Is this the worst deal of the SPAC era?

0
Placeholder while loading article actions

The abysmal performance of companies that have gone public by merging with special purpose acquisition companies has encouraged the United States Securities and Exchange Commission to tighten investor protections and disclosure requirements.

SPACs were touted as a shortcut to a stock market listing and a way for retail investors to access promising start-ups. But hype and haste have often sidetracked due diligence and financial checks. The promise gave way to losses and, in some cases, lawsuits. A 25-company index that went public by combining with a SPAC has fallen more than 75% from its peak in February last year.

When financial historians need a poster child for the boom and bust of SPAC – echoing Pets.com in the dotcom era – they’ll be spoiled for choice, but may end up naming View Inc.

The “smart window” maker’s disastrous $1.6 billion merger with a Cantor Fitzgerald-backed SPAC illustrates why reforms are long overdue. Already reeling from an accounting scandal that exploded a few months after the SPAC deal was struck in March 2021, View warned last week that it was in danger of running out of money. The shares extended their decline to 93%, making it the second best performing SPAC trade in the last two and a half years. (1) The cast of institutions involved in the company and its ill-fated blank check transaction – Cantor, Goldman Sachs Group Inc., Softbank Group Corp., Credit Suisse Group AG and the now insolvent Greensill Capital – reads like a game technology bubble bingo game.

To recap, View makes glass panels with an electrically charged coating that automatically tints when the sun shines, eliminating the need for blinds.

The Silicon Valley-based company has racked up about $2 billion in losses since it was founded more than a decade ago, and it has negative gross margins — a fancy way of saying its smart windows cost more to build than it does. they don’t sell.

Still, SPAC generated gross proceeds of $815 million, and in November 2020 confidently predicted that View would require “no additional share capital” before achieving free cash flow positive. However, View said last week that its ability to remain a going concern was in “substantial doubt” because its $200 million in cash will not last another 12 months. Whoops.

And because View hasn’t filed earnings reports since May 2021, it risks having its shares delisted from the Nasdaq at the end of this month. The hiatus stems from View’s disclosure in August of accounting irregularities related to projected repair costs. Inaccurate collateral accumulations forced the resignation of its chief financial officer in November. The more realistic liability calculation far exceeded the company’s modest annual sales. “Disclosure of a problem with the functioning of our finance and accounting organization is painful,” View CEO Rao Mulpuri wrote in a November letter to employees, adding that he took “full ownership” of the issues.

The warranty review has been completed and no further hardware errors have been identified. Yet despite assurances of “substantial progress,” the company still hasn’t released restated accounts for 2019 and 2020, or accounts for the last four quarters. Oops again. View did not respond to requests for comment.

After investing over $200 million in the SPAC deal, Singapore’s sovereign wealth fund, GIC, must be furious. Retail investors who have piled into the stock are also licking their wounds. Unsurprisingly, some have filed a class action lawsuit.

Others have only themselves to blame. The SoftBank Vision Fund pumped $1.1 billion into the company in 2018 — one of a long list of misguided investments in capital-intensive real estate companies (recall WeWork Inc. and Katerra Inc., which also imploded). SoftBank remains View’s largest shareholder, with a 30.5% stake.

Rather eye-catching, much of the proceeds from SPAC clearly went to repay a $250 million high-interest credit facility provided by another struggling SoftBank investment, Greensill Capital. The loan provider is not identified in the SPAC prospectus, but the size is similar to the exposure reported in January 2021 by a Credit Suisse Group AG supply chain fund for which Greensill purchased assets. The loan was repaid the same month Greensill filed for bankruptcy. The Swiss bank can consider itself lucky, as other risky loans from Greensill have proven to be much more difficult to recover.

Another dollop of SPAC money went to $44 million in fees for the banks and law firms that worked on the deal. Goldman Sachs was View’s merger adviser and helped recruit investors for a separate $440 million prize pool that backed the SPAC deal. Meanwhile, Cantor Fitzgerald’s bankers were hired to advise his own SPAC – a conflict of interest unfortunately common in SPAC country. (Cantor’s CF Acquisition Corp II is one of at least eight SPACs he has founded. Cantor ranked third last year in Bloomberg’s SPAC advisor rankings, behind Citigroup Inc. and Goldman).

In fairness, Cantor disclosed the potential conflict, and the SPAC deal was done at a lower valuation than SoftBank was awarded by View in 2018. Cantor also had more skin in the game than most SPAC founders, from less at first. Receiving a third of his free sponsorship shares (which were once worth $125 million but now nearly worthless) was contingent on hitting now likely unattainable share price targets. And some of his advisory fees were paid in stock rather than cash. Cantor also invested an additional $50 million in the transaction. It’s not clear if Cantor still has so many View actions. A Cantor filing this week said he only owned 8 million View shares at the end of March, a reduction of more than 50%. He declined to comment.

Like most SPACs, it did not obtain an independent fairness opinion on the value of the transaction. This is something the SEC’s proposed rules would effectively require in future SPAC transactions, while requiring banks that subscribe to SPAC IPOs to take legal responsibility for prospectus information, including financial projections. .

Too bad too that there was no independent underwriter in this case, because the quality of the preparation of Cantor SPAC is questioned by disgruntled investors who went to court in February to ask him to provide information on his diligence.

The chances of View becoming profitable quickly seem slim, so it must try to raise capital in a market that has suddenly turned very sour for cash-burning tech companies.

His plight shows why companies need to have strong financial controls before going public and why we need gatekeepers with full legal responsibility for SPAC disclosures. The SEC reforms come too late for View investors, but may help avert another similar blowout.

More writers at Bloomberg Opinion:

You cannot bet on SPACs. Thank you, Gary Gensler! : Chris Bryant

The SEC is coming for the SPACs: Matt Levine

SoftBank’s Son Survived Bigger Disasters: Gearoid Reidy

(1) My benchmark for a “large” SPAC deal was an enterprise value over $1 billion.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

More stories like this are available at bloomberg.com/opinion

Share.

Comments are closed.