The recent bubble in special purpose acquisition companies provided a lot of fodder for short sellers, from Nikola and MultiPlan to Clover Health and others.
This year, with most SPACs now trading below their $10 IPO price, there’s not much money left on the table for short sellers.
But SPAC short sellers have sensed a gift in the not-yet consummated deal between Trump Media and Technology Group and the Digital World Acquisition Group, a high-flying SPAC that is also under investigation by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, according to its securities filing.
That SPAC is now the most shorted one in the world, according to a new report from S3 Partners, which tracks short interest.
Digital World is also the only short in the market with more than $100 million in short interest, S3 Partners found. As of January 20, the short interest in that SPAC was almost 13 percent, for a total of $323.73 million.
So far, shorts have been losing money on this bet. As of Thursday, they were in the red by $144 million on the stock and another $1.4 million on the warrants, according to the S3 Partners report.
The stock, which fell more than 8 percent during Monday’s market rout, closed Monday at around $67 per share. That’s more than six times the $10 IPO price but down about 30 percent from its close on the day of the deal’s announcement on October 20.
When Digital World said it planned to merge with Donald Trump’s media company — itself a blank slate with no revenues and no business — it surged as high as $175 per share in midday trading. It closed that day at $94.20, as many of the original hedge fund investors, like Boaz Weinstein’s Saba Capital and Lighthouse Investment Partners, exited immediately on the news, according to published reports.
While scant details about Trump Media were disclosed at the time, the deal was announced only 21 days after the SPAC’s IPO. That raised concerns that the two companies may have acted illegally by having conversations ahead of the IPO.
Indeed, the New York Times in October reported that Trump had been discussing the possibility of a deal with the SPAC’s sponsor months before it went public. In their filing for the IPO, however, those executives said, “We have not selected any specific business target and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any business combination target.”
Now the SEC is looking at the deal. “The anecdotal evidence indicates to me that the SEC will most likely reject the merger deal,” Phillip Braun, a finance professor at Northwestern University’s Kellogg School of Business, wrote in a Seeking Alpha post last week. He also noted that the individuals behind the SPAC “have been the target of prior scrutiny.” He expects the stock to fall to around $10. Under SPAC terms, that’s the price at which shareholders can redeem and get their money back.
An effort to get investors to sign onto a $1 billion PIPE, or private financing, for the deal also proved difficult, according to a report last week in the Times, which attributed the problems to the political and legal issues surrounding the former president, as well as his record of bankruptcies and disputes with creditors and partners.
The hedge funds that turned down the PIPE included some prominent SPAC investors, like Millennium Management, Balasny Asset Management, and Hudson Bay Capital, the Times reported.
Devin Nunes, a Republican congressman closely tied to the former president who resigned in January, has become Trump Media’s CEO.
Truth Social, which is the name of Trump Media’s social media platform, plans to launch by the end of the first quarter.
