Research Notes: Fun With De-SPACs
A look at de-SPACs roughly two years after the trend exploded
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The crash in de-SPACs — public companies created by merging private businesses with special purpose acquisition companies — should create opportunities for investors. Some de-SPACs perhaps have been unfairly tarnished by the group’s reputation. Others haven’t fallen far enough and offer classic “short to zero” theses.
A look at the group shows both potential long and short ideas. But it’s also worth analyzing de-SPACs as a whole, as some recent trends perhaps offer additional caution for the market as large.
SPACTrack.io offers an excellent database of de-SPAC mergers. According to the site, some 291 such mergers have closed since the beginning of 2020. Overall returns are abysmal:
The average de-SPAC is down nearly one-thirdfrom the $10 reference price;
The median de-SPAC trades at $5.52, off 45%;
Only 50 de-SPACs — barely one-sixth of the group — trade above $10;
A nearly equal number (48) have declined more than 75%.
Returns are even more disastrous on a relative basis, as the S&P 500 is up 39% since the start of 2020, and the NASDAQ 100 66%.
Looking at cohorts based on the time of deal announcement, it does seem like the trends are improving:
before Jan. 16, 2020: -12%
1/16/20 through 6/30/2020: -37%
2H 2020: -32%
Q1 2021: -44%
Q2 2021: -34%
7/1/21 thru today: -13%
But the gains in the more recent cohort at least in part are due to some strange trading of late (more on this in a minute). Redemptions actually have steadily increased, touching an average of 60% between July and November of last year, with a couple of de-SPACs of late clearing 90%. The higher redemptions, in particular, suggest the quality of the merger seems to have decreased over time — which isn’t necessarily a surprise. The IPO market has remained open for the best companies, and SPAC sponsors by now generally have taken the best of the remaining private companies (and many, many more) public.
Indeed, four of the 14 mergers that have closed since Feb. 4 of this year already trade below $4: telecom supplier QualTek (QTEK) at $2.80; 3D printing company Fast Radius (FSRD) incredibly at $1.33 two months after the merger close (despite a valuation cut ahead of that close); and lidar sensor plays Quanergy (QNGY) at $2.00 and Cepton (CPTN) at $3.70.
Simply looking at the types of companies that have gone the SPAC route too highlights how crazy the trend has been. There are five different eVTOL (electric vertical take-off and landing) companies now public because of de-SPAC mergers; a sixth pulled its plans to do so. An equal-weighted portfolio of those five stocks is down almost 40%.
By my count, there are nine lidar plays. There are two controlled agriculture plays; a variety of telehealth options (none with any apparent market share); several “space stocks”; and many electric vehicle plays beyond the aforementioned lidar sensor manufacturers.
Certainly, there are less growth-y/more normal businesses, like insurers, financial services companies (including M&A stalwart Perella Weinberg (PWP)), and a steelmaker (Algoma Steel (ASTL)). But overall, the makeup of the SPAC boom tracks the perception: early-stage, (supposedly) high-growth companies that appeal to retail investors.
De-SPAC Winners and Losers
The five biggest winners of the 291 de-SPACs:
Rare earth miner MP Materials (MP): +428%
Biotech Cerevel Therapeutics (CERE): +257% (positive Phase I results last year did most of this work)
Right-wing-ish Starbucks clone Black Rifle Coffee (BRCC): +175% (more on this in a moment)
Marketing software developer System1 (SST): +152%
Renewable natural gas producer Archaea Energy (LFG): +118%
The five biggest losers:
Chinese edtech (seriously, a Chinese edtech de-SPAC…there isn’t a worse combination of words in the financial world) Meten Holding (METX): -98%
UCaaS provider Ucommune (UK): -97%
Chinese media play Glory Star Media Group (GSMG): -91%
IT solutions company (and now pure-play cloud provider) American Virtual Cloud Tech (AVCT): -91%
Retail investor trap/NFT play Hall of Fame Resorts (HOFV): -90%
I haven’t done a deep dive by sector, but a look at the overall list is pretty unsurprising. In EVs, for instance, the better companies — QuantumScape (QS), Lucid Motors (LCID), Luminar (LAZR), even Fisker (FSR) — have held up reasonably well. In any sector, however, owning any company that’s behind in tech and/or market share has been a recipe for disaster. (This was precisely the point, of course: SPACs were the way to get those second-tier businesses to the public markets, since institutional investors had the due diligence capabilities to price them accordingly.)
One area of interest might be biotechs. CERE has been a winner, but as far as I can tell, there’s only one other biotech/biopharma above water: Alpha Tau Medical (DRTS), whose merger closed last month. Incredibly, there are twenty-eight other de-SPACs by my count, all of which trade below $10.
To be sure, biotech stocks as a whole have sold off over the past year or so: most biotech ETFs are off 35-40% from 52-week highs. And it may be that the weakness in biotech de-SPACs is well-deserved: the IPO route already was common for early-stage companies in a way that it wasn’t in other sectors. If a biotech couldn’t raise capital via an IPO, perhaps it didn’t deserve to raise capital at all.
