Description

Ad. Ventures is a recent blank check company that has recently split it common and warrants from the original units. I believe that purchase of the common (AVPA) provides unusually attractive risk reawards and should merit purchase by virtually all investors.

We have recently spent a great deal of time evaluating the merits of investing in blank check companies to determine their suitability for our portfolio. Our conclusion is that they provide very favorable risk/reward potential. A SPAC™ (Single Purpose Acquisition Corp.) is another term for a "blank check" company. The basic concept is that an underwriter raises money for a management team to make an acquisition (frequently debt is used to augment the size of the acquisition). In order for the transaction to go through, less than 20% of the shareholders must elect to opt out. If no acquisition target is found the shareholders receive most of their investment back (generally about 90%)

The typical SPAC structure is a unit IPO consisting of one or more common shares and warrants. Upon closing of the IPO about 90% of the proceeds are placed in an escrow account in order that funds are available if shareholders reject the eventual proposed acquisition (note that every shareholder retains the right to "opt out" regardless of the vote outcome).

Investing in a SPAC involves two decisions which are made at two different times. The first one is whether we believe the initial management team is likely to find a desirable acquisition candidate. Subsequently (typically nine to twelve months later) we will need to assess whether we agree with management's decision. Management is highly incentivized, via a large equity grant (generally 20% for which they made a nominal payment), to find an acquisition candidate that investors will support (these shares have no opt out feature and cannot be sold for three years). Obviously shareholders are unlikely to support management's proposal if the stock is selling below the "walk away" price.

The current price of Ad. Ventures Common ($5.16 per share) is, in our opinion, unusually attrcative. The amount of money in the trust is currently $5.60 per share (this is a much higher than normal amount as Wedbush was trying to insire that its early deals would be veru successful) and will likely grow at 2.5% per annum. Thus, a year from now the trust should be worth about $5.74 per share (11.2% higher than the current selling price)and in 18 months $5.81 (12.6%). Thus, if management is UNSUCCESSFUL, we will generate a low double digit return that will be taxed at a long-term capital gains rate. If they are successful in convincing shareholders to accept their proposal, the shares by definitiion will have to trade higher than the "put price" creating a much higher rate of return.

Thus on a failed deal we make a low double digit return, on a successful deal we make more (undefined how much more), its favorably taxed and if held to maturity (usually 18 months in rare cases 24 months) we can NEVER lose money. Thus the risk is a low double digit return, the reward is a higher (but undefined return). Your grandmother should own this stock!

Catalyst

A deal must be done or money returned within 18 months (in extreme cases 24 months). If a deal is struck earlier (quite likely the annualized rate of return soars!). BTW, the money is held in excrow in a trust account at Smith Barney, Citigroup Global Markets, maintained by Continental Stock Transfer.