A record-breaking SPAC deal to bring a Vietnamese electric-vehicle maker to market showcases just how distorted things have become in the industry.
(Bloomberg) — A record-breaking SPAC deal to bring a Vietnamese electric-vehicle maker to market showcases just how distorted things have become in the industry.
VinFast is going public with a $27 billion enterprise value through a tie-up with the special-purpose acquisition company Black Spade Acquisition Co., which raised a modest $169 million in a July 2021 initial public offering.
That valuation-to-IPO ratio of almost 160 times would be the largest ever, a Bloomberg analysis of SPAC Research data show. The median this year is one-and-a-half times. Another signal of the discrepancy between the valuation and Black Spade’s cash is that even if there are no redemptions, the EV firm’s existing shareholders are set to own 99% of the company, leaving a tiny portion for SPAC investors who hold on through the deal.
“Why isn’t VinFast doing an IPO in Vietnam?,” said Jay R. Ritter, professor of finance at the University of Florida. “Undoubtedly because the market isn’t going to give them anywhere near a $27 billion valuation.”
As such, it is the latest evidence of SPAC sponsors assigning heightened valuations to target firms to get deals over the line, according to industry watchers. It’s not a good trend. The majority of de-SPACs with eye-popping enterprise value-to-IPO ratios over the past two years have fallen sharply.
Crypto miner Bitdeer Technologies Holding Co., health-care services provider Etao International Co Ltd., and financial tech firm Pagaya Technologies Ltd. have all crumbled since going public at valuations that outstripped the cash raised by the SPAC at a more than 25-to-one clip. MSP Recovery Inc. quickly wiped out billions in market value when it debuted last year before crashing to a record low of 39 cents earlier this month — a more than 95% dive from the $10 level at which SPACs typically go public.
The VinFast deal “is an outlier in several respects,” Ritter said. It has a “very high enterprise value and an extremely high enterprise value to the amount in the SPAC trust.”
The companies have said they expect the deal to close sometime in the second half of the year, subject to regulatory and shareholder approvals. There’s no date yet for investors to vote on the pact.
The resulting company will trade at a premium to most peers including Rivian Automotive Inc. and Nikola Corp., according to Bloomberg Intelligence analyst Ken Foong and Siti Nur Fairuz Khalil. Both Rivian and Nikola have wiped out more than 90% of their value from late 2021 peaks. What’s more, VinFast is “unprofitable and faces fierce competition in the US and Europe, where it is expanding,” the pair warned.
The VinFast pact doesn’t have supplemental financing for the company to bolster its cash position once the deal is completed outside of a promise to deliver $30 million. That is in contrast to the previous 25 mergers that assigned enterprise values above $5 billion in the past three years. They had some form of additional financing, typically through a private investment in public equity, or PIPE, or forward purchase agreements to deliver additional cash.
Mass redemptions are also likely to hit the amount of cash VinFast will get from the deal, assuming it gets completed. The opportunity for investors to swap shares for cash has plagued the industry over the past two years as investors recoup their investment plus interest before any merger deal.
This year’s average redemption rate sits above 90%, extending a trend that first started causing fractures in early 2021.
As for the valuation, “at some point the numbers become almost theoretical or philosophical,” said Usha Rodrigues, a professor of corporate law at the University of Georgia School of Law. “I can’t say enterprise value doesn’t matter, because it matters,” but given the incentives of the SPAC sponsors to close a deal, and relative value of comparable companies, they had better have some robust justification for that kind of valuation.
(Updates with commentary in final paragraph.)
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