Andretti Acquisition Corp. (NYSE:WNNR) has entered into a definitive agreement to combine with generative AI company Zapata at an enterprise value of $283 million.

Boston-based Zapata has developed technology to use quantum computing and numerical data to generate text and data for industrial applications.

The combined company is expected to trade on the NYSE under the symbol “ZPTA” once the deal is completed in the first quarter of 2024.

Transaction Overview

Andretti has about $84.2 million in its current trust after seeing 65.6% of shares redeemed thus far and it expects this to be further reduced to about $50 million by close. It expects to supplement this with $20 million in senior convertible notes that would be priced at a 15% discount to ordinary shares.

Zapata expects to add $48 million to its balance sheet through the deal after paying $12 million in transaction expenses with $10 million specifically set aside for growth capital purposes.

Assuming about 40% of Andretti’s remaining trust is redeemed, Zapata shareholders would own 61% of the combined company at close with public Andretti shareholders taking a 14.3% stake. Note investors would own 7.2% and Andretti’s sponsor would see its promote shares convert to a 17.5% stake.

The sponsor’s stake is subject to adjustments, however. Although the deal does not carry a minimum cash condition, 30% of Andretti’s promote shares will become unvested if the final closing cash is less than $10 million. If it is between $10 million $25 million, then Andretti will unvest a proportionate amount of shares between 0% and 30%, but if closing cash comes in at $25 million or higher, the whole promote will vest.

Unvested shares will be forfeited if the combined company does not trade at or above $12 for 20 of 30 trading days within three years of close.

Similarly, both the company and sponsor have agreed to lock up their shares for one year with the possibility of early release should the stock trade at or above $12 for 20 of 30 trading days at least 150 days out from close.

Holders of Zapata preferred stock can begin trading slightly earlier at either six months from close or once the stock hits the $12 benchmark at least 90 days from close.

Should Andretti terminate the combination, Zapata must pay the SPAC $1 million plus expenses up to a maximum of $5 million.

Quick Takes: Quantum generative AI has come a long way since Google (NASDAQ:GOOGL) filed for the first patent in the domain in 2019.

Since then, Zapata has racked up 19 patent applications in quantum-inspired AI patents to Google’s 10 and it now has the fifth-most patent families using the technology globally.

The quantum portion of Zapata’s approach is important because it avoids many of the pitfalls of generative AI that have recently drawn some skepticism to the space. While text-based generative AI can spit out text and images, its efficiency is limited by generalized data sets and the natural imperfections that come with human language.

Quantum data-based generative AI meanwhile can train on a client’s private data environment and leverage the speeds and depth of quantum computing to test massive amounts of potential combinations simultaneously at higher speeds.

To develop these capabilities, Zapata has teamed up with fellow de-SPAC IonQ (NYSE:IONQ) to investigate the potential marriages between quantum hardware and generative AI software. The two announced that their long collaboration had progressed to a “strategic alliance” last month.

Zapata’s SPAC partner, meanwhile, may have been among those looked at skeptically earlier in the SPAC for the presence of its “celebrity” executives. It is led by Co-CEO Michael Andretti, a successful racecar driver and CEO of the family’s Andretti Autosport business. His even more renown racing father Mario Andretti also serves as a special advisor to the SPAC.

These speed racers also diversified the SPAC team around them with long-time industrial sector executives William Sandbrook and William Brown serving as co-CEO and CFO, respectively.

But, interestingly, the most hands-on experience with Zapata and quantum generative AI came not from these other team members, but the Andrettis. Andretti Autospot hired on Zapata in 2022 to crunch numbers to find efficiencies with its IndyCar teams.

Zapata was able to develop predictive models for race car tire degradation as well as applications for fuel usage, financing and insurance functions for the company. The two continue to work on new ways of leveraging sensor data to gain an edge on the race track.

But, Zapata has put its technology to use for a wide range of other clients as well. BASF (DE:BASF) has used Zapata software to optimize its value chains and speed up materials discovery in chemical processes. BMW (DE:BMW) put it to use optimizing the schedules for its manufacturing lines while Banco Bilbao Vizcaya Argentaria (NYSE:BBVA) has used it for risk management and derivatives pricing.

Many of these forays were mere case studies and may not represent permanent revenue streams. But, Zapata along with partner L3Harris won a $7.3 million contract in May to help direct quantum projects for the US Defense Advanced Research Projects Agency (DARPA).

The company estimates that the total addressable market for its solutions will hit an eye-popping $1.3 trillion by 2032, of which it estimates it could service $366 billion. This would require a truly meteoric rollout for a company that was itself spun out of Harvard just a few years ago in 2017.

But, this is a space where being early may not be considered to be a downside in the market. Without any pure-play generative AI competitors currently listed, Zapata’s technology capitalized by Andretti’s race car fuel may make for a buzzy deal in the retail community.

Click here for the full investor presentation.

ADVISORS

• Zapata Advisors:
  • Foley Hoag LLP is serving as legal counsel
• Andretti Advisors:
  • Cohen & Company Capital Markets, a division of J.V.B. Financial Group, LLC (“CCM”), is serving as exclusive financial advisor and lead capital markets advisor
  • Paul, Weiss, Rifkind, Wharton & Garrison LLP is serving as legal counsel