The Well-Earned Prize: NEXT Renewables’ proposed SPAC merger, in detail

Back in October, we speculated that the gang at NEXT might muse from time to time about re-naming their company BY GRABTHAR’S HAMMER, EVENTUALLY — given the epic effort they’ve undertaken in developing their massive Columbia River RD and SAF project, but they’ve found a better name altogether. We reported last week that NEXT Renewable Fuels and ITAQ, a special purpose acquisition company, (the full name of the SPAC is Industrial Tech Acquisitions II) signed a merger agreement expected to result in NXTCLEAN Fuels, Inc. The boards of directors of NXT and ITAQ have each approved the transaction. Let’s look in more depth at the transaction and NEXT’s progress, today.

Next steps for the project

We profiled the project in NEXT Renewable Fuels and its big, big, big, long, long, long project in Oregon, here. . NXT has received the majority of its key permits and expects to begin construction upon completion of an Environmental Impact Statement currently underway with the US Army Corp of Engineers. Commencement of RD/SAF production is projected for 2026; the Company expects to be EBITDA positive in its first full year of production.

The Digest’s Multi-Slide Guide to the combination and project

You can visualize the project, the financials, the fundamentals, all here in this multi-slide guide as filed by the stakeholders with the SEC.

The ITAQ backstory

ITAQ is SPAC company; the IPO closed in January with $175 million in proceeds. ITAQ is sponsored by Texas Ventures, a leading technology and venture capital firm with expertise in capital markets and structured finance.  The Texas Ventures’ approach is to identify emerging trends and opportunities prior to recognition by the broader marketplace, and to take a proactive approach in working with entrepreneurs and managers who have the determination to build world-class companies. Texas Ventures has made more than 30 portfolio investments, several in life sciences and energy tech, this is the first we know of in renewable fuels. 

This SPAC is slightly on the light side. In 2021, 613 SPACs raised $145 billion in their IPOs, an average of $236 million — so this one, which comes at the later end of the 2021 SPAC frenzy, is about 30 percent smaller than the average for the year.

The deal terms

The combined company is expected to have an implied post-money pro forma enterprise value of approximately $530 million and an equity value of approximately $666 million at closing, assuming no redemptions by ITAQ public shareholders. Assuming no redemptions by ITAQ public shareholders, the transaction is expected to deliver up to approximately $176 million of cash held in ITAQ’s trust account. The conditions to NXT’s closing include the amount remaining in the trust account after any redemptions by ITAQ’s public stockholders, plus the net proceeds of any private financing completed by ITAQ, is at least $50 million. ITAQ has retained England & Company for a private capital raise, if necessary.

In the transaction, a newly formed subsidiary of ITAQ will merge with NXT, with NXT surviving as a wholly owned subsidiary of ITAQ. Pursuant to the merger, all pre-closing stockholders and holders of convertible debt of NXT will receive common stock of ITAQ, which will continue after the closing as a publicly traded company under the name NXTCLEAN Fuels, Inc. The transaction, which has been approved by the boards of directors of both NXT and ITAQ, is expected to close late in the second quarter of 2023, subject to shareholder approvals and other customary closing conditions.

 The Company’s first project is a /750 million gallon per year RD/SAF refinery in at Port Westward, Oregon, along the Columbia River. The project is advancing through permitting and expects to begin construction upon completion of an Environmental Impact Statement currently underway with the US Army Corp of Engineers. 

The United connection

United Airlines Ventures entered into a strategic investment agreement with NXT pursuant to which it invested in NXT and could continue to invest as much as $37.5 million, as long as NXT meets certain milestones

The SPAC caveats

In the case of ITAQ, the company currently has roughly 21 million shares outstanding, or a market cap of $217 million and a share price of $10.10. That’s the IPO proceeds plus the original 4.2 million shares pre-IPO.  

The agreement specifies that the merger could close with as little as $5 million remaining in ITAQ’s accounts after redemptions to shareholders opposed to the merger — it’s a common feature of SPAC mergers, offering investors an exit through share redemption — the terms are pretty lean. That’s as high as a 95 percent redemption rate, yikes. It puts emphasis on more of the private investment in public entity (PIPE) financing that we see in the United Airlines Ventures investment. Overall, the merger has to have a minimum of $50 million in hand from the assets of the SPAC and the proceeds from a PIPE investment round.

Given the heat around renewable diesel, there’s little doubt the venture could raise the amount — the cost of the money is always dependent on market conditions and investors will want to keep a close eye on other SPAC transactions, as well as the efforts to expand the demand side of the California Low Carbon Fuel Standard as the wave of clean fuels deployment has caused a dip in the value of carbon credits, as was always the point of an LCFS which is designed as a catalyst to innovation not a crutch.

