6 SPACs to Buy for 'Smart Money' Returns
Everything you need to know about the resurgent special purpose acquisition company (SPAC), and which SPACs you should put on your radar.
The special purpose acquisition company (SPAC) might be the hot new trend, but it has been around since the 1980s.
SPACs are often referred to as "blank check" companies because investors get nothing but a best-efforts agreement from the sponsors' management team that it will combine with an operating business within a specific time frame, usually 18 to 24 months.
Over the years, their popularity has ebbed and flowed, and right now, they're flowing.
Plenty of capital is on the sidelines just waiting to be invested. Demand for traditional initial public offerings has slowed a bit thanks to COVID-19. And entrepreneurs are looking for a faster pathway to the public markets. That combination of factors has made SPACs a natural conduit for deal flow.
But What Exactly Is a SPAC?
Without getting too far into the weeds, a person or persons with professional experience in one or more industries goes to investors, hat in hand, asking for capital. They expect to use that capital, along with debt, to acquire an operating business.
If it sounds a lot like private equity, that's because it is. It's a close cousin along with the leveraged buyout (LBO). As a result, a significant percentage of the SPACs that successfully raise money are sponsored by private equity firms, hedge funds and other "smart money" billionaires. (A sponsor is a group of people who put up the initial capital to form the SPAC before it goes public.)
In return for their small investment, sponsors are issued founders' shares. This amount is typically some nominal figure (often $25,000), issued at $0.002 per share or some other smallish figure. The intent is to allow the sponsors to retain 20% of the SPACs equity after its IPO.
Typically, 90% of the funds raised from investors in the IPO are deposited in a trust account that pays interest on those funds. The remaining 10% of the funds are used for expenses necessary to find and acquire an operating business.
Generally, the SPAC will offer at $10 per "unit." Each unit includes one share of common stock and one-fourth of one warrant, which entitles the holder of one redeemable warrant to buy a share at, say, $11.50, or some other higher price determined by the sponsors.
Once the funds are raised, the clock starts ticking. The SPAC then has a specified amount of time (typically 18 or 24 months) to conclude a business combination. And if the SPAC ever wants to merge with another company, it usually needs to get a majority of shareholders to approve the combination.
Yes, SPACs are a little different and more complicated than your average company. Fortunately, if you like the idea of letting the "smart money" go hunting, you can easily buy and sell SPACs through your brokerage account like you would a stock or fund.
Keep reading as we examine six SPACs to buy. These companies are at different stages of the process, so some are publicly tradable right now, while others will be eventually. But all are worth your consideration.
Data as of Aug. 2. Data provided by Renaissance Capital and Morningstar unless otherwise indicated. Companies have to wait 52 days from closing before separating common shares and warrants; the "U" at the end of a ticker typically designates SPAC units that haven't yet split.
Pershing Square Tontine Holdings
- IPO date: July 21, 2020
- Amount raised: $4.0 billion
Fresh off his $2 billion-plus profit from betting against the markets at the precise moment they were crashing, Pershing Square Capital Management's Bill Ackman has delivered the largest fundraising in the history of SPACs.
Ackman, who is determined to own a "mature unicorn," sold 200 million units of Pershing Square Tontine Holdings (PSTH.U, $21.04) in July at $20 a unit. He originally planned to raise a more modest $3.45 billion but opted to upsize the SPAC because of overwhelming interest from investors.
That has contributed to a record-breaking year for SPACs that have seen these companies raise $17.1 billion in proceeds through the end of July, already shattering 2019's full-year high-water mark of $13.6 billion.
Pershing Square Capital Management's various funds acquired $1 billion of the units in the offering and have a right to buy another $2 billion, giving the SPAC $5 billion in cash to go hunting for a company.
"Our thesis is by having a $5 billion cash pile in a public company; it's our own version of a unicorn. It's a one-of-a-kind entity," Ackman told Yahoo Finance in July. "So, we're looking to marry a unicorn. So we're prettying ourselves up for the most attractive possible partner."
PSTH is looking for a mature unicorn with a market capitalization of $10 billion or more, The type of mature unicorn it's looking for is one that already boasts a strong balance sheet and formidable barriers to entry, as well as "large enterprise values and significant long-term growth potential that will be likely candidates for inclusion in the S&P 500 index."
The SPAC has 24 months to complete a business combination. Should it have a letter of intent, the time frame extends to 30 months.
Churchill Capital IV
- IPO date: July 29, 2020
- Amount raised: $1.8 billion
Before 2020, the average SPAC might raise $500 million if it were lucky. Now, it seems, a raise of a billion dollars or more is commonplace.
One of the latest to achieve seven digits is former Citigroup (C) executive Michael Klein. The former banker sold 180 million units of Churchill Capital IV (CCIV.U), which has not yet gone public. He raised $1.8 billion, which was 80% higher than initially planned.
It's not Klein's first rodeo, either. In fact, it's his fourth.
His first SPAC, Churchill Capital, raised $600 million in September 2018 and completed an acquisition eight months later. Churchill Capital merged with Clarivate PLC (CCC), a company that specializes in life sciences information and data analytics.
Klein raised another $600 million for Churchill Capital II (CCX) in June 2019, but it has yet to complete an acquisition. However, in February, Klein's third SPAC, Churchill Capital III (CCXX), raised $1 billion, and it did find a target. In July, the SPAC announced it would merge with MultiPlan, a provider of end-to-end healthcare cost management solutions that's worth $11 billion by enterprise value.
