We have more Gig news….and for the record, there has been a Gig announcement nearly every day for the past week as it moves towards closing its combination with Kaleyra. Yesterday’s news, however, involves a non-binding letter of intent with an affiliate of Nomura Securities International, Inc. (“Nomura”). The details of which are that Nomura will use its best efforts to purchase 2,000,000 shares of GIG, at an aggregate price of approximately $21 million (or $10.50 per share), prior to the closing of GigCapital’s business combination and Nomura agrees not to redeem any of those shares at the vote, effectively backstopping the trust.
The way it will work is, post-combination close, Gig/Kaleyra will transfer $21 million to Nomura, and Nomura can then sell the Shares, publicly or privately, at any price, but not less than $10.50 per share. So let’s say Nomura purchased those 2,000,000 shares PRIOR to combination closing at an average price of $10.00. That would be $20 million in aggregate. However, they still have to sell them at $10.50 (or higher), or $21 million in aggregate at $ 10.50. Nonetheless, these sales can happen at any time prior to the Maturity Date, which is twelve (12) months from the closing of the Business Combination, or the Extended Maturity Date, which is twenty four (24) months from the closing of the Business Combination, if mutually agreed to extend by Kaleyra and Nomura.
However, and this is a big however for Nomura, on each quarterly anniversary of the closing of the Business Combination, there will be a reset and depending on how many shares Nomura has sold, Nomura will transfer to Kaleyra, cash equal to the pro rata amount of the Prepaid Forward Amount for that quarter, but not less than ~$10.50 per Share. And THEN, Kaleyra will transfer to Nomura the difference between the Prepaid Forward Amount and the amount equal to the number of remaining Shares held by Nomura multiplied by the Forward Purchase Price ($10.50), or Nomura will transfer to Kaleyra the pro rata portion of the Prepaid Forward Amount with respect to the Shares that may have been sold by Nomura in the prior quarter.
Yeah, this is super confusing. So, to cut through that legal mumbo jumbo, let’s say Nomura sells 500,000 shares of the 2,000,000 in the first quarter at $10.75. Nomura, makes $125K which is the difference between $10.75 and $10.50 on those 500,000 shares. However, let’s say Nomura can sell zero shares because the share price is trading at $9.00. Nomura is not allowed to sell below $10.50, but they’re not losing money if they sell zero shares. They just keep at it until the Maturity Date (See below). Additionally, at the Maturity Date or Extended Maturity Date, whatever number of shares remained unsold (for instance, if the Kaleyra’s shares are trading sub $10.00 or even at $10.30 (which is still below the Forward Purchase Price of $10.50), which means Nomura can’t sell those shares, the shares will be transferred back to Kaleyra at $10.50.
To clarify, Nomura is not doing this for free (in the event it can’t sell any shares at $10.50 or higher). On the Maturity Date, the Forward Purchase Price will be equal to the Initial Forward Price per Share accruing at a fixed rate of 275 bps per annum from the date of the closing of the Business Combination. On the Extended Maturity Date, the Forward Purchase Price will be equal to Initial Forward Price accruing at a fixed rate of 350 bps per annum from the date of the closing of the Business Combination. So Nomura is getting a little bit of yield to compensate for this purchase on top of any sales it can make.
However, the big question is, why is Gig doing this? There is no condition to closing of this transaction of $20 million or greater, just $5,000,001. So why is Gig trying to lock up an additional $21 million worth of shares? Well, the answer isn’t totally clear, but perhaps it has something to do with the float. Meaning, since the Rights have been taken out of the equation and what is left (post-vote) is a minimal float if there are significant redemptions, you have a potential situation where the share price can be extremely volatile, such as what happened with PHUN or ORGO. If you recall, PHUN traded north of $500 post-vote due to their low float. So, by having Nomura step in at above $10.50 as a seller, it can effectively keep the share price from trading at crazy levels, That’s just a theory though.
In any event, there’s been a whole lot of financial engineering for this combination. However, post this announcement, Gig should be moving towards setting a vote date. But you never know. Maybe Gig has more surprises in store.