What is the redemption rate by SPAC shareholders, these days? According to SPAC Alpha, the average redemption rate for July to November 2021 was in the 43-67 percent range, up from a 7 to 43 percent range in the first half of the year.  Bizjournals is reporting an 81 percent redemption rate in 2022.

This Harvard Law School forum avers that “Although some SPACs with high-quality sponsors do better than others, SPAC investors that hold shares at the time of a SPAC’s merger see post-merger share prices drop on average by a third or more.”

Why do SPAC investors bail out — or rather, why do they come in at all given that the bail-out rate is so high? As our friends at Harvard explain:

In order to attract IPO investors, SPACs promise an attractive return for allowing the SPAC to hold their cash for two years. SPAC shareholders that redeem their shares receive the full price of the units sold in the IPO with interest—plus the right to keep the warrants included in the units for free. For SPACs in our study, that has amounted to an average annualized return of 11.6% for redeeming investors, with essentially no downside risk. 

What’s especially interesting about this deal for SPAC investors who might choose to stay the course?  In a nutshell, it’s the presence of blue-chip partners for offtake and feedstock

What’s nerve-wracking?

The final permits are not yet issued for construction, As we observed in this review of NEXT, the permitting process in Oregon can be like rowing in a lake of peanut butter, lot of effort, slow progress. Sometimes I wonder if the officials who serve as the guardians of Columbia River permits have taken too much to heart the words of the old patriotic song Hail Columbia:

Immortal patriots, rise once more,
Defend your rights, defend your shore!
Let no rude foe, with impious hand,
Invade the shrine where sacred lies
Of toil and blood, the well-earned prize.

The Well-Earned Prize

When achieved, a berth along the Columbia River is a well-earned prize indeed. Think terminal access, think barging opportunities, think experience with large scale industrial operations, think infrastructure, and think proximity to the Oregon, Washington state, BC and California low carbon fuel markets. The advantages are enough to tempt otherwise sane corporate executives into a six-year assemblage of all the pieces that go into what would be the first refining operation built in Oregon in lo these many years. I wouldn’t wish the effort on the faint of heart, but the road to Oregon Country was not opened by the faint of heart, the pioneers came in wagons, on foot, dragging sledges. It was never about the hardships, it was about the opportunity for the family that undertook the journey perilous.

Herbert Hoover once observed:

”Our individualism differs from all others because it embraces these great ideals, that while we build our society on the attainment of the individual, we shall safeguard to every individual an equality of opportunity to take that position in the community to which his intelligence, character, ability and ambition entitle him; the we keep the social solution free from frozen strata of classes; the we shall stimulate effort of each individual to achievement; that through an enlarging sense of responsibility and understanding we shall assist him to this attainment; while in turn he must stand up to the emery wheel of competition.”

Hoover hit all right notes there for a venture in renewable fuels. Safeguard, equality, opportunity, intelligence, character, ability, ambition, achievement, responsibility, competition. These perhaps are the 10 most American words of all, words to reflect on — more powerful than margin, offtake, feedstock, yield, rate — but each set of words tied to the other.

Combining the best of both, that is what justifies the Special Acquisition Company in the first place, as it once justified John Jacob Astor’s ventures along the Pacific Coast which led to the first settlement of Oregon in 1811, at Astoria. The town of Astoria is still there, much enlarged and changed — the ideals are everywhere in Oregon, though the people may not always speak of them in this manner. At the heart of a new venture is the ability to endure the uncertainty of success — that emery wheel of competition — but of course, that is what makes a prize a well-earned prize, and  the larger the venture, the greater the reward, and a substantial reward awaits the stakeholders, though success is not yet assured, not near yet. 

Reaction from the stakeholders

“West Coast states are demanding a clean fuels conversion of the transportation and aviation industries with aggressive targets necessitating rapid increases in clean fuel supplies,” commented Christopher Efird, Chief Executive Officer and Executive Chairman of NXT. “NXT is advancing toward becoming one of the largest US-based suppliers of clean fuels for these markets and is investigating and pursuing potential vertical expansion into other clean fuels.”

Scott Crist, Chief Executive Officer and Chairman of ITAQ, stated, “Renewable diesel and sustainable aviation fuel are the most desired liquid fuels in the world, and there is an urgent global need for more. NXT has a multi-prong business plan and is developing a strategically positioned facility along the Columbia River in Oregon.”