My last article focused on the opportunity related to the Legacy Acquisition Corp. spac-warrants. What was supposed to be an ‘easy’ trade turned out to be a lesson in margin of safety.

Legacy’s (LGC) intention at the closing of the business combination with Onyx (CarID) was to buy out all warrants outstanding for a total consideration of $1.00 per warrant, payed out partly in cash and partly in shares. With the warrants at the time of writing trading at $0.62, one could buy the warrants and make >60% in a month, as closing was expected on November 20. I mentioned a couple of risks, one of which was the ongoing tender offer for the shares. If too many would tender their shares, it might be difficult to close the deal. This risk however appeared low, given that a month into the tender offer period only very few tendered their shares.

As I was hoping to cruise toward a nice return in a very short period, the easy ride turned into a roller-coaster. Three days before the expected closing, LGC issued a statement that basically said that all was fine and that the combination would close as expected. However, the day before closing LGC announced the results of the tender offer, which showed a massive 84% of shares tendered. This was a lot and certainly unexpected, and raised the fear that the remaining cash balance would not suffice to close the deal (spacs need to have a minimum cash balance to close a deal). Following this result, holders of LGC shares panicked and dumped shares into the market, causing the share price of LGC shares to crater to ~$8 (-20%). This was clearly an overreaction as LGC is a spac; as explained in previous articles, if a spac does not close a business combination, it would have to liquidate and return money to its shareholders – ca. $10 per share. So even if the deal would not close (and LGC shareholders were thus expected to receive ~$10), some freaked out and sold LGC shares down to $8. LGC nonetheless was able to close the business combination on November 20 and on Monday last week, CarID (Onyx to be precise) started its life as a public company. Nonetheless, a lot of warrant holders were just in it for the trade (same here) and now owned CarID shares. Given the recent decline in LGC shares, many dumped their shares in the market as soon as possible, causing the shares of CarID to drop to ~$6.

I partly blame LGC management for this reaction as they (perhaps) could have prevented it by stating along with the results of the tender offer that the business combination would (still) close. However, it is what it is and what could have been a profitable trade turned out to be less profitable. Given a share price of $7 (during the first trading day after closing), this trade returned 0.082*7 + 0.18 = $0.75, which is still +21% given our base price of $0.62. It would be ridiculous of me to complain about +21% in ~1 month.

Now, you might think that this is over and that I exited this trade, but that would not be correct. As a general rule, whenever there’s panic in the market there’s probably also an opportunity. And instead of selling my new CarID shares, I actually added (a lot) to the position.

CarID recently released its Q3 2020 results. For the first 9 months of 2020, CarID generated roughly $13m ebitda and $23m cash, compared to a 2020 guidance of $14m (adjusted) ebitda. This is pretty good. Let me quickly repeat what I wrote before on CarID: I find it to be an ‘ok’ business currently mainly driven by a covid tailwind. I believe that as of H2 2021 difficulties might arise as year-on-year comps start to deteriorate. Also, the cash generation is mainly due to negative working capital and customer deposits, so as you comp negatively, this might become ugly. However, assuming say $16m ebitda (adjusted) for 2020 and net cash of ~$36m, CarID is trading at ~12x 2020e ev/ebitda. When you think that Q4 and Q1 will probably continue to be good quarters and its main comparable company PRTS is trading at 38x 2021e ev/ebitda, than I believe CarID is poised for a quick rebound, especially as the company will go on the (digital) road and analysts initiate coverage on the company. I believe that 7 months until H2 2021 is plenty of time for CarID to start marketing its story.

So the warrant trade was less profitable than expected, but let’s see if we can make the most out of this new opportunity.