Phillip Singapore Strategy – Free lunch for the few January 14, 2022 981

·         Three special purpose acquisition companies (SPACs) will be launched on the SGX – Vertex Technology Acquisition Corp. (VTAC), Pegasus Asia (PA) and Novo Tellus Alpha Acquisition (NTAA, pending).

·         The IPO offers are an attractive free lunch for investors. SPAC shares are 100% redeemable at S$5 offer price with free warrants thrown in with the shares. The public or retail offer is only 1.5 – 2.0% of the total issued shares.

·         Apart from SPAC-ulating on the newsflow, we are cautious on SPACs post-IPO until valuations and ownership structures of the target company are determined.



1.       Non-IPO investors at a disadvantage: IPO investors in SPACs are essentially buying zero coupon capital-guaranteed bonds with free warrants (or convertible bonds). Put in simple terms, they can get back all their IPO subscription money (i.e. S$5 per unit) and yet enjoy free warrants. The opportunity cost is theoretically interest income foregone on a 2-year fixed deposit. Investors buying into the SPACs post-IPOs will be immediately disadvantaged even if they purchase at the initial issue price of S$5. The free warrants lower the cost for IPO investors.

2.       Wait for the acquisition. We would prefer to wait until details of the target company are disclosed before deciding on investing in a SPAC. Investors must monitor both the valuations and shareholding structures. Valuations for the target company may be priced to perfection, or at best fairly valued. The target company will likely be issued shares in the SPAC in exchange for the acquisition. This may create a large share overhang if there is an insufficient lock-up period.

3.       VTAC’s structure stands out. Among the three SPACs, the VTAC structure stands out:

         i.     Larger in size. VTAC has raised a larger cash sum of S$200mn. The other two SPACs are S$150mn respectively. A larger cash hoard should enable the SPAC to acquire a much larger and hopefully more attractive technology target company since scale is a competitive advantage.

        ii.     Fewer warrants. VTAC units come with a 0.3 warrants each. The remaining 0.2 warrants are issued to shareholders that vote for the acquisition. The other two SPACs provide 0.5 warrant each, a much larger “free ride”.

      iii.     Time and price-based vesting (or lock-up) of promote shares. 49% of the sponsor promote shares can be exercised only 12 months after the acquisition. The remaining 51% of the promote shares vest only (or can be disposed of ) at S$6.0 (17%*), $7.0 (17%) and $8.0 (17%). PA has price vesting at S$5.75 (25%) and S$6.50 (25%). NTAA has no price vesting.

*refers to the proportion of total founder shares.


Salient points

·     At the point of listing, the SPACs will issue units. Each unit is entitled to one share and 0.3 warrants (VTAC) or 0.5 warrants (PA/NTAA). Both shares and warrants are separated for trading from the 45th day of listing.

·     Sponsor promote (or founder) Class B shares is the virtually free equity given to the sponsor as compensation for completing the acquisition.

·     Investors can redeem the $5 per share for cash if the acquisition (or business combination) is completed or after 24 months. Ironically, they can vote for the acquisition and still redeem their shares.

At-risk capital is used to fund the operations, offering expenses and other costs of the SPACs. The capital is raised via private placement warrants to the sponsor. These warrants are each priced at S$0.50 (VTAC/NTAA) and S$0.02 (PA). It is not entirely clear how they were priced, but the S$0.50 is a good reference price for trading.



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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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