After Tuesday’s close, Accel Entertainment (ACEL), which was brought public last year through TPG Pace Holdings (TPGH), became the first de-SPAC’d company to call its warrants for shares with a trigger above $10. Very few SPACs are able to get a $10.00 call feature on their warrants, and none had opted to exercise it prior to ACEL. While the transaction does eliminate the “warrant overhang”, it is not going to come cheap. Each full warrant will be exchanged for 0.250 shares of ACEL.

Transaction Mechanics

The warrants were priced on the below table using Black-Scholes, which accounts for volatility as well as time value of money. The model uses a relatively high volatility (minimum of 40%) that makes the securities expensive very quickly if the stock begins moving above $10. Since the business combination happened less than eight months ago, it leaves the warrants’ with 52.129 months to expiration, also adding to the firm’s cost to call them.

The fair market value of the common was determined to be $10.095 using a 10-day average closing price ending June 11th. Although it is not shown explicitly in the table, the values meet at 0.250 shares per warrant, as noted in the filing.

Exchange

The full warrant’s value will come out to $2.52 (0.25 multiplied by the $10.095 share value). The warrants closed on Thursday at $2.29, according to FactSet, suggesting the market may have been ready for it. The exchange certainly benefits the investors, though it is hard to believe the company would do this out of their own goodwill.

So this begs the question “why now?”. The exchange can be partially justified using the standard rationale “to clean up the balance sheet” and eliminate the overhang on the stock, but Accel still paid a premium due to the large amount of time value left on the warrant. The company may be expecting good news in the short term and would want to capitalize on the potential upside. Taking that a step further, equity markets are performing well again and management may have wanted to eliminate warrant dilution ahead of a follow-on offering.