Spac-squared is Wall Street’s latest wheeze
JUST when you think you’ve seen it all in Spac-land, along comes a money-losing company that only recently went public via a blank-cheque firm announcing a merger with a second special purpose acquisition company (Spac) to save its skin. Spac-squared, if you like.
Wejo Group, a British connected-vehicle data company, became a public company in November 2021 after combining with Virtuoso Acquisition, a Spac. Last Tuesday (Jun 6), Wejo said it plans to merge with another blank-cheque firm, TKB Critical Technologies I, to secure up to US$100 million in cash.
While this isn’t the first time a Spac has announced a deal with an already-public company, such transactions are unusual. Typically, these listed cash-shells are used to bring private companies onto the stock exchange, circumventing the regular initial public offering process.
It’s also the first time I’ve seen a company that’s already completed one Spac merger promptly turn around and do another. Former Spacs are called de-Spacs, so I guess we could also dub this a re-Spac. Angela Blatteis, TKB’s co-chief executive officer, acknowledged in a press release that the parties were “breaking new ground with a unique de-Spac transaction”. TKB is advised by Jefferies Financial Group.
Wejo’s financial contortions underscore the economic pressures recently-listed tech companies face, as rising interest rates deter investors from investing in cash-burning enterprises and their slumping share prices and low trading volumes make it harder for them to raise capital. Several have recently been acquired by rivals with more cash than they have.
It also comes as Spac sponsors struggle to find attractive deals within the allowed time limits and risk having to liquidate, thereby causing their financial backers to lose their initial investment. In this case, the TKB sponsors put in around US$11 million in return for shares and warrants to acquire additional shares, according to my analysis of its financial filings.
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So why the re-Spac? Wejo warned in November that its US$15 million cash balance was sufficient only for a “very short period” and that, if it failed to find new funding, it may have to file for bankruptcy. Last month, it raised US$10 million in convertible debt from General Motors, but that won’t last long: Wejo is burning around US$6 million a month.
Wejo is one of the companies that Palantir Technologies invested in via a flawed investment for software sales strategy. Wejo still owes Palantir tens of millions of dollars for using its software, which is one reason it’s facing a cash crunch. Wejo said in November it was in discussions with an unnamed key vendor “to allow the company to defer the payment of a substantial licence-fee commitment that it is contractually obligated to pay in the first quarter of 2023 and settle the obligation with the company’s common shares in lieu of cash for a portion of the amount owed”.
The main problem, though, is that Wejo has yet to generate much revenue. Total sales last year were around US$10 million, and it doesn’t expect to reach cash flow breakeven until mid-2025. So why on earth would TKB shareholders want to invest?
Well, for starters, Wejo’s shares have plunged more than 90 per cent since November 2021 and its market capitalisation has shrunk to about US$65 million, so it’s much cheaper than when it first went public. Indeed, Wejo’s market value is barely a quarter of the US$235 million the Spac holds in its trust account.
Furthermore, TKB shareholders are being offered a sweetener so they don’t ask for their money back (also known as exercising their redemption right). Those who agree to financially back the transaction will receive US$11.25 of value, rather than the US$10 they initially put in. The number of Wejo shares they receive will be decided based on the price later this year and are subject to a collar. Depending on the level of redemptions and Wejo’s then prevailing share price, the Spac investors and its financial backers could end up owning almost three-quarters of the company.
TKB was supposed to conclude a business combination by the end of this month, or return money to shareholders. However, it is seeking an extension, which would give it until the end of June to complete a deal. When TKB shareholders vote on the extension in a couple of weeks, they can also ask for their money back, so we’ll have a better idea of what they think of the deal then.
As is always the case, Wejo’s latest Spac transaction will take several months to close, hence it will need to continue seeking other forms of short-term funding to tide it over. But if it closes as planned, Wejo will retain its current ticker and continue to trade on the Nasdaq exchange.
Will we see more re-Spacs? Perhaps. There are hundreds of listed cash-shells looking for targets, and plenty of de-Spacs that badly need the cash. It does seem an incredibly convoluted way to raise money, but desperate times call for desperate measures. For better or worse, the re-Spac race is on. BLOOMBERG
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