A Trucking SPAC Creates Another Paper Billionaire
Thomas Healy will become a paper billionaire as long as the shareholders of cash shell Tortoise Acquisition Corp. vote in favor of a merger with his company. Tortoise is led by Vince Cubbage, a former oil and gas executive and ex-investment banking sector head at Banc of America Securities.
Hyliion’s main goal is to lower the emissions of existing heavy-truck models by supplying hybrid and electric propulsion systems that can be slotted into various manufacturers’ vehicles. Although the company won’t generate meaningful revenue until 2022 it has been valued at about $7 billion.
Hyliion Inc. is one of a number of companies that choosing to go public by way of special-purpose acquisition vehicle known as a a SPAC. Going public via a SPAC is less time-consuming than a regular initial public offering (IPO) and it lets the target negotiate a sale price directly with the sponsor, rather than letting the price be determined by the whims of institutional investors or prevailing market volatility. In a SPAC a sponsor, here Tortoise’s creators, invest about $7 million of its money into the SPAC and receive roughly $450 million in equity value from Hyliion. Although becoming more and more popular (North American SPACs have raised more than $40 billion so far this year) there is a question whether the sponsor or SPAC’s high fees (known as the “promote”) are justified. In a traditional IPO, bank underwriting fees usually don't exceed 7% of the gross proceeds.
Tortoise shares have more than quadrupled in value since the merger announcement.
Jay Clayton, chairman of the Securities and Exchange Commission, said last week that the U.S. regulator was examining how SPAC sponsors disclose their pay structures. The SEC reviewed Tortoise’s proxy statement and must have been happy with the way it disclosed the SPAC’s potential compensation.
In Hyliion’s case...
(1) The sponsor paid $25,000 for its founder shares and another $6.7 million for the warrants. At current prices the Tortoise sponsor will own Hyliion shares worth $532million following the merger. I’ve subtracted from that the cost of exercising the warrants. The sponsor’s actual return may be affected by financial arrangements with directors and an investor Atlas Point Energy described in this proxy statement. Sponsors also incur costs outside the SPAC structure.
(2) A figure that includes the separate pool of institutional money known as a PIPE that Tortoise arranged.
(3) Tortoise’s proxy statement prominently explains the sponsor has interests in the merger that are different from regular shareholders, that the sponsor’s founder shares are worth $233 million and that it holds millions of private placement warrants. The proxy statement also discloses the percentage share ownership if the warrants are exercised.