Late yesterday evening, we had an early stocking stuffer with the IPO filing of Gores Holdings IV, a $400 million, 1/4 warrant SPAC. So does this mean we’ve been naughty or nice? Depends on who’s looking at it.
The headline details are that Gores IV is a carbon copy of the team from Gores III. Alec Gores will once again be Chairman and Mark Stone will be CEO. Additionally, Andrew McBride is back as CFO and Secretary, and the Directors of Gores III – Randall Bort, William Patton and Jeffrey Rea – are back again for Gores IV as well.
Alec Gores and Mark Stone have been the Chairman and CEO team for all three prior Gores SPACs and it has clearly been a successful pairing. Gores I, which bought Hostess Brands (the Twinkie deal – TWNK) is currently trading at $14.07 and Gores II, which bought Verra Mobility (VRRM) is currently trading at $14.28. Gores III (GRSH) which recently announced their combination with PAE, is trading slightly above trust, but it’s still early. Clearly, this team knows SPACs. And more importantly, they know how to negotiate and structure a successful SPAC transaction. With that being said, what about the terms?
The terms are what you would expect for a top notch team, but there are a few curveballs. Notably, that 1/4 warrant, but also a few other surprises. This is a 24 month, 100% in trust, 1/4 warrant deal, but Gores IV has also added the warrant call for shares at $10.00 term. Albeit, without the additional $0.10 kicker that we’ve seen as of late. Additionally, Gores IV can remove up to $750,000 a year from earned interest to fund their working capital. Plus, no Crescent Term for this deal.
Interestingly, this is the first SPAC we’ve seen where the sponsor will be purchasing their at-risk private placement warrants at $2.00, which values the warrant at approximately $0.50 right out of the gate and keeps it better in line with 1/3 warrants deals that purchase their private placement warrants at $1.50. (Note: Conyers Park II, which also had a 1/4 warrant purchased their warrants at $1.50. Gores IV appears to be a correction or improvement on the 1/4 warrant structure).
However, when viewed all together, these are tough terms for SPAC investors, to say the least. But again, very much like Conyers Park II, that’s probably not the investor base they’re looking to build a book around. To better explain, if we use VRRM (Gores II) as an example, the share is trading at $14.28 and the 1/3 warrant is trading at $4.06, so if you invested at IPO for $10.00 and held long-term, you would currently be enjoying a 56% return. The problem for SPAC investors is, they don’t hold long-term. And in the past, long only investors weren’t willing to take a 24-month gamble on a blank check company, hence the need for SPAC investors to fill that 24-month gap between IPO and combination close. But when you have a consistently successful team like the Gores team, that’s a game changer for the long-only group. However, it’s far easier to get long only investors involved when you have a sector focus, like Conyers Park (Consumer). The Gores team has a very broad focus and can look in a variety of sectors, so the long-only crowd might be a little more challenging.
But SPAC investors will still invest in Gores IV. At least the ones who invest for the share. And although that redemption value will be very low due to the $750K/year coming out of interest for working capital, it’s still a pretty good bet that they’ll be able to sell their position north of $10.30 come announcement time (or even earlier). The warrant, on the other hand, well…it will be very tough for warrant players to get excited about this deal, but the private placement purchase at $2.00 does help.
All told, Deutsche Bank is still pushing the envelope with terms, but in a frothy SPAC market, this deal will get done. SPAC investors won’t be happy about it, but it’s getting harder and harder to push back with so many new investors participating. We’ve talked before about a bifurcation of the product, but whereas before the bifurcation was about the deals, now it’s probably more about a divergence in the SPAC investor base. A topic to revisit at a later date…
It’s unclear if Gores IV will be pricing in December or January, but this is most likely a December deal. Which, if Gores IV does price this year, that means we have a real shot at closing the year at $14.0 billion in gross proceeds raised, a big record. Stay tuned…
Summary of terms below:
Deutsche Banks is sole book-runner.
Weil, Gotshal & Manges LLP and Ropes & Gray LLP are issuer’s counsel and underwriter’s counsel, respectively.
KPMG LLP is auditor.