly went missing until his dead body was found buried in his garden. His girlfriend was convicted of his murder.

See also: Spac euphoria turns into painful reckoning as liquidity runs dry

Blank-cheque companies

A lottery of a different sort has taken place in the stock market. In 2021, the special purpose acquisition company (spac) boom took a hold of the market.

Spacs are also known as blank-cheque companies. Spacs raise money in an IPO and then have two years to find a merger target. The target is a private company that they bring public through the merger.

See also: Grindr's biggest investors are billionaires on stock surge

The shares in a spac are redeemable. If the spac investors do not like the merger, they can redeem their investment.

Buoyed by low interest rates, spacs blossomed in 2021. A total of US$140 billion was raised by spacs in 2021. This was more than twice the funding raised by conventional IPOs.

Spac promoters claimed that they were providing ordinary investors with access to the next Amazon. Companies in technology, artificial intelligence, biotech and electric vehicles were popular spac targets.

The boom evaporated in 2022. The spac Index is down 50% from its peak. The de-spac companies (these are the spacs that completed the mergers) have fared worse. Grab Holdings, the world’s largest spac deal, is down 80% from its peak.

The collapse has created an embarrassment of riches. In some cases, the de-spac companies have raised more money than they can spend. Also, the drop in stock prices has left many spacs trading close to their net cash. Shakespeare did not need the money that he splurged.

Space frontier

One such example is Astra Space, a space tech company. The company is at the cutting edge of the final frontier — space.

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It completed its de-spac in 2021. Since then, it has lost 90% of its value. The drop has been so savage that it is now trading at below its net cash of US$148 million ($198 million). The heavy capital expenditure has burnt about US$200 million in the last two years.

However, cash flow positivity may be imminent. Investors should reach for the stars with this spac.

Nextdoor Holdings is a social network for a neighbourhood. It connects communities by providing local information. Facebook and Instagram are adept at linking people across continents. Nextdoor links people across the street with a local cake shop.

It uses technology to cement the neighbourhood. The company went down the spac route in 2021. After losing 74% of its value, its net cash of US$604 million is three-fourths of the market cap.

According to the forecasts, it would become free cash flow-positive in FY2025. It would burn around US$71 million in the interim, which is less about a 10th of its net cash.

Nextdoor’s revenue is growing at 10% per annum. It may be better off selling the site to a tech giant. Facebook, trading under Meta Platforms, might be a buyer for a platform with an implied value of US$150 million. By making it an investment trust, the promoters could generate a return of 5% in fixed deposits. This would amount to a guaranteed return of US$40 million.

Nextdoor may be the bargain around the corner. The spac boom has been a windfall beyond the fondest expectations of its sponsors. Investors should reward companies that avoid Shakespeare’s fate.

Nirgunan Tiruchelvam is head of consumer and internet at Aletheia Capital and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column

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