(Bloomberg Opinion) -- Just when you think you’ve seen it all in SPAC-land, along comes a money-losing company that only recently went public via a blank-check firm announcing a merger with a second special-purpose acquisition company to save its skin. SPAC-squared, if you like.
Wejo Group Ltd., a British connected-vehicle data company, became a public company in November 2021 after combining with Virtuoso Acquisition Corp., a SPAC. On Tuesday, Wejo said it plans to merge with another blank-check firm, TKB Critical Technologies I, to secure up to $100 million in cash.
While this isn’t the first time a SPAC has announced a deal with an already public company, such transactions are unusual. Typically, these listed cash shells are used to bring private companies onto the stock exchange, circumventing the regular initial public offering process.
It’s also the first time I’ve seen a company that’s already completed one SPAC merger promptly turn around and do another. Former SPACs are called De-SPACs, so I guess we could also dub this a Re-SPAC. Angela Blatteis, TKB’s co-chief executive officer, acknowledged in a press release that the parties were “breaking new ground with a unique deSPAC transaction.” TKB is advised by Jefferies Financial Group Inc.
Wejo’s financial contortions underscore the economic pressures recently listed tech companies face, as rising interest rates deter investors from investing in cash-burning enterprises and their slumping share prices and low trading volumes make it harder for them to raise capital. Several have recently been acquired by rivals with more cash than they have.
It also comes as SPAC sponsors struggle to find attractive deals within the allowed time limits and risk having to liquidate, thereby causing their financial backers to lose their initial investment. In this case, the TKB sponsors put in around $11 million in return for shares and warrants to acquire additional shares, according to my analysis of its financial filings.
So why the Re-SPAC? Wejo warned in November that its $15 million cash balance was sufficient only for a “very short period” and that, if it failed to find new funding, it may have to file for bankruptcy. Last month it raised $10 million in convertible debt from General Motors Co., but that won’t last long: Wejo is burning around $6 million a month.
Wejo is one of the companies Palantir Technologies Inc. invested in via a flawed investment for software sales strategy. Wejo still owes Palantir tens of millions of dollars for using its software, which is one reason it’s facing a cash crunch.
The main problem, though, is that Wejo has yet to generate much revenue. Total sales last year were around $10 million, and it doesn’t expect to reach cash flow breakeven until mid-2025. So why on earth would TKB shareholders want to invest?
Well, for starters Wejo’s shares have plunged more than 90% since November 2021 and its market capitalization has shrunk to about $65 million so it’s much cheaper than when it first went public. Indeed, Wejo’s market value is barely a quarter of the $235 million the SPAC holds in its trust account.
Furthermore, TKB shareholders are being offered a sweetener so they don’t ask for their money back (aka exercise their redemption right). Those who agree to financially back the transaction will receive $11.25 of value, rather than the $10 they initially put in. The number of Wejo shares they receive will be decided based on the price later this year and are subject to a collar. Depending on the level of redemptions and Wejo’s then prevailing share price, the SPAC investors and its financial backers could end up owning almost three quarters of the company, as you can see in this slide.
TKB was supposed to conclude a business combination by the end of this month, or return money to shareholders. However, it is seeking an extension which would give it until the end of June to complete a deal. When TKB shareholders vote on the extension in a couple of weeks they can also ask for their money back, so we’ll have a better idea then what they think of the deal then.
As is always the case, Wejo’s latest SPAC transaction will take several months to close, hence it will need to continue seeking other forms of short-term funding to tide it over. But if it closes as planned, Wejo will retain its current ticker and continue to trade on the Nasdaq exchange.
Will we see more RE-SPACs? Perhaps. There are hundreds of listed cash-shells looking for targets, and plenty of De-SPACs that badly need the cash. It does seem an incredibly convoluted way to raise money, but desperate times call for desperate measures. For better or worse, the Re-SPAC race is on.
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To contact the author of this story:
Chris Bryant at [email protected]