WL Ross Holding Corp (“WLRH”) is a Special Purpose Acquisition Company (“SPAC”) headed by Wilbur Ross. There are three securities trading and we are long WLRH (the common shares):

1.    WLRHU (units with a share of the stock and a warrant attached)

2.    WLRH (common share)

3.    WLRHW (one warrant equivalent to ½ share with an exercise at $5.75)

We are long WLRH the common shares. On average it trades around 50-100K shares but it varies with some 10K shares days and then 1M+ other days.

Before we get into it, we recognize there is unlikely to be huge upside here; however given the trading price (less than $10), the downside is minimal outside of the time value of money. We treat it as a cash equivalent where no deal means we basically get our money back and a deal gives us a probability of a 10%-20% return pop +/- any future returns if we like the deal and hold post-acquisition. Additionally given the timing involved (IPO was Jun14) Mr. Ross is going to have to act relatively soon (probably in next 3-4 months) to get the deal completed. As the financials state:

"The Company will only have 24 months from the closing date of the Public Offering (June 11, 2016) to complete its Business Combination. If the Company does not complete a Business Combination within this period of time, it shall (i) cease all operations except for the purposes of winding up; (ii) as promptly as reasonably possible, but not more than ten business days thereafter, redeem the public shares of common stock for a per share pro rata portion of the Trust Account, including interest, but less taxes payable (less up to $50,000 of such net interest to pay dissolution expenses) and (iii) as promptly as possible following such redemption, dissolve and liquidate the balance of the Company’s net assets to its remaining stockholders, as part of its plan of dissolution and liquidation. The Sponsor has entered into letter agreements with the Company, pursuant to which it has waived its rights to participate in any redemption with respect to its initial shares; however, if the Sponsor or any of the Company’s officers, directors or affiliates acquire shares of common stock in or after the Public Offering, they will be entitled to a pro rata share of the Trust Account upon the Company’s redemption or liquidation in the event the Company does not complete a Business Combination within the required time period." 

The Nature of SPACs 

Before we discuss WLRH specifically, we need to acknowledge that SPACs have an overall record of actually destroying value (for shareholders that stayed on post-acquisition of a target) as shown here courtesy of SPAC Analytics :

 Source: SPAC Analytics (http://www.spacanalytics.com/)

There are three key observations to draw from this data:

1. Liquidated SPACs have a 0% return (i.e., they act as a cash equivalent)
2. SPACs that have completed an acquisition typically do poorly (-12.8% return annually)
3. We are not exactly sure how they calculate the announced an acquisition target but it should reflect only the current ones. In general there is a day 1 pop if the sponsor is good and the deal favorable (Del Taco style). 

To understand why liquidated SPACs have a 0% return, we have to understand how they are structured. With SPACs the cash raised is held in a Trust Account (typically invested in treasuries of less than 180 days duration) until (i) an acquisition is approved by shareholders or (ii) two years pass, no acquisition is proposed and the company is liquidated with cash returned to shareholders.

Critically for investors, even in the event of a proposed acquisition you are allowed to sell your shares back to the SPAC and receive your pro-rata cash held by the trust (plus interest less any taxes due which shouldbe de minimus). This means that investors are guaranteed to get their cash back at roughly par even in the event of an acquisition they deem to be unfavorable.

Additionally, while the market price of the SPACs do fluctuate somewhat over the lifetime of the SPAC, they typically trade close to the redeemable cash value of the shares. This allows investors to sell their shares on the open market if cash is needed for other investment opportunities. We have been able to trade it off around $10.50 a few times. 

So, your downside is relatively protected, what about the upside? The data above would indicate that overall when you invest in SPACs and hold through an acquisition you lose money. However with Wilbur Ross, we think the likelihood of that is significantly lower. 

WLRH

Wilbur Ross is a well-known billionaire investor with decades of experience around restructurings and private equity type plays. Mr. Ross is the Chairman and CEO of WLRH. WLRH has raised the following:

1.   $500.25M in units (one share of common plus one warrant only exercisable in the event of a successful business combination) as part of its June 2014 IPO (held in the Trust Account including $18.3M of deferred underwriting costs only payable in the event of a successful business combination).

2.   $11.2M in private placement warrants purchased by Mr. Ross (22,400,000 warrants purchased at $0.50). This cash was used by the Company to pay $9.2M in up            front underwriting costs and other formation/operating costs.

3.   $25K in Founders Shares (common stock only, no warrants). Mr. Ross was given 14,375,000 shares for $25K of which 1,875,000 shares were forfeited to bring Mr. Ross’ ownership down to 20% of the company post IPO (12,506,250 shares / 62,531,250 shares post IPO). These shares cannot be sold until after a successful business combination.

Therefore pre-completion of a business combination, there are 50,025,000 common shares outstanding excluding the Founders shares (Founders shares cannot be redeemed until a business combination is completed) with $500,250,000 (it's a bit higher now with interest but there are offsetting liabilities) held in trust ($10/share) that can be redeemed in cash. 

The upside- Will WLRH be able to make a deal?

Mr. Ross stands to lose the following if a combination is not successfully completed.

1.     $125M (12,506,250 common shares at a current price of $10) for which he paid basically nothing;

2.    $11.2M in private placement warrants already purchased - REAL CASH

We do not believe that Mr. Ross would have gone through the trouble of establishing the SPAC and investing $11.2M in warrants (that only exercise with a completed business combination) without a lot of confidence a smart deal could be made. 

Additionally, the fact that the bankers deferred roughly $18M of their fees ($9M were paid and the remaining $18M will  only be paid in the event of a completed business combination) also indicates their belief that a transaction will occur.