HyperloopTT's public SPAC debut may not go quickly

Hyperloop Transportation Technologies (HyperloopTT) entered final merger agreement with the special purpose acquisition company (SPAC) Forest Road Acquisition Corp. II, which is led by former Disney executives Tom Staggs and Kevin Mayer. The combined company will list shares at a preliminary valuation of $600 million.

In theory, Hyperloop technology is a vacuum tube-based system that moves people and goods by levitating capsules at the speed of an airplane on the ground. The speeds are supposedly achieved “by using passive magnetic levitation technology and a linear electric motor in a minimally pressured, drag-reducing tube,” according to HyperloopTT. The aim is to provide a clean, safe and efficient form of transport.

Despite a lot of hype, money and a lot of dazzling CGI renderings, Hyperloop technology still seems like an impossible dream. The technology has never been proven at scale, and even if it had, the services would likely be so expensive that they would be loss-making for the company. Elon Musk’s The Boring Company is perhaps the most prominent proponent of hyperloop technology, but so far all TBC has to show for it is a tunnel in Las Vegas that carries passengers in painfully slow-moving Teslas.

So it’s quite surprising to see a SPAC deal on the horizon to take a company with no short-term or possibly even mid-term returns to the public markets. In fact, given the specifics of the deal, the company will likely need to raise funds again immediately just to operate.

Right now, the deal is expected to provide the combined company with $330 million in net revenue. That is until the SPAC’s shareholders withdraw their money before the deal closes. with redemption rate this year averaged 81%it’s more likely that at best HyperloopTT will walk away with about $70 million from the merger — that’s based on the $350 million in trust the SPAC currently has.

Yet even that forecast may be rosy. Michael Olrogh, assistant professor of law at New York University and co-author of the report, “A Sober Look at SPACs,” said HyperloopTT can also expect to pay about $20 million in transaction fees that will go to the banks working on the deal, not to mention the free stock going to the sponsor. What it would mean: The combined company would come away with less than $70 million, not enough money to make a meaningful impact on hyperloop scaling technology.

“I see from the deal that there is no PIPE. So no experienced investor was willing to make firm commitments to finance this deal,” Olroghe said. “My best guess is that they’re just hoping they can find some unsolicited investors who won’t be able to redeem their shares, thereby handing over $10 per share for equity worth very little .”

HyperloopTT can still choose to cancel the merger if the SPAC has less than $40 million in trust, according to Ohlrogge, who noted that the cancellation option prevents the target from giving away millions of shares to the sponsor and millions to the banks if the SPAC after all, he doesn’t give any money on the deal. The decision must be made quickly as The SPAC is expiring and must complete the transaction before March 2023.

“Given the time it takes to get deals together, this is getting as late as they could announce and they’re probably hoping to be done by then,” Olroghe said.

Some experts say Forest Road Acquisition Corp. II is struggling to close a deal, any deal, before the deadline. If it doesn’t, it will be forced to liquidate and return investors’ money. Note that last year Forest Road took The Beachbody Company public, which eventually became a disaster for long-time shareholders.

In the third quarter, Beachbody reported revenue of $166 million, down 20% from Q3 last year, and a net loss of $33.9 million. The company’s shares are trading at $0.78, down nearly 69% year to date.

What HyperloopTT wants to achieve

Skepticism aside, HyperloopTT says it has developed a full-scale test track in Toulouse, France, a Hyperloop insurance framework model, and safety and certification guidelines.

The company is working with the European Commission and the US Department of Transportation on Hyperloop system projects. For example, HyperloopTT works on a feasibility study in the U.S. Great Lakes region and is working with Hamburger Hafen and Logistik AG to develop cargo hyperloop technology in Germany. The company is also trying to find a site in Canada to study a commercial prototype, including a three-mile passenger system and an R&D and experience center, the company says.

HyperloopTT is pursuing an “asset-light technology licensing business model” or “hyperloop-as-a-service” model that could lead to three revenue streams, including a one-time license fee during system construction, annual license fees over lifetime of a system and annual percentage of sales.

It is quite clear that the HyperloopTT and all its derivatives have a long way to go before they can make a commercially viable product. Our best guess is at least another 10 years of R&D before we can even begin to think of Hyperloop technology as more than vaporware. This is what makes the SPAC deal so confusing today, especially when the appetite for such deals has waned significantly, especially for pre-revenue companies.

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