In Churchill Capital IV, Klein is looking to acquire a company that has excellent long-term growth prospects, a significant competitive advantage, recurring revenue, attractive free cash flow, and participates in an industry where consolidation opportunities exist. And it has 24 months to do it.
Flying Eagle Acquisition
- IPO date: March 5, 2020
- Amount raised: $600 million
Of all the sponsors to grace the world of SPACs in recent years, entertainment industry veterans Jeff Sagansky and Harry Sloan would have to be considered two of the most prolific individuals in this ever-burgeoning segment of corporate finance.
The duo's first SPAC was Golden Eagle Acquisition, which raised $175 million in May 2011 by selling 17.5 million units at $10 apiece. It announced its business combination in November 2012, acquiring Row 44, a provider of satellite-based broadband for the airline industry, and 86% of Advanced Inflight Alliance AG, which specialized in movies and games for the airline industry.
The company, renamed Global Eagle Entertainment (ENT) after the combination, has not been a success. It entered Chapter 11 bankruptcy proceedings in July with assets of $630.5 million and liabilities of $1.09 billion.
Still, Sagansky and Sloan have done five more SPACs since then, with a third partner, Eli Baker, a fund manager in California-based Manifest Investment Partners. One of their SPACs, DiamondEagle, ended up merging with DraftKings (DKNG).
The most recent, Flying Eagle Acquisition (FEAC, $10.59), raised $600 million in early March. While it doesn't have a specific target in mind, Sagansky and Sloan's experience in media and entertainment suggests the eventual acquisition will be related to these industries. An acquisition must be completed within 24 months of the March 5 close.
Dragoneer Growth Opportunities
- IPO date: TBD (Filed July 24, 2020)
- Expected raise: $600 million
The Dragoneer Growth Opportunities SPAC is sponsored by the Dragoneer Investment Group, a Registered Investment Advisor (RIA) around since 2012 that manages more than $10 billion in assets.
At first glance, investors might pass on this SPAC because they're unfamiliar with Dragoneer Investment Group. However, if you peel back the layers, it has quite an impressive cast of characters.
CEO Marc Stad is a 41-year-old investment wunderkind who Fortune magazine has named a "40 Under 40" member on more than one occasion. The list of directors is exemplary, too, and includes David Ossip, CEO of Ceridian HCM Holding (CDAY); and Sarah Frier, currently the CEO of neighborhood social network Nextdoor. Frier was CFO of Square (SQ) from July 2012 and November 2018, when she left Square to take the top job at Nextdoor.
In the past, Stad has backed companies including Spotify (SPOT) and Uber Technologies (UBER), so he's looking for growth. Beyond that, Dragoneer will look at six areas: software, internet, media, consumer/retail, healthcare IT, and financial services/fintech.
Dragoneer Growth Opportunities will have 24 months to conclude a business combination once it goes public. If it has a letter of intent, that would be extended to 27 months. You're not getting much to wait, though, as the trust account pays an estimated 0.2% annually.
When it goes public, Dragoneer's units will trade under the ticker DGNR.U.
RedBall Acquisition
- IPO date: TBD (Filed July 28, 2020)
- Expected raise: $500 million
Billy Beane, the Oakland Athletics' executive vice president of baseball operations, didn't win a World Series in the 18 years he was the team's general manager. But his analytics-based approach to baseball, which still allowed him to field competitive teams with relatively meager payroll, was successfully copied by many organizations across multiple sports. His story was made into a book, Moneyball, by Michael Lewis, and then into a movie.
Given Beane's sports background, it's only natural that the baseball guy would get involved in a company called RedBall Acquisition.
Beane has partnered with Gerald Cardinale, the managing partner of RedBird Capital Partners, a New York-based private equity firm that focuses on sports and related industries. Although it is free to target any industry, RedBall plans to narrow its search to professional sports franchises.
The speculation is it will attempt to acquire a European soccer team. In June, RedBird Capital acquired 85% of Toulouse FC, a team in France's Ligue 2, from Olivier Sadran, the CEO of airline catering firm Newrest.
With approximately $2 billion in buying power, RedBall could get their hands on a pretty good squad. That's especially true given COVID-19 and the near-term future of professional sports attendance.
The SPAC is ideal for business professionals who have significant sports-related experience, whether on the business or sports side of operations, to raise capital. Investors should expect more sports industry figures to come out of the woodwork over the next 12-24 months.
RedBall Acquisition units will trade under the ticker RBAC.U after the offering.
East Resources Acquisition
- IPO date: July 22, 2020
- Amount raised: $300 million
East Resources Acquisition (ERESU, $10.00) is the brainchild of Buffalo Bills and Buffalo Sabres owner Terry Pegula. As its name would imply, the SPAC intends to acquire a company currently operating in the North American energy industry.
Pegula sold his oil and gas business, East Resources, to Royal Dutch Shell (RDS.A) in 2010 for $4.7 billion. It's fitting that his SPAC is using the same name to buy back into the energy industry.
The SPAC is looking for long-lived assets that have low fixed costs, are producing oil and gas and generating free cash flow, but are underperforming their true capabilities. It is not looking for a business with significant undeveloped acreage. It wants producing high-margin assets.
This won't be a passive investment. East Resources Acquisition seeks operational control from any business it acquires through the 24-month search process. If you're OK with parking some cash for up to two years to let Pegula find a gem, the funds held in the trust account will pay 1% interest.
Given the number of energy bankruptcies that have already taken place in 2020 – 47 through the end of June – combined with Pegula's extensive experience in oil and gas, ERESU is probably one of the best SPACs to buy this year.
