Shares of mobile-gaming platform Skillz (NYSE:SKLZ) dipped a little when the market opened on Friday. As of 11 a.m. EDT, the stock was down 3%. It’s down a little this morning because management announced the redemption of its publicly traded warrants. Here’s why this matters to Skillz shareholders and what you need to do if you own the warrants.
When special purpose acquisition companies (SPACs) go public, they don’t trade as shares but rather as units. SPAC units have two components: shares and warrants. In time, units get split into their composite parts and trade separately. Like all stocks, shares of SPACs are small ownership stakes in the company. By contrast, the warrants aren’t ownership stakes but rather represent the right to buy shares at a predetermined price if certain conditions are met.
Skillz went public via a SPAC. In this case, it was predetermined that if it was above $18 per share for 20 out of 30 days, management could redeem the warrants. According to today’s press release, this condition was met on July 13. Therefore management today announced it is indeed redeeming the public warrants.
Anyone who owns the warrants now has the right to buy Skillz stock at $11.50 per share. For perspective, there are over 8 million warrants. That means that if everyone exercises their warrant, there will be over 8 million new shares added to Skillz, technically diluting current shareholders. However, keep in mind that this is always a real possibility with a SPAC investment and one that shareholders should have been planning on all along. And on a positive note, this could result in almost $100 million in extra cash for Skillz if everyone exercises their right.
If you’re a shareholder of Skillz, you don’t need to do anything. However, if you own warrants, now is the time for action. They expire at 5 p.m. EDT on Aug. 16. With other SPACs I follow, I’ve seen the redemption period close with thousands of unredeemed warrants, meaning their holders got nothing. It’s a shame. These warrants are worth something right now. Their holders should make sure they at least get something for them.
Warrant holders have two options. First, you could technically sell your warrants to someone else. As of this writing you’d get around $3.50 per warrant. Second, you could exercise your warrant and buy Skillz stock for $11.50 per share.
I wouldn’t overthink this as an arbitrage situation, trying to make a decision based on which one makes you more money today. I would view the decision more simply: If you like Skillz for the long term, then consider exercising your warrants. If you don’t like Skillz for the long term, then maybe selling your warrants is the better option.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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