SPAC produces one of world's biggest billionaire implosions

THE merger machine that's minted some of the world's biggest new fortunes is also responsible for one of the largest wealth implosions.

Arrival's Denis Sverdlov, who was worth US$11.7 billion a year ago, lost his billionaire status last month as shares of the electric-vehicle maker he founded have cratered since combining with a special purpose acquisition company (SPAC). His 94 per cent decline in net worth is the largest wealth loss of anyone outside China who appeared on last year's Bloomberg Billionaires Index, exceeding even the 90 per cent drop of Carvana's Ernie Garcia III.

Only Chinese education-tech billionaires Zhang Bangxin and Larry Chen, who lost 96 per cent and 99 per cent of their fortunes, respectively, amid the country's crackdown on the industry, have notched larger percentage declines.

Sverdlov's collapse is a cautionary tale of how SPACs - a financial manoeuvre that boomed in recent years - can go from a means of wealth creation into one of destruction. Even some banks that helped create the SPAC market are now spurning them over risk concerns, with Goldman Sachs Group and Bank of America both curtailing their involvement.

The once-niche market was seen as a way to help companies get a public listing while avoiding some of the disclosure requirements of an IPO, attracting all kinds of deep-pocketed financiers, celebrities and athletes. This year through mid-May, 66 SPACs had raised just US$11.5 billion on US exchanges, compared with 317 that had amassed US$102 billion at this point in 2021, according to data compiled by Bloomberg.

"Arrival is dealing with the negative halo effect of SPAC companies," said Susan Beardslee, principal analyst at ABI Research.

Margin loan

A spokesperson for Arrival declined to comment.

Adding to Sverdlov's troubles was a margin loan he took out last year from Citigroup against US$1.5 billion of Arrival stock. In April, a company controlled by the former billionaire granted the bank a security interest in about 5 per cent of his shares in exchange for US$79 million, which he used to pay back the loan.

SEE ALSO

Dragonfly Energy strikes SPAC deal valued at US$500m: sources

A former Russian deputy minister, Sverdlov, 43, founded the UK-based company in 2015 using money from a previous fortune in telecoms. By 2020 he'd invested US$450 million in Arrival and the following year took it public after combining with CIIG Merger, a SPAC led by Peter Cuneo, the former chief executive officer of Marvel Entertainment.

Arrival's market value quickly soared to more than US$13 billion, making Sverdlov one of the wealthiest people on the planet thanks to his roughly 75 per cent stake. SPACs were especially popular method at the time for taking EV companies public, with investors rewarding companies like Nikola, Lordstown Motors and Canoo with super-sized valuations. Last week, Canoo warned that it may not have enough cash to keep doing business.

Hampered by production delays and forced to abandon earlier forecasts, Arrival's share price has fallen about 95 per cent since its post-merger peak. Aside from concerns over its SPAC route to market, investors don't appear enthusiastic about its plans to use microfactories to build electric vans and buses. The company - which currently has one factory in the UK and is building 2 more in the US - has yet to bring a product to market.

'Bit nebulous'

"Arrival's microfactories strategy still feels a bit nebulous," said Philippe Houchois, a managing director at Jefferies in London. "It's interesting intellectually, but we haven't seen it in practice yet and the market doesn't like uncertainty right now."

The company said last week that it aims to begin production at its UK factory in the third quarter with 400 to 600 vans built by year-end.

Arrival reported US$735 million in cash or cash equivalents at the end of the first quarter, according to a May 10 statement, giving it a substantial cushion as its market capitalisation falls. It expects to end the year with US$150 million to US$250 million in cash.

Unlike the founders of Nikola and Lordstown Motors, who left their companies after shares cratered, Sverdlov is staying put. Partly that's out of necessity. The entity through which Sverdlov controls Arrival, known as Kinetik, is required to maintain control of 50 per cent or more of its voting shares until the end of the year, according to a November securities filing. BLOOMBERG