During the special purpose acquisition (Spac) mania of the past year or so, many criticisms have been levelled at this practice of taking a company public via a cash shell versus a traditional initial public offering.
One of these critiques has centred on disclosure — in the US, unlike with a traditional IPO, Spacs are allowed to make forecasts about how they reckon their businesses will develop in the future. This is because of a technicality in the SEC rules: a Spac is a considered a merger rather than a public offering, and therefore is not subject to the same rules as a vanilla listing would be. (More on this in Institutional Investor here.)
Arguably, for a business with zero revenue, the ability to make these projections is a God-send. Forecast in your investor deck that sales in 2025 will make the current valuation reasonable and, suddenly, a multi-billion dollar price tag for a nascent company doesn’t seem quite so mad.
The problem is, however, when the future inevitably arrives.
On Tuesday evening Romeo Power, a $1.3bn battery manufacturer for commercial vehicles, reported its first earnings as a listed company after merging with Spac RMG Acquisition Corp on December 30 last year. It’s fair to say there was quite a serious change in guidance.
First, here’s the 2021 revenue forecast from the merger presentation deck, published on November 1:
Guide your eyes to the second column — “2021E” — and you’ll see Romeo Power expected to make $140m in revenue this year, up from just $11m in 2020.
Yet, less than five months later, there was an unpleasant surprise for investors who had been pinning their hopes on this parabolic growth kicking in over 2021.
From the press release (with our emphasis):
So, at best, that’s a 71 per cent drop in forecast revenues in under half-a-year.
Just a hunch, but FT Alphaville expects Romeo Power won’t be the only Spac revising down its expected numbers over the coming months.
At pixel time, Romeo Power’s shares off 13.6 per cent in pre-market to $8.96. Power down.