DEEP DIVE ON US WATER STOCKS – PART III COULD SDAC THE SPAC BE THE NEXT WATER PLAY?

Earlier this month the Federal Government announced the first ever Tier 1 water shortage for the Colorado River Basin.
 
Water levels in the basin, specifically the dams at Lake Mead and Lake Powell, have reached critically low levels.
 
This has been called “a 500-year drought” and it is causing water shortages across the West.
 
On Aug. 3, the State Water Resources Control Board, the biggest watershed in the state, voted 5 to 0 to issue an “emergency curtailment” order for the Sacramento-San Joaquin Delta watershed.
 
Then the Metropolitan Water District of Southern California took the step of declaring a water supply alert for the first time in 7 years.
 
Deven Upadhyay, chief operating officer for the South Cal Water District said “we cannot overstate the seriousness of this drought. Conditions are getting worse, and more importantly, we don’t know how long it will last.”
 

Finding a Way to Capitalize

 
My search for water investments has been a great learning experience. However, ways to play it have been hard to find.
 
It is easy to pick up on trends caused by this massive drought. It is hard to find ways to capitalize on it.
 
Vidler Water (VWTR – NASDAQ), which I wrote about a few weeks back, is an obvious beneficiary.  But Vidler’s assets are in Arizona and Nevada. 
 
I would still like to find a California water play. Vidler’s water assets are only peripherally tied to California water. 
 
California water prices continue to increase. While the Colorado River Basin shortage contributes to this, the bigger driver has been the (lack of) snowpack. The index that tracks the water price in California – called the NASDAQ Veles Water Index (NQH2O) – continues to tick up.
Source: WestWater Research
 
But as my last blog on Cadiz (CDZI – NASDAQ) showed, investing in water, especially in California water, is a political minefield.
 
Water is local. The rights are local, or state owned. Each state has a different set of rules. In some states, like Arizona, tribes hold significant water allotments. State and local governments hold all the cards when it comes to approving new projects. And you can’t just move water across state lines like you can with oil.
 
That has made me think that the “just one thing” of water investing has as much to do with the team as the asset.
 

Will SDAC Become A Water SPAC

 
With that in mind, last week I landed on a promising SPAC with a water bent and a stellar team.
 
Sustainable Development Acquisition Corp (SDAC – NASDAQ) came public in February after raising $316 million in an upsized offering.
 
The terms of the offering are the same as any SPAC. Units were purchased at $10. They came with a half-warrant that is exercisable at $11.50. Warrants expire in 5 years.
 
SDAC is being sponsored by Renewable Resource Group LLC (RRG).   RRG is a private company that has long had a focus on land, water and renewable energy – in California.
 
The founders at the company, Cole Frates and Ari Swiller, have been involved in California water and renewables for 20+ years. The team holds deep California political connections. One of the principals at RRG, Charles Stringer, even held the position of Chair at the Los Angeles Regional Water Quality Control Board.

A Direct Connection to Los Angeles Water

 
In fact, RRG has seen two appointments to the Los Angeles Water Board. The second happened in 2019, when their COO Nicole Neeman-Brady was named to the board of commissioners. 
 
And oh BTW, Nicole Neeman-Brady is also the CEO of SDAC.
 
Neeman-Brady has a history in water. In addition to the LA Water Board and her role with RRG, earlier in her career Neeman-Brady was President and Founder at Edison Water Resources, a distributed water purification and recycling business.
 

Owning the Water

 
RRG has made big water deals in the past.  Even though it’s a private company and very, very low key (this is the website), we can glean some info about past deals from the local news.
 
A couple of years ago, Voice of San Diego wrote a piece titled “A Little-Known Company is Quietly Making Massive Water Deals”.
 
The article outlined two RRG deals. It described how RRG “now controls thousands of acres of land in another place with special ties to the Colorado: the Imperial Valley”.
 
The Imperial Valley is a small population, with less than 200,000 people. Yet it has access to as much of the Colorado River water rights as Arizona and Nevada combined.
 
In fact, according the LA Times, “Imperial County controls more than two-thirds of the water California is allowed to draw from the Colorado River”.
 
As the article states (with my emphasis) “With very little fanfare, RRG is now one of the largest private landowners in the Imperial Valley.”
 
While I can’t be sure – as RRG is a private company – it appears they still own all that Imperial Valley farmland – and all that water.
 

The Clear Target is Water… or Water Technology

 
Like all SPAC’s, SDAC can’t really lay out their plan and what they expect to acquire.
 
