How a failed retailer and a tax shield can create an accidental Spac

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Call it the accidental Spac.

Wish, an online retailer, listed its shares during the IPO frenzy of the pandemic. Not long after, in early 2021, its market cap peaked at $18bn. But its business model — an online dollar store with offbeat products and promotions — never quite landed. 

Earlier this week, Wish announced a deal to sell itself for just $173mn to a Singaporean ecommerce company Qoo10, a seemingly ignominious conclusion for the one-time VC-backed high flyer.

But Wish’s managers are preparing a second act. The company, now known as ContextLogic, will survive as a shell company. It will be fortified both by retaining the cash sale proceeds and a whopping $2.7bn in cumulative net operating losses (NOLs).

The US federal corporate tax rate is 21 per cent, leaving the nominal value of the resulting potential future tax shield at just under $600mn. ContextLogic’s new goal, like traditional blank cheque vehicles, will be to find a merger partner capable of using those losses to offset its tax liability. 

Finding an appropriate deal partner is not such an easy task. The US tax authority puts limits on acquirers’ use of tax losses to deter pure arbitrage transactions. Therefore, the current shareholders of Wish will have to remain in economic control of a combined company to use the full $2.7bn balance. Like a Spac, ContextLogic could supplement its firepower with a private equity firm providing the capital infusion needed to buy a larger business, its management said.

NOL shell companies are not entirely unprecedented. After the US regional bank Washington Mutual failed during the financial crisis, its $6bn of NOLs were placed in a publicly traded company that launched in 2012. Eventually, private equity firm KKR invested hundreds of millions of dollars in that shell, known as WMIH.

In 2018, WMIH finally merged with a real business, Nationstar Mortgage, at an aggregate valuation of $3.8bn. WMIH, the shares of which initially traded at around $10, are now above $70.

Wish’s book value, or its assets less liabilities, was $272mn, or just over $10 per share, when last measured at the end of October. That figure has undoubtedly dropped in the past almost five months, although the $173mn gross acquisition price may still represent a discount to the latest book value. 

Some shareholders may well sell their Wish shares at the current price of around $6.50 each and move on. But the NOL strategy the company is pursuing can be thought of as a free call option on an M&A punt. It still might be an easier task than selling trinkets on the internet.