The Nightcap from SPAC Track

Autonomous vehicle startup Aurora is close to finalizing a deal to merge with Reinvent Technology Partners Y, the newest special purpose acquisition company launched by LinkedIn co-founder and investor Reid Hoffman, Zynga founder Mark Pincus and managing partner Michael Thompson, according to several sources familiar with the talks.

One of the sticking points is the targeted valuation, which had been as high as $20 billion. It is now closer to $12 billion and the deal is expected to be announced as early as next week, said multiple sources who have asked not to be identified because they’re not authorized to discuss the deal. Aurora declined to comment. Reinvent also declined to comment.

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Aurora already has a relationship with Hoffman. In February 2018, Aurora raised $90 million from Greylock Partners and Index Ventures. Hoffman, who is a partner at Greylock, and Index Ventures’ Mike Volpi became board members of Aurora as part of the Series A round. The following year, Aurora raised more than $530 million in a Series B round led by Sequoia Capital and included Amazon and T. Rowe Price Associates. Lightspeed Venture Partners, Geodesic, Shell Ventures and Reinvent Capital also participated in the round, as well as previous investors Greylock and Index Ventures.

While Hoffman and Reinvent showing up on two sides of a SPAC deal would be unusual, it is not unprecedented. For instance, a blank-check company formed by T.J. Rodgers announced in February a merger with Enovix, a battery technology company that he has been a director of since 2012 and is its largest shareholder, Bloomberg reported at the time. In this case, Hoffman is a board member, but not its largest shareholder.

Aurora, which was founded in 2017 by Sterling Anderson, Drew Bagnell and Chris Urmson, has had a high-flying year. In December, the company reached an agreement with Uber to buy the ride-hailing firm’s self-driving unit in a complex deal that valued the combined company at $10 billion.

Aurora did not pay cash for Uber ATG, a company that was valued at $7.25 billion following a $1 billion investment in 2019 from Toyota, DENSO and SoftBank’s Vision Fund. Instead, Uber handed over its equity in ATG and invested $400 million into Aurora. The deal gave Uber a 26% stake in the combined company, according to a filing with the U.S. Securities and Exchange Commission. (As a refresher, Uber held an 86.2% stake (on a fully diluted basis) in Uber ATG, according to filings with the SEC. Uber ATG’s investors held a combined stake of 13.8% in the company.)

The deal, which values UMG at some 35 billion euros ($42 billion), will leave Pershing Square Tontine (PSTH: $22.06) with $1.5 billion of cash 1 , which Ackman plans to keep and use for another deal. He’s also creating something new entirely: a SPARC, or special purpose acquisition rights company.

Unlike a SPAC, where investors blindly pledge capital to acquire an unknown company, the SPARC won’t ask for money just yet. Ackman will seek out another acquisition target, and tell his investors what it is. If they like the prospective deal, they can pony up cash to fund it.

Financially, it’s complex. In the initial SPAC, the shares were sold for $20 apiece. Of that, $14.75 is being used to acquire the stake in UMG. The remaining $5.25 will fund another deal. The SPAC’s investors will also get rights to invest in the SPARC, which when combined with Pershing Square’s money could create as much as $10.6 billion in financial firepower for dealmaking.

It’s a neat piece of financial engineering that lets Ackman parlay his initial SPAC into several deals. And in many ways, the SPARC structure is kinder to investors than the SPAC, since it gives them more visibility into what they’re actually buying, won’t incur big underwriting fees and isn’t subject to the same two-year limitation that SPACs have to find a target.

Even so, it’s a whole lot more complex than what they surely thought they were investing in last July, and is a piecemeal way of letting investors realize the full value of their initial commitment. The SPAC’s shares dropped 7% in premarket trading, which suggests Ackman needs to do more to convince investors of the transaction’s merits. Ackman’s SPAC was itself supposed to be an innovative approach that gave investors more protection by offering a different incentive structure than usual.

Now that a traditional SPAC deal isn’t happening, he’s ginned up another innovation in its stead.

Last year at this time, Palantir was gearing up for its long-awaited stock market debut. Now, the data analytics software developer has emerged as a major investor in other tech companies that are themselves getting ready for the public markets.

Palantir’s latest investment was announced on Thursday, when Babylon Health said it would be going public through a special purpose acquisition company (SPAC). A group of investors, including Palantir, committed to invest a combined $230 million into the Babylon transaction.

Palantir has now agreed to at least six SPAC deals in less than three months.