DWAC: Where Big Tech and Free Speech Collide

by | Mar 7, 2022

The disruption of mainstream media is now an investing theme

Following the theme of “what’s working in SPACs,” we take a closer look at Digital World Acquisition Corp. (DWAC). With a war in the Ukraine drawing even more attention to the issues of censorship, free speech and freedom of information, DWAC is converging, or stumbling, on several important themes, depending on your perspective.

Industry Backdrop

DWAC shares are up 89% YTD. At a time where risk assets are collapsing, DWAC stock has outperformed, rocketing 89% YTD versus a decline of 10% for the S&P500 over the same period. Shares are approaching $100, up from a $10 IPO price in September 2021. Upward momentum shows no sign of abating, with shares beating 52-week highs on an almost daily basis.

The big picture: Information, free speech. It’s clear that access to information is an important piece of the conversation, whether it’s ‘hacktivist’ group Anonymous, who’s hacking over 1,500  websites in a self proclaimed ‘cyber war‘ with Russia; or Elon Musk, whose Starlink satellites will not block Russian news sources “unless at gunpoint.”

Different View on Free Speech

Source: Twitter

Resistance to Big Tech. DWAC is in part an emotional investing play on Big Tech censorship– the idea that Big Tech companies have become the gatekeepers and that the political right has become increasingly deprived of access to Internet infrastructure. In order to reduce the spread of violent and exploitative content, social media companies have begun employing moderators to remove inappropriate material from their platforms. While pornography and hate speech are protected by the first amendment, public sentiment suggests that this type of content—along with content depicting violence or inciting violence—does not belong in social media. Tech companies prohibit this content in their terms of service. However, the line gets murky as call to violence is more subtle—neither graphic nor explicit—but still results in violent activity. It gets even murkier when political figures are involved. One person’s moderation is another’s suppression.

Moderation viewed as suppression.  These issues came to a head after the January 6 Capital riots, when a violent mob of President Donald Trump’s supporters, urged by the outgoing president to “stop the steal,” stormed the US Capitol. The next day, Facebook (FB) issued Trump an indefinite suspension. The day after, Twitter (TWTR), where Trump tweeted more than 25,000 times during his presidency, issued him a permanent suspension, and over the following week, barred more than 70,000 other users. Snapchat, Youtube, Twitch and other platforms followed, while Apple (AAPL) and Google (GOOG, GOOGL) cut Parler, a small social network popular with far-right users, from their app stores, and Amazon (AMZN)  removed it from its cloud computing service, forcing the network offline. The tech companies claimed Trump and his supporters’ “incitement to violence” and “hate speech” violated their terms of service.

DWAC up close

Truth Social has launched, in limited form.  Created by the year-old Trump Media & Technology Group, Donald Trump’s social media platform, Truth Social, launched, in limited form, on the US Apple App store in an aptly-timed President’s Day launch.

Twitter of the Right. Heralded for months as the crown jewel of Trump’s post-presidential business ambitions, supporters pledged it would revolutionize social media and take down the mainstream social networks where Trump is banned. The app is in early stages but is speculated to have similarities to Twitter (TWTR). Recall that former president Donald Trump was banned from Twitter, Facebook and YouTube last year.

Bumps in the road. Project lead and former congressman Devin Nunes said it would be fully operational by the end of March. The site was almost inaccessible on its debut, owing to technical glitches, a 13-hour outage and a 300,000-person waitlist. Trump himself has been absent from the platform since his initial comments over two weeks ago. 

An attention-grabbing headline

DWAC: SPAC sponsor and transaction overview

SPAC sponsor overview. DWAC CEO Patrick Orlando, a former derivatives trader at Deutsche Bank AG, has been involved with several SPACs. One of his other SPACs, Yunhong International (ZGYH), based in Wuhan, China, called off a roughly $7 billion deal with a Chinese energy company in September 2021, and ultimately liquidated. DWAC’s Chief Financial Officer is Luis Orleans-Braganza, a member of Brazil’s National Congress.

Blemished track record. Yunhong revealed that it had suffered a loss in its trust account. As with any SPAC, the funds raised in an IPO are meant to be kept safe in short-term government securities so they generally earn a small amount of interest (or none when rates were cut to zero) and should not decline in value.

Details are thin. While we are very familiar with limited disclosures in SPAC filings, the DWAC deal is truly in a class of its own. A look at the short presentation deck shows just how unusual Mr. Trump’s company really is. There’s little more to see other than a sketch of big picture ideas. While at least some SPACs have merged with companies that don’t yet have revenue, Mr. Trump’s operation is even more nascent.

DWAC SPAC Team Summary

No DWAC team member has successfully completed a SPAC transaction yet

Red flag: PIPE terms and ownership structure should raise eyebrows. DWAC’s $1 billion “death spiral financing” — leaves many investors questioning whether the PIPE participants are only in it only for a short-term gain. At an initial conversion price of $33.60, PIPE investors got a healthy 20% discount to DWAC’s share price at the time. Shares are currently approaching $100. Also of note: the conversion price is subject to adjustment, Post-merger, if the deSPAC’s 10-day VWAP is at or above $56 there is no adjustment. But if the average price falls below $56, the conversion price is adjusted 40% lower to as low as $10 per share and $10 per share would mean the holders of the preferred stock could be converted into 100 million shares. Preferred holders have an incentive to see the deSPAC stock drop. The lower the price the more shares they will receive when they convert their preferred stock. But for common DWAC stockholders, additional preferred shares would be dilutive. Also note, despite its ‘free speech’ bent, DWAC isn’t really a stock for the people: DWAC shareholders will receive only 13.8% of the new company’s stock.

DWAC: As always, the devil’s in the details

Source: Investor Presentation

DWAC is a retail-driven momentum story right now

No sales, no problem: DWAC valued at $4 billion. At $100 per share, DWAC would have an implied market capitalization approaching $4 billion. The question investors should be asking is: to what extent is DWAC being driven by sentiment trading versus fundamentals? Amidst a train wreck of SPAC mishaps, call us “old school” but we’d like to see more of a business model.

DWAC projections: Could use some details on earnings and profitability

Source: Investor presentation

Small float makes this a potential squeeze candidate. DWAC’s holder base is almost entirely retail investors (institutions ~6%). A small float of 30 million shares makes this an ideal short squeeze.

DWAC versus TWTR performance

Like it or not, the disruption of the media industry is an investable theme. Given the increasing polarization of political views, we expect to see more disruptive plays on mainstream social media. Other plays on the theme: CF Acquisition Corp. VI (CFVI)/Rumble and Black Rifle Coffee (BRCC). Even the Forbes SPAC, which involves a $400 million investment from cryto exchange Binance, shows that everyone gets to tell their story.

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