A new “SPAC” is set to list on the AltX next week – Should you buy it?

By next week (25 June 2024), the AltX will get a new listing… And I’m not talking about Rainbow Chicken unbundling from RCL Foods. I’m talking about a brand-new listing in the form of a special purpose acquisition company (SPAC).

SPACs are typically dubbed “blank cheque” companies. They list on stock exchanges with no commercial operations or assets. Instead, they raise a bunch of capital and then, use that capital for listing requirements and for viable acquisitions or takeover targets in their respective industry.

For example, JSE-listed small caps Mahube Infrastructure and Capital Appreciation started out as SPACS. The former raised money to buy renewable energy assets such as solar and wind farms. Meanwhile, the latter used funds to buy Fintech and Software businesses.

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So, what’s the newest SPAC about to hit the market? And should you buy into it?

Cannabis investing comes to SA!

Established in 2018, Cilo Cybin Holdings supplies medical cannabis products such cannabis flowers, THC and CBD oils, cannabis-infused vapes and more.

They also own a state-of-the-art indoor cultivation facility. Here, they can dry, trim and further process licensed cannabis products such as oils, tinctures, topicals creams, and isolates. Furthermore, they can also execute 3rd party manufacturing for the international cannabis industry.

In addition to processing cannabis, this facility also produces and packages final, labelled products ready for consumer markets.

While, the business is located in South Africa, the Cilo Cybin strategy is geared towards exports of medicinal cannabis to other markets outside SA.

In fact, its certified cannabis products are accepted by the relevant international regulatory authorities in Australia, Japan and Thailand. And in 2023, the company successfully began exporting Cannabis Active Pharmaceutical Ingredients (API), oils, and flowers to the Australian market.

Other than cannabis, Cilo Cybin will also pursue further licenses to manufacture MDMA, Psilocybin, and LSD products in the future.

This might sound strange. After all, many of the above drugs are considered illegal. However, over the past few years (particular in the US), MDMA and Psilocybin have increasingly gained recognition as viable treatments for certain health conditions.

Should you buy SPACs when they list?

Now, listing as a SPAC comes with requirements. One of those is the SPAC must complete a viable acquisition typically within 36 months.

Failure to do so will result in Cilo Cybin’s voluntary liquidation and a return of raised capital.

It’s highly unlikely this will happen to Cilo Cybin. Once listed, the group plans to acquire its first target asset – Cilo Cybin Pharmaceutical – and its 2,500 m2 facility in Midrand.

From there, the company plans to graduate to the main JSE board before the end of the year, and then hunt for further growth opportunities in the cannabis market.

For now, however, Cilo Cybin will list with around a R70 million market capitalisation. So, the company’s really tiny. This should change as it expands and acquires new businesses.

While it’s great South African investors can access new companies specialising in fast-growing medical markets, there’s a big risk investing in SPACs.

For one, they could spend a ton of cash on an acquisition or assets that fail to generate any significant growth. In a worst-case scenario, this could lead a SPAC to bankruptcy (as we’ve seen in the US markets).

That’s why you should always remain cautious investing in SPACs. I prefer to give them at least a year to see if they’ve acquired profit-enhancing businesses or assets, or even sealed new client deals in various markets.

In the case of Cylo Cybin, I’ll be following the company’s future strategy closely and keep Red Hot Penny Shares readers updated on whether the company has great profit-potential.

For now, though, avoid the IPO. After all, IPOs typical don’t perform well straight after listing.