(Bloomberg) -- There are 653 SPACs left in the US after the boom went bust last year. Only one of them still trades at the kind of frothy levels that was common during the height of the go-go days: Digital World Acquisition Corp.
Digital World is the Miami-based company that’s planning to merge with Donald Trump’s media venture, and the 67% premium that it trades at is above every other special purpose acquisition company in the market today, a reminder of just how powerful Trump’s grip remains on his base. Scores of retail investors loyal to the ex-president make up a large chunk of the holders of Digital World’s stock and, regardless of the mounting challenges the merger faces (both the SEC and Justice Department have launched probes), they’re not selling.
This is a huge advantage for SPAC managers at a time like this. But there’s also a real disadvantage to tying the fortunes of your blank-check company to this sort of politically focused crowd. Many of the investors haven’t taken the time to understand the ins and outs of SPAC rules and, as a result, fail to cast votes when Digital World sponsors, a group led by the financier Patrick Orlando, ask them to.
The votes that Orlando called, one after the other in rapid-fire succession last month, were to seek a no-cost extension of the merger deadline into late next year. His inability to get a quorum forced him and his partners to put up $2.9 million to buy three more months. That gives them until early December to get the deal done and, considering how the probes have bogged down the process, Orlando is pleading with investors once again to grant the SPAC a cost-free extension until next September. He’s called a vote for Thursday.
“There’s no rational reason why any shareholder should vote against an extension or not vote,” says Jay Ritter, a finance professor at the University of Florida. He finds the whole episode odd because, he notes, these votes are usually procedural. “So it must be the case of people not paying attention or getting confused if they do go to vote. A lot of people have bought it for ideological reasons, and aren’t necessarily, by retail standards, sophisticated investors.”
Should Orlando fail to get enough votes on Thursday, he can try again and again, just like he did in September, right up until Dec. 8. At that point, though, if he still doesn’t have investor support for an extension, he and his partners would have to decide whether to pull the plug on the SPAC or pony up another $2.9 million to keep it alive.
That might not seem like a lot of money for a major player in the blank-check industry, but Orlando’s two other SPAC offerings have both been duds that he’s been forced to shut down. One of the closings is scheduled for today. A failed SPAC costs its sponsors about $8 million, Ritter estimates. So by that measure, Orlando and his partners are already out almost $20 million, when including the extension for Digital World.
Matthew Tuttle, chief executive officer at Tuttle Capital Management, figures they’ll keep putting up the money. Trump, he suspects, would be loathe to see it fail. “They’re going to do everything possible to get this deal done,” said Tuttle, whose Greenwich, Connecticut-based firm specializes in ETFs. “If they need to throw in about $3 million, they’ll throw in the $3 million.”
SPAC Liquidations
Representatives for Orlando, Digital World and Trump Media didn’t respond to e-mail requests for comment. Attempts to call Orlando were unsuccessful. Phone numbers listed for him on Digital World’s filings and on releases for his two other SPACs were out of service.
Orlando caught on as a derivatives trader in the 1990s, doing stints at JPMorgan Chase (NYSE:JPM) and Deutsche Bank (ETR:DBKGn). He went on to start a banking firm by the name of Benessere Capital and co-founded a sugar-trading company before embracing the booming blank-check industry. He’s a Trump fan, having sent the ex-president a letter last year that commended his “thought leadership,” according to the Washington Post.
Trump has said that he plans on using the cash raised from the merger to help Trump Media “fight back against the tyranny of Big Tech.” The company’s social network, Truth Social, is a key piece to that plan. For the many Wall Street skeptics out there, Elon Musk’s purchase of Twitter has only added to the doubts over Truth Social’s viability. Musk’s plan to scrap bans on users may open the door for Trump to return to the app after he was kicked off early last year. Trump says he won’t return if invited back.
The Digital World shareholder vote comes as a wave of liquidations hits the SPAC industry.
With interest rates soaring, the economy slowing and stock markets sinking, managers this year have shut down some 39 SPACs and returned cash to investors, up from just one in all of 2021. (That one was Orlando’s first SPAC.) And there are another dozen sponsorship teams -- including those led by Wall Street titan Ken Moelis (NYSE:MC), serial dealmaker Bill Foley, and former NFL quarterback-turned activist Colin Kaepernick -- that are pushing to liquidate before year-end as deal deadlines approach.
The fallout has spread to the de-SPACs, those blank-check companies that were successful in completing mergers. The DE-SPAC index has tumbled 72% in the past year, more than four times the 15% slump in the S&P 500.
To be clear, even Digital World hasn’t been immune to the market collapse, with its share price tumbling 90% from the peak it hit at the height of the frenzy early last year. But, unlike most other SPACs, its stock has found investor support at a level -- just above $17 -- that’s significantly higher than the $10.20-per-share payout guaranteed to investors when a SPAC fails.
©2022 Bloomberg L.P.