Let’s Talk about the GS Acquisition Holdings Warrant Redemption Feature..

By now, most people who follow the SPAC product have heard about the Goldman Sachs sponsored, GS Acquisition Holdings Corp.  In fact, this afternoon an amended S-1 had already been filed.  That’s a really quick turnaround and either reflects a stellar job by the lawyers in putting together the initial filing or everyone involved wants this off their desk before Memorial Day Weekend. Probably the former, but maybe a little of the latter as well. But before everyone takes off for the three day weekend, let’s dig a little deeper into GS Acquisition’s public warrants and their redemption features.

Typically, SPACs can call for the redemption of warrants on a cash or cashless when the last reported sales price of the share equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period.  It should be noted that there are SPACs with redemption thresholds of $21.00 and even $24.00, but the most used price has been $18.00 for the past few years.  GS Acquisition Holdings uses this feature as well with a price of $18.00 per share with an option for both cash and cashless exercise.  However, they’ve also added a new feature…

Redemption of Warrants for Shares

The new twist to the warrant redemption allows GS Acquisition to call the redemption of warrants for shares.  However, the call of warrants for shares is now at a threshold of $10.00! 

“…if, and only if, the last reported sale price of our Class A common stock equals or exceeds $10.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) on the trading day prior to the date on which we send the notice of redemption to the warrant holders.”

And the number of shares a warrant holder receives will be based on the “fair market value” at the redemption date, which essentially puts a cap on the value of the warrants.

The table below is provided in the S-1 and shows the number of shares of Class A common stock that a warrant holder will receive based on the date of redemption and the share price.

Now, a lot of the institutions that participate in SPAC IPOs are in these deals for the opportunities inherent in the warrant.  If an institution buys the unit, they can redeem or convert the share for the pro rata amount in trust at the time of redemption or conversion, which provides a safe and attractive yield.  Arguably, that “yield” is risk-free and hence it trades like a zero-coupon bond. But the “juice” has always been in the warrant, which provides a free look at the resulting company post-combination.  Upon deal announcement, the warrants typically trade much higher.  For instance, take a look at TPG Pace Energy below.  TPGE announced their transaction with Enervest on March 20th.

The GS Acquisition Warrant redemption for shares essentially caps the value of the warrants.  No more juice. Is this a bad thing?  It really depends on which side of the table you sit.

On the one hand, this feature cleans up one of the biggest headaches SPACs have always had – what to do about all those warrants mucking up the capital structure. Plus, maybe it’s time that investors invested in SPACs for the actual business combination rather than treat them as a yield play while speculating on the warrants.

On the other hand, the warrants are what got many investors and institutions to invest in SPACs in the first place. And 24 months is awfully long time to wait and see if you’ll get a decent return on your investment, even if it is a stellar management team.  So without the warrant, will there be enough incentive to wait that long?

It remains to be seen how difficult this will be to market, but $600 million is a really large amount to sell. However, SPACs have always gone through evolution cycles and the time is ripe to try something new.  I guess we’ll find out if this feature flies soon enough.