Funding Thesis

The clock is ticking for hashish centered SPAC Silver Spike Acquisition Corp. (SSPK) (NASDAQ:SSPKU) to resolve whether or not to merge with a hashish or non-cannabis goal since its liquidation deadline is simply three months away on February 12, 2021. The corporate should make a deal announcement between from time to time.

Just like different hashish centered SPACs, the warrants of SSPK (SSPKW) traded at a comparatively low degree worth vary as a consequence of authorized and regulatory overhang (see chart beneath). Given the current developments, the present worth degree represents a great entry level with an awesome risk-reward profile.

SSPKW Worth Chart

Supply: Bloomberg

If SSPK continues to give attention to a hashish goal, the business fundamentals are anticipated to enhance additional going ahead after the current election. Judging from the post-election worth trajectory of the ETFMG Different Harvest ETF (NYSEARCA:MJ), it’s affordable to imagine 30-50% upside for SSPKW after a deal announcement. If SSPK chooses to pivot to a non-cannabis goal within the “sizzling” sectors, the potential upsides for SSPKW could possibly be 2x-3x.

Firm Overview

SSPK is a hashish centered SPAC that accomplished the preliminary public providing in August 2019 and had $254 million in its belief account as of September 30, 2020. The SPAC has an 18-month length and could have till February 12, 2021 to finish its enterprise mixture. Like many 2019 classic offers, SSPK has a ½ warrant construction, i.e., you have to to personal two warrants to get one entire underlying frequent share upon warrant exercising.

SSPK CEO Scott Gordon has in depth deal-making and capital market expertise from working with a number of excessive profile Wall Avenue corporations earlier than shifting his focus to managing a hashish SPAC. His background truly makes us marvel how he would method the hashish and non-cannabis determination. Would he be leaning extra towards a non-cannabis deal? It isn’t a nasty selection for a primary time SPAC sponsor if he may generate a great return by merging SSPK with a non-cannabis goal and set a strong begin for his SPAC monitor document. He may instantly elevate Silver Spike II and get one other two years to seek for a hashish goal, throughout which there could possibly be extra readability on the regulatory and authorized atmosphere on the hashish business.

Tailwind for Hashish Trade

In our writeup on June 30th, 2020 (“2 Cannabis SPACs with Potentially Significant Upsides In 7 Months”), we expressed a bullish view on hashish SPACs based mostly on their worth ranges and the enhancing regulatory and authorized atmosphere for the hashish business. After the presidential election early this month, there have been certainly main constructive growth:

  1. 5 extra states voted to legalize hashish, i.e., leisure use in New Jersey, South Dakota, Montana, and Arizona, and medical use in Mississippi;
  2. The newly elected Biden/Harris administration is extensively anticipated to assist decriminalizing hashish, broadening entry to medical hashish, and never interfering within the states’ choices on hashish insurance policies.

One key overhang nonetheless stays, although – if Republicans are nonetheless in command of the Senate, it’s going to turn into unlikely for the US to federally legalize hashish. The market response to those developments, nevertheless, was upbeat as evidenced by the ETFMG Different Harvest ETF, which was up 30% because the election. SSPK warrant (SSPKW) within the meantime was decoupled from the sector rally (see chart beneath).

If SSPK picks a hashish firm as its merger goal, SSPKW may doubtlessly converge with MJ as the worth of the merged firm can be pushed extra by hashish business fundamentals. Assuming SSPK’s goal is a strong one, we’d count on at the very least 30% upside from the present degree for SSPKW.

SSPKW vs. MJ

Supply: Bloomberg.

Doubtlessly Extra Upside from a Non-Hashish Goal

If SSPK chooses to pivot away from its focused hashish business and into one of many “sizzling” sectors, it won’t be the primary one to take action. It isn’t that unusual for a SPAC to ultimately mix with a goal that’s completely different from its centered business described within the prospectus. Latest examples embrace Spartan Vitality Acquisition Corp. (SPAQ) and Switchback Vitality Acquisition Corp. (SBE); each began out power centered at IPO however pivoted to the EV business and the market preferred their offers. Two hashish centered SPACs not too long ago additionally introduced mergers with non-cannabis targets and the return for the warrant holders from these “pivoting away” offers have been truly surprisingly good.

One current instance is Steady Street Acquisition Corp. (SRAC). SRAC was launched as a cannabis-focused SPAC in November 2019 with $150 million in its belief account. Since then, its frequent share traded largely beneath $10 whereas its warrants have been largely beneath 80 cents. On October 7, 2020, it introduced a merger with Momentus, a business area infrastructure firm, which is undoubtedly a big deviation from SRAC’s focused business. Judging from the inventory and warrant response (see charts beneath), the market appeared to be pleasantly shocked by this enterprise mixture.

SRACW Worth Chart

Supply: Bloomberg.

One other instance is Tuscan Holdings Corp (THCB). THCB accomplished its IPO in March 2019 with over $270 million in proceeds within the belief account and had a liquidation deadline in December 2020. The corporate was sponsored and managed by Tuscan Holdings Acquisition LLC and the focused business was hashish. On November 13, 2020, THCB introduced intent to mix with Microvast Inc. which is a number one supplier of battery applied sciences for business and specialty use electrical autos. The announcement was properly obtained by the market and the worth of THCB warrants (THCBW) greater than doubled (see chart beneath).

THCBW Worth Chart

Supply: Bloomberg.

Key Dangers

  1. If a SPAC can not full a enterprise mixture by its liquidation deadline, the corporate might be liquidated and its warrants will expire nugatory.
  2. Hashish regulatory atmosphere is probably not progressing as favorably and shortly as anticipated which may have a adverse affect on hashish centered SPACs.

Conclusion

With the liquidation deadline simply three months away, SSPK should decide quickly on whether or not to pursue a hashish or non-cannabis deal. SSPKW ought to profit from both of the 2 outcomes, although we’d count on a take care of a non-cannabis goal to generate extra upside as evidenced by the current examples. Just like different SPACS, key dangers would come with a SPAC liquidation or a take care of muted market response.

Disclosure: I’m/we’re lengthy SSPKW. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Pronews
Author: Pronews