Plutonian (NASDAQ:PLTN) has entered into a definitive agreement to combine with consumer products firm Big Tree Cloud at an initial equity value of $500 million.

Shenzhen, China-based Big Tree manufactures and distributes personal care items with a specialization in feminine hygiene products.

The combined company is expected to trade on the Nasdaq once the deal is completed in the first half of 2024.

Transaction Overview

Plutonian has an estimated $33.8 million in its current trust after seeing 43.6% of shares redeemed in an August extension vote that will allow it extend its transaction deadline up to August 2024.

It has not yet supplemented this with additional outside funding, but the parties have agreed to make reasonable best efforts to raise at least $10 million in other financing. The deal does not include a minimum cash condition.

Company shareholders will have the opportunity to earn an additional 20,000,000 shares if Big Tree expands its retail distribution footprint to 200 stores. These stores must be department stores, grocery stores, pharmacies, super markets, or other retailers with a minimum floor space of 500 sq. meters (1,640 sq. ft.).

Both the company and sponsor have agreed to a six-month lock-up, but each may begin trading shares earlier should the company trade at or above $12 for 20 of 30 trading days. This early release applies to Plutonian for all of its sponsor shares, but only half of those held by Big Tree stockholders.

Quick Takes: “Store count” is not a clause that SPAC-watchers have seen in earnout terms any time lately and one wonders if there might be an opportunity to game it.

In the US context, a single wholesale contract with a major retailer like Walmart might entail placements in over 200 stores. But, there would be no guarantee that that foothold would be renewed. If the products were a little slow off the shelves, such a deal might only last a season or two.

It would also be an open question as to whether the revenue generated from such placements would equal the value that Big Tree shareholders would be giving themselves as a bonus through this clause.

If the parties expect the company to maintain its price through de-SPAC at roughly $10 per share then this distribution would be worth $200 million in equity, or $1 million per store.

Of course, if the parties are expecting Big Tree to trade similarly to other China-based de-SPACs in recent years, this earnout looks far more reasonable. The 24 China-domiciled companies that have completed a SPAC deal since 2010 last closed at a median share price of $2.03, or $0.37 when adjusted for stock splits.

That equates to a bonus of $40.6 million, or $7.4 million, respectively, which may make a bit more sense for a company of its size. According to its Alibaba-integrated (NYSE:BABA) website, it has a total staff of 52 employees operating out of 5,106 sq. meters (16,750 sq ft) of manufacturing and office space.

It partially outsources its manufacturing capacity to third parties as an original design manufacturer (ODM) and it is ranked #5 on Alibaba for its period underwear products.

This product line likely opens up higher margins than its wider line of sanitary napkins, but this is still overall likely a thin-margin space. Its sanitary napkins packs wholesale for $0.26 to $0.32 each and period underwear for $0.50 to $0.56, so the company will likely need to move significant volumes to fund growth from sales.

But, aside from this, the parties have thus far not laid out a strategic rationale for why now would be a good time for the company to list in the United States.  Although it appears the company is interested in transitioning more from an ecommerce base to brick-and-mortar retail, it has given few other signs of how it plans to expand.

ADVISORS

• Company
  • Paul Hastings LLP, Commerce & Finance Law Offices and Maples Group are serving as legal counsel to Big Tree Cloud.
• SPAC
  • Wilson Sonsini Goodrich & Rosati, P.C. and Global Law Office are serving as legal counsel to Plutonian.