16th Mar 2021
Special Purpose Acquisition Companies (SPACs) stormed to prominence over the last two years and have now overtaken the traditional IPO route as a way for companies to go public. SPACs raised $38.3 billion from 130 deals in only the first two months of 2021, with retail investors representing 46% of SPAC trading volume in January.1 That is an increase on the 30% recorded two months ago, and much larger than the approximately 20% of S&P 500 trading that takes place on Bank of America’s platform by retail investors. Next generation investors are clearly seizing the opportunity that SPACs offer to get in early on merger and acquisition deals that used to be a closed shop for the wealthiest clients or investment banks. And the Defiance SPAC ETF seeks to capture growth in this space with a diversified basket of SPACs across the whole IPO flow.
Together with the excitement however, is some concern that the great returns for investors cannot continue. As celebrities like Jay-Z, Shaquille O’Neal, Ciara Wilson and Serena Williams put their names behind SPACs, observers are cautioning that not all that glitters is necessarily gold. When an investor buys a SPAC share, they are trusting the sponsor to choose and merge with a target company with great potential. As more SPACs are created and search for deals, there is concern that competition could push up the value of mediocre companies, or push SPACs sponsors to take unhealthy risks on companies yet to prove their worth.
While there are no guarantees, recent SPAC mergers seem to indicate otherwise. We are seeing high valuations, but also strong companies at the cutting edge of new trends, given the cash and profile boost they need to get to the next level. Take online payments company Paysafe, which went public via Bill Foley’s SPAC, Foley Transimene Acquisition Corp II in December 2020. The SPAC brought in $7bn of the $9bn valuation, the rest via PIPE (private investment in public equity) funding. Paysafe is a leading global payments provider focused on digital commerce and iGaming transactions, with 3.8 million active users for its digital wallet segment. It holds the No. 2 market share position in the global digital wallet market and has customers like DraftKings Inc, YouTube and William Hill.2 Potential for growth lies in the iGaming segment as more states legalize online sports betting and iGaming.
Another recent SPAC merger was with the “Netflix of financial content,” the Beacon Street Group, which holds a portfolio of 12 brands in investor research, aimed at a broader range of readers than just the institutional-investor crowd. Beacon Street has appeared to locate the future of investing in the more than 60 million self-directed investors in the U.S. It claimed more than 10 million subscribers at the end of 2020, of which about 860,000 were paying customers. It aims to corner the market of advice to retail investors. As a digital subscription business, there are hardly any incremental costs to adding a new subscriber, and revenue climbed from $238 million in 2018 to $377 million last year, with management projecting $651 million in sales in 2022.3 The deal with SPAC Ascendant Digital values Beacon Street at about $3 billion.
Not to be limited to financial services or digital payment methods, SPAC deals are taking on the whole range of sectors. Another major deal was announced between Vector Acquisition Corp and Rocket Deal, valuing the latter at $4.1bn and bringing its rocket-making business in competition with Elon Musk’s SpaceX. Rocket Deal said that the investment would supercharge its growth and allow it to send astronauts to space.4
The range of targets helps explain the variety of SPACs being formed- “Do It Again” is a new SPAC targeting the North American restaurant and food industries. It formed last week and aims to raise $125 million to target businesses operating in the restaurant, food-related and franchise sectors in North America. Parallel recently announced its $1.9bn merger with SPAC Ceres Acquisition Corp, founded by music entrepreneur Scooter Braun, to deepen its research and development on medical cannabis production. And Plano-based Stryve—the company behind convenience snack biltong, a better, healthier alternative to beef jerky—has announced a merger with Andina Acquisition Corp. The deal values Stryve at $170 million, will bring about $67 million in gross cash proceeds to the company and position convenience chain giant 7-Eleven veteran, Scott McCombs, as its CFO.
Despite some sideline whispering, its seems the game is going ahead. Investors, both institutional and retail, are ferociously forming and buying shares in SPACs. SPACs are doing what they promised and seeking out targets. Despite some concern about speculation, SPACs are an accessible and transparent new route to public status, which brings the M&A market to a broader audience.
1 “Unusual first-day rallies in SPACs raise bubble concern: ‘Every single one of them has gone up’” February 10, 2021. https://www.cnbc.com/2021/02/10/unusual-first-day-rallies-in-spacs-raise-bubble-concern-every-single-one-of-them-has-gone-up.html
2 “Paysafe Goes Public Again In SPAC Deal: What Investors Should Know,” Chris Katje, December 07, 2020. https://www.benzinga.com/news/20/12/18678982/paysafe-goes-public-again-in-spac-deal-what-investors-should-know
3 “The ‘Netflix of Financial Content’ Is Going Public Via a SPAC,” Nicholas Jasinski, March 2, 2021. https://www.barrons.com/articles/the-netflix-of-financial-content-is-going-public-via-a-spac-51614724186
4 “A $750 Million SPAC Injection Puts Rocket Lab in Direct Competition with SpaceX,” Ashlee Vance, March 2, 2021. https://www.bloomberg.com/hyperdrive