(Bloomberg) — There are 653 SPACs left in the U.S. after the boom ended last year. Only one of them is still trading at the kind of frothy levels that were common during the height of the go-go days: Digital World Acquisition Corp.
Digital World is the Miami-based company that plans to merge with Donald Trump’s media venture, and the 67% premium it’s trading at is above all other acquisition specials on the market today, a reminder of how powerful Trump’s grip remains. his base. Scores of retail investors loyal to the former president make up a large portion of Digital World’s stockholders, and regardless of the growing challenges the merger faces (both the SEC and the 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 downside to tying the fortunes of your blanco company to this kind of politically focused crowd. Many of the investors haven’t taken the time to understand all the details of the SPAC rules and as a result fail to vote when Digital World Sponsors, a group led by financier Patrick Orlando, asks them to.
The votes Orlando called, one after the other in quick succession last month, were to seek a no-cost extension of the merger deadline until the end of 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, given how the probes have bogged down the process, Orlando is once again appealing to investors to give the SPAC a free extension until next September. He has been called for a vote on Thursday.
“There is no rational reason why any shareholder should vote against an extension or not vote,” said 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 has to be that people don’t pay attention or get confused if they go and vote. A lot of people have bought it for ideological reasons and are not necessarily sophisticated investors by retail standards.”
Should Orlando fail to get enough votes on Thursday, he can try again and again, just as he did in September, right up until December 8. But at that point, 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 business, but Orlando’s two other SPAC offerings have both been duds that he’s been forced to shut down. One of the closures 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 nearly $20 million, when you include the Digital World extension.
Matthew Tuttle, managing director at Tuttle Capital Management, believes they will continue to put up the money. Trump, he suspects, would hate to see it fail. “They will do anything to get this deal done,” said Tuttle, whose Greenwich, Conn.-based firm specializes in ETFs. “If they need to throw in about $3 million, they’ll throw in $3 million.”
Representatives for Orlando, Digital World and Trump Media did not respond to emailed requests for comment. Attempts to call Orlando were unsuccessful. Phone numbers listed for him in Digital World’s filings and on releases for his two other SPACs were out of business.
Orlando caught on as a derivatives trader in the 1990s, making scrimmages at JPMorgan Chase and Deutsche Bank. He went on to start a banking firm called Benessere Capital and co-founded a sugar trading company before embracing the booming blanco business. He is a Trump fan, having sent the ex-president a letter last year praising his “thought leadership,” according to the Washington Post.
Trump has said he plans to use the money 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 of that plan. For many Wall Street skeptics out there, Elon Musk’s purchase of Twitter has only increased doubts about Truth Social’s viability. Musk’s plan to unban users could open the door for Trump to return to the app after he was fired early last year. Trump says he won’t come back if invited back.
Digital World’s shareholder vote comes as a wave of liquidations hits the SPAC industry.
With interest rates soaring, the economy slowing and stock markets plunging, managers this year have shut down about 39 SPACs and returned money to investors, up from just one in all of 2021. (This was Orlando’s first SPAC.) And there are another dozen sponsorship teams — including those led by Wall Street titan Ken Moelis, franchise dealmaker Bill Foley and former NFL quarterback-turned-activist Colin Kaepernick — are pushing to liquidate before the end of the year as deal deadlines loom.
The fallout has spread to de-SPACs, the blank check companies that were successful in completing mergers. The DE-SPAC index has fallen 74% since November 1, 2021, more than four times the 16% decline in the S&P 500 over the same period.
To be clear, even Digital World has not been immune to the market collapse, with its share price plunging 90% from the peak it reached 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 is significantly higher than the $10.20 per share payout guaranteed to investors when a SPAC fails.
(Updates 12-month returns for De-SPAC index.)
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