Could a SPAC Save Donald Trump from Bankruptcy?

Welcome to the President’s Day edition of HX Daily!

Today, we will talk about a situation that proves that the stock market is NOT "efficient" and that it could also save Donald Trump…

The situation is the company Digital World Acquisition Corp. (NASDAQ: DWAC).

Many of you might remember this company from a couple of years ago. It went public in September 2021, issuing 25 million shares at $10 per share, thus raising a quarter of a billion dollars.

The company is a "Special Purpose Acquisition Company" or "SPAC". This is something else you might remember from a couple of years ago.

SPACs are publicly traded holding companies that raise a pool of money (the $250 million) that they will then use to purchase a business.

As my old friend John Coleman pointed out, we are right now at the third anniversary of the peak in the SPAC market. Here is a chart of one of the leading SPAC ETFs…

About a month after going public, the company announced it would purchase Trump Media & Technology Group. 

This is the parent company of the alternative social media company Truth Social. That is the social network that Trump began to use after being booted off from Twitter.

In just a couple of days, the stock went from $10 per share to a high of $175! Some investors made millions in just 48 hours…

After that? Not so much.

As my colleague Whitney Tilson correctly called – stocks that go vertical like a rocket most often return to Earth. That is what happened to DWAC. Here is the stock chart until year-end 2023…

There are SO many angles to this story that we could write several hundred pages on the history of SPACs, the SPAC bubble, the mechanics of the DWAC transaction, and the fundamental value (or lack thereof) of the transaction.

We may do that in future issues of HX Daily, but right now (in honor of President's Day!), we want to bring you up to speed with what has happened recently. Here is the stock chart for the last year…

The stock has turned into a rocket ship – AGAIN!

After stabilizing in 2023 between $12 and $17 per share, on January 16, the stock took off. 

Within six trading days, it hit a 52-week high of over $58 per share. That is an almost +250% return in a bit more than a week of trading!

What happened?

That day, Trump stormed to victory in the Republican primary elections for the 2024 Presidential Election in Iowa.

His victory wasn't surprising because he had been polling with a commanding lead for months. Still, Iowa is the official start of the primary season. Dominating this vote brought the likelihood of a Trump candidacy, and it reminded his supporters about DWAC.

About a week later, the company filed a form with the Securities and Exchange Commission (SEC) discussing how they terminated highly dilutive financing.

The stock also has a high short interest, so combining the incremental demand and the short interest was like throwing a lit match into a pile of kindling!

There are many moving pieces around how many outstanding shares will exist after a transaction. Still, the number is somewhere between 125 million and 175 million.

The stock is nowhere near those old highs from before. Still, it has been trading around these levels, giving the company a remarkable valuation of $6.3 billion to $8.8 billion.

Again, there are a lot of moving pieces, but Trump would own more than 50% of the company. This means $3 billion to $4 billion.

This is where it gets even more interesting…

It is hard to follow ALL the legal news around Trump. Still, the most significant recent news was that he would be on the hook for coming up with $355 million as part of a New York state fraud ruling.

There are a LOT more details in this story. Still, it seems highly likely that he will have to come up with a significant amount of money ($50 million to $100 million) in the next few months to essentially post "bail."

Does Trump have the money? Maybe. Who really knows?

If he does, it will pinch, and he needs all the liquidity he can get to fund his lifestyle, business, and campaign. 

He can try to get someone to loan him the money, but he already needs help getting a similar loan for a much smaller ruling.

Will a donor or wealthy benefactor help him? Again, who knows?

We have seen wealthy benefactors help out politicians in binds on both sides of the aisle. Does anyone want to buy a painting?

Let’s bring it back to DWAC…

My old friend Glenn Tongue had an interesting idea - could Trump sell shares in DWAC and solve his financial problems?

The answer is – YES.

Many things need to fall into place for any of this to happen. The deal has to close, and some time must pass before he can sell shares. The value of the shares may fall, etc.

However, we think that if the deal closes, he could get a margin loan that would cover his costs.

How likely is his holding in DWAC to bail him? We think it is a low probability, but it IS possible.

Meanwhile, what do we do with DWAC stock?

Congratulations if you are a holder – you just made a TON of money! Now SELL!

Or at least sell what you initially put in, plus another 25%, and then let the rest ride.

Should you short the stock? Honestly, it's uncertain that you could get the shares to short, so it may not even be possible.

Also, the stock may continue to increase and even double or triple from here!

While that may be true, our partner Whitney Tilson has an excellent track record of calling out situations like this, and we agree with his approach. 

In our view, there is a 99%+ chance that these shares will be (much) lower before the end of the year.

Whatever ends up happening here with Trump and DWAC, it will be interesting to watch!