BT Explains: Why do Singapore-listed Spacs have vastly different redemption prices? 

TWO special-purpose acquisition companies (Spacs) – Novo Tellus Alpha Acquisition (NTAA) and Pegasus Asia – announced differing redemption prices for their shares this week. This was even though both had the same initial public offering (IPO) price of S$5 per unit.

NTAA will let investors redeem S$5.18 for each Class A share, higher than the S$5.03 rounded-up price offered by Pegasus Asia.

Peggy Mak, research manager at Phillip Securities Research, described NTAA’s redemption price as a “positive surprise”. She noted that the price translates into a return of about 3.6 per cent over two years.

The Business Times explains the difference in redemption prices for both companies.

Background

Both companies, along with Vertex Technology Acquisition Corporation (VTAC), listed on the Singapore Exchange (SGX) in 2022. They were the first Spacs to debut in Singapore.

Last December, Pegasus said that it would not conclude a business combination and would wind up, citing unfavourable market conditions. NTAA followed with a similar announcement a month later. Both companies will delist from SGX later this month.

VTAC, which also had an issue price of S$5 per unit, went through a business combination with live-streaming platform 17Live Group last December. It paid shareholders who exercised their redemption rights S$5.01 per share.

How do Spacs decide on a redemption price?

Spacs typically place the funds they raise during their IPO process in an escrow account. These proceeds can be invested and earn an interest for the account pending the acquisition of a target. The interest can be used for administrative and general working capital expenses.

If the Spac cannot find a suitable target, or if the majority of shareholders vote against the business combination, the Spac will be liquidated and the pro-rata share of the escrow account will be returned to shareholders.

The refunded amount, which is known as a redemption price, involves dividing the aggregate amount available in a Spac’s escrow and bank accounts across the total number of shares to be redeemed.

The aggregate amount in a Spac’s escrow account may include any interest earned, but excludes other fees incurred by a Spac, such as its operating expenses and taxes.

Why do NTAA and Pegasus have different redemption prices?

Analysts attributed various factors to the difference in the Spacs’ redemption prices, including the initial capital raised and their cash-management strategies.

Cheng Chye Hsern, who heads the investment team at wealth advisory firm Providend, said that the difference in redemption price could be due to their different level of assets and number of redeemable shares.

Pegasus Asia has a total amount of S$152,814,869 in its account which will be distributed over a total of 30,458,900 shares.

Likewise, the aggregate amount in NTAA’s escrow and other bank accounts is S$160,797,022. This amount will be divided by 31,018,500, which is the total number of redeemable shares.

Cheng added that the final aggregate amount to be distributed to shareholders could vary for several reasons. For example, the two companies could have raised different fund amounts from investors or had different fee expenses and cash-management strategies.

Zheng Bolun, a research analyst from investment firm FSMOne.com, said that the redemption price of a Spac can be influenced by the redemption and warrant exercise structures. These are typically specified in a Spac sponsor’s IPO prospectus.

In the case of Spacs in a liquidation scenario, the use of the Spac’s interest proceeds also affects the redemption price.

For example, Pegasus Asia noted in a Jan 26 bourse filing that its escrow account had undrawn interest of around S$3.58 million as at Dec 31, 2023.

The company said that it withdrew interest income in July 2023, November 2023, and January 2024 in the amount of S$0.7 million, S$1.3 million and S$3.02 million respectively. These amounts were used for expenses, working capital and corporate income tax.

In NTAA’s case, the company said in its quarterly cash update last November that it had not used the interest income from its escrow account other than to invest in bills issued by the Monetary Authority of Singapore.

On Feb 2, the company said that it will redeem all its issued Class A shares. The price per share would be equal to the aggregate of the amount on deposit in its escrow account divided by the number of Class A shares in issue. The aggregate would include interest earned on and income derived from funds held in the account, and amounts deposited in other accounts held by NTAA.

What does this mean for investors?

Cheng of Providend noted that investors can track a Spac’s fees, costs and cash-management plans if they are looking to invest in a Spac that can give them the best redemption price.

However, Mak said that investors should not invest in a Spac based on its potential redemption price.

“Investors that invest in a Spac are giving the company a blank cheque to look for investments at reasonable valuation. Hence, the quality and track record of the sponsor, and its ability to attract investors are key considerations,” she added.