I think that the ideal acquisition would be a piece of those Imperial Valley water rights.
 
As these assets are sitting with the sponsor RRG, that is possible. But some of the public comments by Neeman-Brady have made me think the more likely acquisition will be water technology.
 
In a February article in Agri Investor, SDAC was described as eyeing “water efficiency investments”. 
 
In the article, Neeman-Brady said they were looking at “irrigation, at filtration and treatment and re-use”.
 
Water technology may not seem as obvious a “win” as owning water rights, but in the long-term it may turn out to be better.
 
What is clear about water in California is that the crisis is only going to get worse. Technology is really the only long-term solution. California is in desperate need of solutions that reuse, reduce and filter water.
 
RRG has had been hip-deep in water technology for a while.
 
In 2019 RRG signed a JV with Grupo Rotoplas, S.A.B. de C.V. (AGUA -BMV) focused on providing “disruptive hydraulic solutions for the agricultural sector.”
 
The company they launched, called Rieggo, is focused on the agricultural sector in Mexico, on using water more efficiently on crops.
 
RRG has also created a water fund. Together with The Nature Conservancy RRG created a Sustainable Water Investment Fund in 2019.
 
This is a $900 million fund focused on water. It may be the largest water focused fund.
 
The fund invests in agricultural land. It then improves the water management of the land with better farming techniques and by adding technology. This in turn leads to excess water resources that are available for surrounding communities.
 

Likely Water but No Guarantee

 
RRG’s portfolio is so wide ranging that SDAC’s acquisition could be technology, a water resource, or a direct investment in land. While it is hard to pin down the exactly water asset, it seems very likely it will be water related.
 
In an interview in the spring Neeman-Brady said that “there is no other SPAC that is focusing on water”.
 
Brady also said she expects a deal in the first 3-6 months – we are already nearly 5 months in — and further hinted that SDAC is looking to acquire a company that is 3-4 times the size of their $300 million IPO.
 
In the IPO documents, water ranks #1 in their list of market opportunities but there are others listed:
That said, it’s a SPAC and I could be surprised. 
 

A Public Benefits Corporation

 
SDAC has another unique feature. The company has come to market as a public benefit corporation, commonly called a “B-Corp” in finance lingo.
 
Forbes describes a public benefit corporation as:
 
The public benefit corporation is a new type of corporation for a new type of entrepreneur, the social entrepreneur, who creates business models that benefit society, the environment, employees, customers and investors. These social entrepreneurs believe that business can serve both shareholders and society, considering the impact of their decisions on multiple stakeholders rather than maintaining a singular focus on short-term maximization of financial profits.
 
There are two ways I look at this. One side of me says – why would I want to invest in a company that isn’t 100% committed to the best interest of shareholders?
 
SDAC can make decisions that may not be the best one if only shareholders were considered.
 
But… the pragmatic side of me says wait a minute – aren’t there billions of dollars going into ESG investing right now? And aren’t those dollars looking for a home in companies that meet strict social and environmental standards?
 
There is one big problem with ESG funds right now – it is that most ESG investments have no teeth. 
 
Greenwashing”, which is essentially sounding green but doing nothing, is becoming a catch-phrase.
 
But a public benefit corporation has it written right into their charter that they need to balance profits with their social and environmental impact.
 
SDAC is one of only around a dozen public benefit companies to IPO in the last year. It is the first SPAC to follow the structure.
 
So here is a company where its commitment to “green” is written right in to their charter.
 
If the company can pick a good business, the ESG funds should eat it up.
 

No Promises

 
All the signs point to SDAC making a water-focused acquisition. A number of them point to why it could be California.
 
But I don’t know for sure.
 
The safe play is to watch and wait. SPACs are out of favor right now. Chances are there will be plenty of opportunity to buy SDAC once they pick a target.
 
But if you are looking for the chance to gamble, there are worse bets you could take.
 
You can buy the units for right around $10. That means you are paying the same as the SPAC participants.
 
For that price you get a bet and a half (share and half warrant) on SDAC pulling off a coveted water investment.
 
It is… a bet. There is a chance that RRG uses SDAC to bring a solid water asset to the public market that lets investors participate in water – maybe California water.
 
Of course, buyer beware – SDAC could decide to go in a completely different direction. And as with any SPAC, there is always the possibility that RRG will use their SPAC to offload an asset that they are less than thrilled with.
 
But with the former COO in charge, that seems unlikely. More likely, investors get something wet and something good.
 
Keith Schaefer
Publisher, Investing Whisperer