Short-seller Hindenburg Calls PureCycle a “SPAC Charade”
Special purpose acquisition companies (SPACs) have been getting demolished for nearly three months now, with scrutiny intensifying following a massive boom, critics worry could end up harming individual investors.
Many private companies have chosen to go public by merging with SPACs if they have no revenue, as they are typically allowed to release optimistic forecasts for future growth. However, even this unique aspect of SPAC mergers is now garnering additional regulatory scrutiny.
Short-seller Hindenburg Research has released a report calling PureCycle Technologies (NASDAQ: PCT)—which closed its merger with Roth CH Acquisition in March—a “SPAC Charade,” highlighting various ways the SPAC’s sponsors may be bilking investors.
Questioning PureCycle’s economics
PureCycle is a technology company that specializes in polypropylene recycling, which it hopes can revolutionize the plastic recycling industry and help solve one of the planet’s biggest environmental challenges.
Hindenburg notes that plastics recycling has long “been a perpetual challenge from an economic standpoint,” with polypropylene being especially uneconomical due to the hefty expenses associated with sorting and cleaning the plastic.
When PureCycle announced its SPAC deal, it had forecast $224 million in revenue for 2023 with a gross margin of 54% and an adjusted EBITDA margin of 45% for that year. The company projects that revenue will grow to $2.3 billion in 2027, with gross margin expanding to 62% and adjusted EBITDA margin jumping to 59%.
“In a corner of the plastics recycling world that has eluded economic sustainability for the world’s top chemical companies, those numbers would put PureCycle’s margins on par with some of the world’s most profitable tech companies,” Hindenburg writes.
Pumped by the sponsors
Roth CH was sponsored by two investment banks, Roth Capital Partners and Craig-Hallum. Generally speaking, SPAC sponsors are generously compensated for closing mergers with private companies, a practice that has also garnered considerable criticisms. Both banks secured a large number of shares in PureCycle through the deal for around a penny per share, according to Hindenburg.
The research departments of both Roth Capital and Hindenburg have issued buy ratings on PureCycle shares, with price targets ranging from $45 to $48. The bullish ratings helped push the stock higher, meeting certain conditions to allow the shares to become eligible for sale. It does not appear that either bank has sold the stock.
The “worst qualities of the SPAC boom”
Hindenburg also suggests that PureCycle’s executives have a long history of “destroying public shareholder capital” by taking low-quality companies public, all of which have failed, filed for bankruptcy, and/or been delisted.
The executive team has already collected millions of dollars in bonuses simply for closing the SPAC merger, in addition to the C-Suite enjoying generous salaries and other equity-based compensation. Hindenburg estimates executives will collectively take home $40 million before PureCycle generates any revenue.
Hindenburg disclosed a short position on PureCycle shares and believes the company represents everything wrong with SPACs. The short seller argues that executives and sponsors get rich off the deal itself “while hoisting unproven technology and ridiculous projections onto the public markets, leaving retail investors to face the consequences.”
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