Some months ago Churchill Capital Corp (CCX), a spac, announced that it would be taking Skillsoft public. Back in December, I wrote why I think this deal is interesting and why I believe this might be a good entry point for someone willing to bet on the success of the new Skillsoft (subscription model + much improved balance sheet + strong, visible cash flows + good valuation). I don’t intend to repeat myself here given that not much really happened, though it might be precisely because nothing happened so far I‘ve received many questions regarding CCX. I thought I’ll address these questions and provide some comments on the recent developments in spac-land.

So, first of all, why is it taking so long to close the thing (particularly given that one of the main reasons companies choose the spac-route to go public is the short time-to-market)? CCX did not mention any specific reason, but we can make an educated guess:

• One reason might be that in addition to merging with Skillsoft, CCX also acquired Global Knowledge which is currently being integrated with Skillsoft. Though a nice add-on acquisition, it takes time to integrate the companies.
• Another reason might be that the spac-craze of 2020, with plenty of deals announced since Q4, resulted in a major increase in filings. Various spac targets and sponsors mentioned the SEC being swamped with requests and filings and taking more time than usual to respond.
• Lastly, it might simply be that the CC team was busy with the recently announced CCIV deal with Lucid Motors.

From the recent Skillsoft analyst day we know that Skillsoft has been performing better then initially guided. Compared to the guidance provided at the time of the deal announcement, it appears that FY2020 (January 31, 2021) bookings, revenue and ebitda will be on the high end of the provided range and the transition to the new platform Percipio is well on track. This promises well, as 2020 marked the trough, and 2021 should see the transition to the new platform completed. We can expect an acceleration of revenues, margins and cash flow in the coming years.

A good deal of questions related to the recent uncertainty in spac-land and CCX’s ability to close the deal now that CCX shares have been hovering around $10 and many others seem to have broken the $10 barrier. Overall spacs have performed well in recent months and the average premium (price above trust value – $10) even reached >20% at some point, something that I cannot remember has ever happened before. However, the recent rise in interest rates was enough to (finally) trigger a sharp sell-off of spacs across the board and bring prices back to earth.

To answer the question directly, there’s basically zero risk that the Skillsoft deal won’t close. One thing that differentiates Churchill Capital with most spacs is that the cash in the trust is CC’s own cash. This cash, combined with the investment from Prosus basically guarantees enough cash (and votes) to close the deal. 

It seems that the biggest worry of participants is that pre-merger spac prices might drop <$10, causing many investors to vote against a deal (i.c. redeem the shares) and as such the merger to fall through. Though plausible, this reasoning is incomplete. A (big) increase in redemptions will certainly be the case if prices fall enough below the trust value (it’s basically free money), however it is generally not a problem for a spac to receive sufficient votes to approve the deal. THE most important covenant for a spac merger to close is generally related to the (remaining) cash in the trust or the (net) cash on the balance sheet after closing. Though the remaining cash is partially linked with redemptions, this changes the way to look at spac mergers a bit. 

For a company to be listed it must have a minimum cash balance, generally $5m. However, most spac agreements require a much higher amount, e.g. $100m, mostly to make the deal more appealing and show a clean balance sheet after the merger. (Prior to ’year of the spac 2020’ deals generally were structured with more debt on the balance sheet. Many spacs were just an easy way to get rid of a bad/mediocre company or business unit.) If the price falls below trust value per share and high(er) redemptions can thus be expected, it’s important for the spac to nevertheless be able to reach that minimum amount. That’s why additional financing such as debt (generally convertible) or PIPEs (private investments in public equities) can make a difference. Spacs like CFII, which recently merged with VIEW, have been trading >$11 until recently. Some feared that the deal might not close when the price dropped to $9 given that could have triggered large redemptions. Indeed, about $125m was redeemed, though given the large PIPE and trust value, the merger closed without big problems. 

It is important to keep in mind that the cash condition (whatever it may be) and redemptions often go hand in hand but are not necessarily fully tied together. This might cause strange dynamics. We can look at some examples to better understand how this might be the case:

• Legacy Acquisition Corp (LGC) was a bit of a troubled spac. It failed to merge with an specific target a couple of times which led to redemptions and having ca. $60m cash in trust left before announcing a deal with CarID. LGC previously amended the minimum cash condition. When it came to vote for the CarID deal and potentially redeem shares, investors redeemed >$50m, causing the deal to (nevertheless) close with a balance of only $7m (my calculation), just enough to be able to list and even though many voted against the deal.
• On the other hand GigCapital 2 (GIX) – which is close to merge with UpHealth – has plenty of cash given a capital raise of $285m (mostly convertible debt). Due to the SEC taking longer then expected to give the green light, GIX had to ask investors for additional time to close a deal. However, amending agreements generally needs about 67% of investors to vote FOR the amendments (the extension in this case), many more than what would generally be needed to close the deal. The irony here is that even though GIX is certainly able to satisfy the cash condition (and thus has its FOR vote to the deal basically secured) it now desperately needs investor votes to get the extension. And given that many spac investors are retail investors, GIX has been trying to reach out to >20,000 investors to beg them to vote in favour of the extension. Imagine satisfying all conditions to close a deal but being unable to close due to too few votes for an extension. Another way to look at this is that GIX positioned itself to need almost 70% of investors to vote for the deal – a much higher hurdle than normally needed. As such, the extension vote (due tomorrow) is a big vote of confidence for the deal.

The bottom line here is that I much more prefer spac-land to trade down, and not up, before closing a deal. It seems that investors are not aware of the many small but important nuances in merger agreements. This creates uncertainty and uncertainty = discount in my book. Many deals today are nonsense and pure pump and dump schemes and as such should trade down. However, plenty of others are genuine. Finding a spac which negotiated a good deal with basically 100% certainty of deal closing and having that spac trade down its gold to me.

Please keep in mind that the above is a (big) generalisation, and large differences can (and often do) exist between spacs. As always, do your own do diligence.

ToffCap