Letters of Intent and Business Combinations

By: SPAC Research

Email: bk@spacresearch.com

Published: June 1, 2020

Ordinarily after a SPAC’s IPO, there’s a lengthy period during which investors hear precious little from SPAC management. SPAC investors are used to being totally in the dark, other than quarterly reports, until a SPAC’s team inks a definitive merger agreement.

But this quarter, five SPACs have put out announcements disclosing either a signed LOI or advanced negotiations with a target company. Why would a SPAC put out information about a target without having signed a definitive agreement?

Leaving aside the conversation about strategic M&A leakage, there’s a clear motive here. Each of these SPACs has (or had) an upcoming extension meeting. Extension costs have been rising lately, with common shareholders demanding an extra penny or two per share for each month in connection with most extensions. So it’s perfectly reasonable for a SPAC to try to communicate that it has an exciting deal coming down the pipe before asking for extra time.

We went through the past three years and found 12 instances where a SPAC disclosed an LOI or negotiations with a potential acquisition target in advance of a charter extension.

Pre-announcing an LOI has been successful by almost any measure. If you look at a SPAC’s warrant price on the day before and after its LOI announcement, you’ll find a median increase of 41%, demonstrating the market has received LOI news very enthusiastically.


It makes sense for warrants to experience a significant uptick in this situation, given many of them were priced with a reasonable probability of liquidation. These are all SPACs that are near the end of their lives, and at the very least, an LOI communicates that the SPAC is still actively pursuing a business combination that it can sell to the public. And in some cases, the LOI announcement was enticing enough to draw buying interest for the SPAC’s common shares at a price greater than the remaining cash in trust.

Each SPAC on the list went on to seek an extension. The chart below plots SPAC charter extensions since 2017 where the company did not have an announced definitive business combination agreement. You can see clearly that SPACs with an announced LOI — the red dots — ended up paying less for a similar redemption outcome than those without an announced LOI — the blue dots.

The two red dots in the lower left are Nebula Acquisition Corp. (NEBU) and Leo Holdings Corp. (LHC), both of which traded materially above cash in trust on their LOI news. You’d expect any SPAC trading above cash in trust to hold onto its entire trust account. But it’s significant that the rest of the zero-contribution SPACs, which weren’t trading above cash, were able to hold on to any of their trust account without a contribution.

Meanwhile, almost half of the LOI list above has yet to announce its definitive business combination, including Forum Merger II Corp. (FMCI), whose common stock traded above $13 on Friday for the highest print we’ve ever seen on SPAC common equity before an official deal announcement. And both FMCI and FMCIW have turned over more than their entire float since Forum’s LOI announcement in May.

SPACs are still enjoying favorable media coverage and are the only IPOs that seem to be able to get out of the gate right now. Successful deals like DraftKings (NASDAQ: DKNG), Virgin Galactic (NYSE: SPCE) and Nikola (NASDAQ: VTIQ) have all traded above $30 over the past few months. And it looks like retail investors are starting to pay attention.

A website called Robintrack monitors the number of Robinhood accounts that own any given ticker symbol. It’s a reasonable proxy for retail participation in a given stock and if you search Robintrack, you’ll see that many SPACs’ ownership among Robinhood accounts has grown rapidly the past couple months (or weeks). And if you search Twitter for SPAC tickers that are in-play at the moment, you’ll find no shortage of armchair commentary without much grounding in SPAC mechanics. All of which may help explain some of the price appreciation we’ve seen in certain SPAC names of late.

But back to LOI announcements. If it’s working, we should expect more companies to keep making moves like these. However, the market may start to view such announcements more skeptically depending on the outcomes we see from the list above.

And finally, we shouldn’t expect definitive agreements to immediately follow LOI announcements. The six SPACs from the list that announced a deal with their LOI target took an average of 68 days between LOI and definitive business combination agreement. So we may be waiting a bit longer for the current crop’s actual merger agreements.

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