Spartan Energy Acquisition Corp. Warrants: Potentially Significant Upside By August 13, 2020 (NYSE:SPAQ)

Via SeekingAlpha.com

Investment Thesis

Spartan Energy Acquisition Corp. (SPAQ) is a special purpose acquisition company (SPAC) with a focus on the energy industry. It went public on August 14, 2018 and raised $552 million which was one of the largest SPAC initial public offerings in that year. Per SPAC requirement, SPAQ has 24 months to complete a business combination, otherwise it will be liquidated. The deadline for SPAQ to complete such a deal is on August 13, 2020, so it might make an announcement at any time over the next two and a half months.

Owning Spartan Energy Acquisition Corp. warrants (SPAQ.WS) is the best way to capture the potentially significant upsides by this unique catalyst. SPAQ.WS is currently at $0.60 and could potentially rally 3x-5x upon a deal announcement and subsequent shareholders’ approval.

SPAC liquidation is a risk of owning SPAQ.WS i.e. the warrants become worthless after the SPAC fails to complete a business combination by the deadline and gets liquidated. However, this risk is likely limited for SPAQ:

1) SPAQ is sponsored and managed by an affiliate of Apollo Global Management, Inc. (APO), one of the top private equity firms in the world. Apollo has ample resources and capabilities to screen, structure and execute deals in the energy sector.

2) With the IPO proceeds and an additional $300 million capital commitment from APO, SPAQ can potentially pursue deals with a valuation of over $3 billion, which will most likely gain SPAC shareholder approval and institutional support in the secondary market.

SPAQ Background

SPAQ is a special purpose acquisition company focused on the energy industry in North America. It is sponsored by Spartan Energy Acquisition Sponsor, LLC, which is owned by an affiliate of APO. For those who are not familiar with the industry, APO, managed by Leon Black, Joshua Harris and Marc Rowan, is one of the top private equity firms in the world with $315 billion AUM at the end of the first quarter of 2020. The key executives of SPAQ are all from APO. For e.g., Chairman of the Board Gregory Beard is a Senior Advisor at APO, and CEO Geoffrey Strong is a Senior Partner, Co-Head of Infrastructure and Natural Resources investment in APO.

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SPAQ completed its initial public offering on August 14, 2018 and raised $552 million, which was one of the largest SPAC deals in 2018. Per its latest 10-Q filings, SPAQ has $569 million in its Trust Account at the end of the first quarter of 2020. Additionally, SPAQ entered into a Forward Purchase Agreement with APO for $300 million which APO would provide upon completion of the potential business combination. So SPAQ could use $869 million to make an acquisition with a valuation of at least $3 billion. As required by SPAC structure, SPAQ has 24 months from the closing of its IPO to complete its initial business combination. SPAQ’s deal deadline is August 13, 2020 and a deal announcement should be made at any time during the next two and a half months.

SPAQ.WS

SPAQ.WS has standard SPAC warrant terms:

1) The warrant strike price is $11.5 and one warrant is entitled to buy one underlying common share.

2) The warrants are potentially redeemable in a cash or cashless transaction if SPAQ’s share price is above $18 for 20 days out of 30 trading days.

3) The warrants will expire five years after the completion of a business combination or earlier upon redemption or liquidation.

SPAQ.WS was priced at $1.50 at the IPO in August 2018 and currently trades only at $0.60, a good entry point with very favorable risk-reward given the clear catalyst in just two and a half months. The likely price outcomes for SPAQ.WS are as follows:

1) Upon a deal announcement, the warrant price could trade up to the range of $1.5-$2.

2) Upon completing the shareholders’ approval and assuming the deal is well received by the secondary market investors, such as Virgin Galactic (NYSE:SPCE) and DraftKings (NASDAQ:DKNG), the warrant price could potentially go to the range of $4-5 or even higher.

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3) If SPAQ is not able to complete a deal by the deadline or its proposed deal is not approved by the shareholders, SPAQ will be liquidated and SPAQ.WS will go to zero. However, this risk is mitigated by APO’s deal sourcing and execution capabilities. So instead of setting the downside at $0, the more reasonable downside target could be $0.30, the all-time low happened in the March selloff.

Another factor unique to SPAQ is that it focuses on the energy industry which is at the bottom of the cycle. Any potential deal SPAQ eventually executes in the next two and a half months could present a high quality long energy trade with significant upside as the industry recovers.

SPAQ.WS Price Chart as of May 29, 2020

Source: Bloomberg.

Key Risks

1) If SPAQ is not able to complete a business combination by the deadline, the SPAC will be liquidated and its warrants will be worthless.

2) SPAC warrants are not as liquid as underlying common shares, warrant investors could be exposed to liquidity risk, especially in the volatile market environment.

Conclusion

SPAQ will need to announce a business combination by August 13, 2020, otherwise it will be liquidated. Owning SPAQ.WS at the current price will not only capture potentially 3x-5x upside created by this catalyst in the next two and a half months, but also enter a pure-play long energy trade together with top private equity firm APO at the bottom of the cycle.

Disclosure: I am/we are long SPAQ.WS. 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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