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CIIG Merger Corp (NASDAQ: CIIC) is a SPAC shell company that recently announced it had entered into a merger agreement with the electric vehicle startup Arrival.

CIIG Merger Corp also issued warrants (NASDAQ: CIICW). And according to their filings, each warrant was "exercisable for one share Class A Common Stock for $11.50 per share".

After the announcement, the stock price of CIIC went as high as $33.50. The CIICW warrants on the other hand, only ever went as high as $8. How does this make sense?

If I bought a bunch of warrants and exercised them immediately, wouldn't I still have made $22 per warrant ($33.50-$11.50)? Following this logic, shouldn't the warrants have reached a high of at least $22?

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Edit: This is not a complete answer because it does not explain why you can't buy the warrant and short the stock to get free money. The current (2020-12-06) price of CIIC is $27, while CIICW is $6.50. There is currently a large gap ($27 - 11.50 - 6.50 = $9 gap) between the intrinsic value of the warrant and its actual price, and this situation has persisted for quite some time already. From my understanding, call options do not sell below intrinsic value (assuming positive interest rates), but why do these call warrants sell below their intrinsic value?

I am only retaining the "answer" below for the benefit of those who wish to continue to investigate further.


If I bought a bunch of warrants and exercised them immediately, wouldn't I still have made $22 per warrant ($33.50-$11.50)? Following this logic, shouldn't the warrants have reached a high of at least $22?

You won't be able to do this because the warrants cannot be exercised immediately. From the first page of CIIG Merger Corp's prospectus (Form 424B4 filing dated 2019-12-13):

The warrants will become exercisable on the later of 30 days after the completion of our initial business combination or 12 months from the closing of this offering [...]

CIIG Merger Corp. must complete an initial business combination (e.g. merger with Arrival) before the warrants can be exercised. You can ignore the 12 months condition, because it has been almost 12 months since the initial offering.

According to CIIG Merger Corp's press release about its merger with Arrival:

Both the board of managers and shareholders of Arrival have unanimously approved the proposed transaction, which is expected to be completed in the first quarter of 2021.

As you can see, it will be some time before the warrants can be exercised (merger date + 30 days). In the meantime, a large number of adverse events could affect the value of the warrant. For example, if CIIC stock crashes or the merger is cancelled, the price of the warrant will fall.

Note that the warrants are going to expire worthless sometime in December 2022 (about a year from now) if CIIG Merger Corp. does not manage to complete any business combinations. This warning is repeated countless times in the prospectus. An example of such a warning from page 32 of the prospectus:

There will be no redemption rights or liquidating distributions with respect to our warrants, which will expire worthless if we fail to complete our business combination within the 24-month time period.

There are probably other factors causing the low warrant price. You should read the documents on EDGAR to find out.

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  • Thank you for your insightful response. I also tried reading the merger documents myself, but I must've missed these important details.
    – AlanSTACK
    Dec 7 '20 at 1:29
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If I bought a bunch of warrants and exercised them immediately, wouldn't I still have made $22 per warrant ($33.50-$11.50)?

Correct. Minus the premium you paid for the options, of course.

Following this logic, shouldn't the warrants have reached a high of at least $22?

Yes. My guess is that the either the warrants are illiquid and the price you saw is stale (especially after a large price move), or the merger created a new class of stock that was selling for $33, and the warrants are for the old class of stock with a different value (e.g. because the old stock is convertible to the new stock by a 3:1 ratio or something).

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  • It took a week for the common to run from $10 to $33.50 so the lack of warrant/stock correlation wasn't because of a spike in the common and then immediate collapse. The warrants are liquid (3.7 million traded the day of the spike to $33.50). The original unit was comprised of one common and 1/2 a warrant but that doesn't explain the failure of a whole warrant to trade at least as high as its intrinsic value (at $33.50). This is definitely a strange one but history tells us that it is priced correctly (there is no free money) so there's some special conversion ratio or similar involved. Dec 1 '20 at 2:12
  • @BobBaerker agreed. if you find more detail that explains it I'll delete my answer.
    – D Stanley
    Dec 1 '20 at 2:14
  • A specific answer might require a deep dive into the prospectus and I'm not in the mood for a swim. Your answer is probably as good as it gets unless one wants to play with EDGAR. Dec 1 '20 at 14:42
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    The article makes sense. Is the author's explanation correct? I dunno. This one is above my pay grade. To answer your question about why not buy the warrant and short the stock, you'd have to look at the borrow rate. It's probably huge. If so and the deal doesn't happen until 2021, that might be a fly in the ointment. Dec 1 '20 at 23:46
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    I just checked the borrow rate and it's about 28%. High but not huge. At the common's current price of $20, that's almost $50 a month. The warrant trades almost $4 below intrinsic so there's your bet. One could need deep pockets if the common zooms and the warrant continues to lag. No options, no hedging just perhaps a scary ride or even a lucky bet if the common collapses. Not my cup of tea. Dec 1 '20 at 23:54
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There is def. an arbitrage here. its not totally risk free but the spread is so enourmous. What I did yesterday was short ciic 33 and went long the warrant for $7 ciicw. Im paying 20% a year to borrow so when the deal closes in 6 months I will have paid $1.5 in htb fees. Giving $33-$11.5-$7-$1.5 = $13 profit really good irr. things that could go wrong. No merger warrant expires - they give the $11 spac money back I get $22-$3-7 as there will by a year of htb fees so $12 profit etc. i have to be able to cover a bigger spread if/when the stock goes cray cray, but I have a basket of a bunch of these and relatively small position

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  • How do you get a HTB cost of $1.50 if the stock is $33 and the rate is 20 pct? Other risks? The daily HTB rate can change and is based on the stock's price. There's also no guarantee that you will be to keep a short position open indefinitely. That could be a problem if the wt/stk spread widens. Dec 9 '20 at 17:36
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You need to read the initial prospectus of the warrants in question. Another SPAC warrant has the terms as follows: Thirty days after the completion of merger, one warrant can be exercised to buy one share at $11.50, OR the company may assign each warrant with 0.2 share of class B stock.

It is the possibility of being assigned 0.2 share of class B stock that is the unknown. Class B stock has not been priced yet...

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  • You have not really answered the question because your answer is not applicable to CIIC. Its class B shares are founder shares that will be automatically converted into class A shares upon the initial business combination (i.e. merger with Arrival, should that occur).
    – Flux
    Dec 11 '20 at 7:09
  • Perhaps you should read the prospectus yourself.
    – Flux
    Dec 11 '20 at 8:22

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