Canadian SPACs: Rising From The Ashes

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Special Purpose Acquisition Corporations (SPACs) are all the rage. Once mired in obscurity, SPACs are reaching a fever pitch. The SPAC uptrend began in 2017, when 34 SPACs IPO’ed and raised $10 billion in funds. This was more than double the year prior. In 2019, there were 59 SPAC IPOs […]

Special Purpose Acquisition Corporations (SPACs) are all the rage. Once mired in obscurity, SPACs are reaching a fever pitch. The SPAC uptrend began in 2017, when 34 SPACs IPO’ed and raised $10 billion in funds. This was more than double the year prior. In 2019, there were 59 SPAC IPOs which raised $13.6 billion. Then came 2020, the year of unprecedented events.

Source: SPAC research

In 2020, there have been 81 SPAC IPOs with funds raised totalling $33.1 billion. There are an additional 30 at various stages of pre-IPO which are aiming to raise ~$6.5 billion in funds. In total, there are now 153 active SPACs on US exchanges with ~$48 billion in trusts.

Today, I do not intend in going into the merits or performance of U.S.-listed SPACs. If you are interested in more in-depth coverage on U.S.-listed SPACs, I would highly recommend following fellow Seeking Alpha contributor Chris Demuth Jr. In my opinion, they provide best-in-class coverage in this area.

The purpose today is to look at the Canadian SPAC market. As someone who covers the Canadian markets on SA, I have been getting asked many questions about TSX-listed SPACs. Naturally, given the popularity south of the border, Canadian investors are looking for similar investments in the great white north.

The good news? There is a Canadian SPAC market. The bad news? It is virtually non-existent.

Canada’s SPAC Background

SPACs south of the border have existed in the US markets since the early 90s, but the TSX had always been resistant to the idea. However, as SPACs gained in popularity in the early 2000s, the TSX finally caved and adopted rules to allow for SPAC listings. Officially, the TSX began permitting SPACs on December 19, 2008.

If SPACs were so popular, one would think that there would be a host of suitors lined up. But no, it was crickets for years. The first SPACs to list in Canada did not occur until 2015 and through 2016 there were six TSX-listed SPACs that went public and combined, they raised approximately $1 billion in trusts.

Unfortunately, they were nothing short of a failure. According to an article by the Globe and Mail from 2017, only one of those six closed a “clean, successful deal.” Summarized, the reasons for their failures were as follows:

  • Unable to compete against large hedge funds and pension plans which had deeper pockets.
  • The SPAC investors proved hard to please.
  • The cost of not closing on a deal is too big of a deterrent.

These issues led to the author concluding that SPACs were all but dead in Canada. He wasn’t wrong – there has been little activity since. In effect, the Globe piece truly was “An Obituary for Canadian SPACs.”

Rising from the ashes

Now that SPACs are as hot as ever south of the border, will it lead to a market revival in Canada? At this point, interest remains muted.

As of writing, there are only two TSX-listed SPAC companies – Bespoke Capital Acquisition Corp. (OTCPK:BKCQF)[TSX:BC.U] and NextPoint Acquisition Corp. [TSX:NAC.V]. Are either of these worthy of your attention? Let’s take a look.

Bespoke Capital Acquisition Corp. “BCAC”

On August 15, 2019, BCAC closed on its IPO raising gross proceeds of US$350 million at US$10.00 per Class A Restricted Voting Unit. A typical offering in which there was an over-allotment option of US$52.5 million.

Each Class A Restricted Voting Unit is comprised of one Class A Restricted Voting Share and one-half Warrant. Each whole Warrant [TSX:BC.WT.U] entitles the holder to purchase one Class A Restricted Voting Share for US$11.50 per share.

The corporation is led by Executive Chairman Paul Walsh (former CEO of Diego) and Peter Caldini (former senior executive at Pfizer).

According to the company’s website “BCAC’s strategy is focused on building a leading international vertically integrated cannabis company operated to the highest standards of regulatory compliance and corporate governance.”

While this may have been attractive a few years ago, the cannabis industry has been decimated. In my opinion, it is one of the least attractive industries. It has been fraught with challenges from governance to operations, and the markets are continuously over-estimating demand. The cannabis industry remains speculative, and still carries considerable risk.

Granted, BCAC can do a 180 as “it is not limited to a particular industry or geographic region for purposes of completing its Qualifying Acquisition.” The likelihood of this is low however, as they still maintain their focus on the cannabis industry.

As of writing, the BCAC is trading at CAD$9.99 per share and has traded sideways since it went public. A year later, there has been little news and no indication they are any closer to closing on an acquisition. Combine that with the fact it is focusing on the cannabis industry, there is little appeal for me here.

NextPoint Acquisition Corp.

Canada’s newest SPAC, NextPoint acquisition just went public on the TSX Index on August 11, 2020. The company raised US$200 million at US$10.00 per Class A Restricted Voting Units with an over-allotment option of $30 million.

The details of the IPO are identical to that of Bespoke. Each Voting Unit [TSX:NAC.V] is comprised of one Class A Restricted Voting Share and one-half Warrant. Each whole Warrant entitles the holder to purchase one Class A Restricted Voting Share at US$11.50.

Since we are not yet 40 days post IPO, the Class A Units NAC.V are still trading on the TSX. Once the 40 days expire, NAC.V will split and the Class A Restricted Voting Shares and Warrants will trade separately under the symbols NAC.U and NAC.WT.U. This means, that if you purchase NAC.V today, you will be entitled to one Class A Voting Share and one-half Warrant per unit.

The team is led by the BasePoint Capital duo of Andrew Neuberger (Founder and former CEO) and Frank Amato (CFO). BasePoint Capital is a privately held, UK-based diversified specialty finance company.

According to Newberger, BasePoint has lent US$4.1 billion in capital and provided investors with net returns of 11% annually. He sold BasePoint Capital earlier this year (January) for an undisclosed amount and is now leading NextPoint.

NexPoint intends to focus its effort on the alternative lending and financial services industry. In my opinion, this is much more attractive as there are plenty of emerging fin-tech companies and well-run alternate lenders that can make for interesting targets.

By all accounts, Newberger had success with BasePoint Capital and he now appears fully focused on NextPoint. Although it has not entered into a written or oral acquisition, NextPoint claims to have already entered into discussions with potential targets.

Of the two TSX-listed SPACs, I believe NextPoint is the one with the most promise and upside.

Conclusion

The SPAC market in Canada is far from robust. In total, there are only seven Canadian SPACs and only two are currently trading on Canada’s largest Index. The rest are trading on either the NEO or CSE exchanges. Of the seven, six are focused on the cannabis industry. In general, this makes them unattractive.

The most interesting is the lone company looking outside the cannabis industry. NextPoint seems to have all the right ingredients for success. However, at US$200 million, it is a smaller SPAC, especially when it is compared to peers south of the border.

Given its low capital, the fact it is being led by a first-time SPAC-er and Canada’s poor record of SPAC success, NextPoint is not without considerable risk.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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