23andMe Stock Pops After Closing Its SPAC Deal
Consumer genetics and research specialist 23andMe (NASDAQ: ME) has closed its merger with special purpose acquisition company (SPAC) VG Acquisition. The stock started trading under the new ticker symbol “ME” on Thursday, gaining as much as 11% as investors cheered the completion of the “de-SPAC” transaction.
As of 12:50 p.m. EDT, shares were up approximately 8%.
The DNA testing market ain’t what it used to be
First announced back in February, 23andMe chose to go public via the SPAC route as opposed to alternatives like a traditional IPO or direct listing. The company was once among the hottest private biotech startups but fell on hard times in recent years amid privacy concerns around sharing sensitive genetic information with the company.
The consumer market for genetic testing has been struggling since 2018, forcing 23andMe to lay off 100 employees in early 2020, or around 14% of its headcount at the time. When the SPAC merger was initially announced, the investor presentation that 23andMe provided validated the financial fears: Revenue dipped 31% in 2020 to $305 million. Furthermore, 23andMe is forecasting another drop in sales this year, with 2021 sales expected to be just $218 million.
To be clear, these woes are not specific to 23andMe. The broader market for direct-to-consumer (DTC) DNA test kits has contracted significantly in recent years, impacting many providers.
Nearly a third of the SPAC shares were redeemed
Despite the weakness in the DNA test kit market and declining revenue, investors had initially sent the stock up 31% when the transaction was first unveiled. Investor sentiment for SPACs was still booming back in early February but has since cooled.
However, it appears that many of VG Acquisition’s public shareholders were uninterested in the target company. 23andMe says that it ended up raising approximately $592 million in gross cash proceeds from the deal, which it plans to use to fund future growth. That haul is meaningfully less than the $759 million in gross proceeds that 23andMe initially expected to bring in.
VG Acquisition had $509 million in cash in its trust account and had lined up $250 million in PIPE (private investment in public equity) financing. Of the SPAC’s cash, $167 million appears to have been redeemed by public investors who did not want to invest in 23andMe. That was nearly a third of the cash in the SPAC.
Generally speaking, SPACs include a redemption option that allows investors to simply get their money back—at the $10 net asset value (NAV)—if they are displeased with the acquisition target. SPAC investors typically buy shares of a SPAC before the target is known, and often base their investing decisions on the SPAC’s management team. If a shareholder bought shares at the $10 NAV, then they face no downside risk while the SPAC is searching for a target since investors can always redeem their shares. It appears that a lot of VG Acquisition’s shareholders chose to do just that, resulting in less money going to the combined company’s balance sheet than initially expected.
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