Still, 28 of 30 (by my numbers) biotech de-SPACs are underwater. It’s hard to believe that an enterprising, educated biotech investor can’t find an opportunity or two in that bunch.
Two Interesting Trends
There are two interesting trends in the de-SPAC data.
First, the rich are getting richer — or at least, the “could be worse” are not getting worse. The de-SPACs trading above $10 are positive overall year-to-date. Obviously, there’s some correlation issues there — a stock that has gained so far in 2022 is more likely to be positive since merger close — but sorting the group by price shows a pretty clear split in YTD returns. The bottom 100 de-SPACs based on returns from the $10 merger price are down, on average, some 40% already in 2022.
That data strongly suggests that investors in 2022 already have begun the process of trying to time the bottom in de-SPACs. And they’ve bid up a reasonable number of names since late January/early February.
But the ones doing the worst at the end of 2021 are pretty much the same ones doing the worst now (only at an even lower price).
Second, traders clearly are starting to execute a strategy of buying de-SPACs right after the close, particularly those with high redemptions and thus low floats. It’s not universal: as noted above, four different de-SPACs with close dates this year have fallen right off the table. But BRCC has soared since its close in early February, for no apparent reason. (To be fair, 2022 guidance did match the outlook given when the merger was announced, which by the standards of the space probably counts as a win.) Energy Value (NRGV) has a similar chart. EV charging play Allego (ALLG) saw a massive reversal last month and touched $28 before settling in around $14 of late. Luxury travel platform Inspirato (ISPO) saw 97% redemptions — and post-close the stock briefly touched $108 (yes, one hundred and eight).
These moves, particularly that of ISPO, seem driven by social media. They’re probably not exploitable from the short side, since a) some of the stocks aren’t shortable and b) those that are, are exceptionally difficult and expensive to borrow. That’s precisely the pumpers’ point: the floats are microscopic.
But we talked last week about the stupidity in the market, and fundamentally it’s difficult to imagine a more illogical trend. From the standpoint of long-term valuation, there is no basis — none — for owning BRCC at $24 or $27 after the close instead of $10 before it. Even from a short-term perspective, there’s no “squeeze” going on here. By definition, no one cares about a crappy de-SPAC with a float of a couple million shares.
These moves are not a sign of a healthy market that’s doing the proper job of allocating capital. Rather, they seem like more evidence for the (yes, still squishy/qualitative/simplistic) case made last week: that the market is not going to find a true bottom until these kinds of trades, and these kinds of “traders”, get flushed out. This trading is another worrisome piece of evidence that we’re a long way from that point.
Some De-SPAC Ideas
But in the meantime, investors still need to invest. And the space does have a couple of intriguing ideas, both long and short.
To be clear, these are ideas from the screen, with limited due diligence at best. But they seem to at least merit some of that work. Starting with the longs:
1. DraftKings (DKNG). Wait, don’t leave. Don’t run to Twitter to mock this idea. There’s a case here that goes beyond “DraftKings stock was at $64 in September, now it’s at $17!”
I’ve spent most of the last two years betting semi-regularly on online gambling platforms in multiple states (check this footnoteif you want details, otherwise carry on). The online sports betting space has changed dramatically. Caesars Entertainment (CZR) has slashed its promotions (and advertising) after giving away billions, Churchill Downs (CHDN) is exiting the space, and smaller companies are not terribly far from dire financial straits.
We’ll talk more about the space soon (probably next week), but there’s going to be a quarter when DraftKings posts bottom-line numbers that shock a lot of investors who have written the company off. I don’t think that quarter is that far away.
The big catch here is management. CEO Jason Robins is, to put it charitably, unimpressive. The Golden Nugget deal was asinine (but all-stock, at least). In that context, I don’t know if DKNG is quite cheap enough yet.
But the stock is worth keeping in mind here in terms of a “skate to where the puck is going, not where it is” argument, and I’m already intrigued by a pairs trade of long DKNG and short another online gambling de-SPAC, Rush Street Interactive (RSI).
2. Open Lending (LPRO). Software lending platform, merged before the boom, 18x forward earnings….worth a closer look.
3. Arko Holdings (ARKO). Convenience store operator (good business), good valuation, possible takeover target amid the national expansion of so many chains.
4. Janus International (JBI). Self-storage supplier — is it a good business to serve wonderful businesses?
5a. Nexters (GDEV). Mobile gaming play with seemingly attractive valuation at a time when studios are getting bought up.
5b. PlayStudios (MYPS). Ditto, but with an activist investor.
Then the list of “are we sure these companies are total garbage?” de-SPACs;
6. Payoneer (PAYO), $4.24, cross-border payments, doesn’t have the take rate problem of DLocal (DLO)
7. Genius Sports (GENI), $4.39, sports betting data/software
8. BurgerFi (BFI), $3.69, fast-casual burgers at ~6x 2022 EBITDA guidance
9. 23&Me (ME), $3.46, probably can create some value somehow, right?
10. Parts ID (ID), $2.05, online auto parts retailer…can’t they sell themselves for something if all goes wrong?
And some intriguing-looking shorts:
1. Local Bounti (LOCL). We mentioned the two controlled-ag de-SPACs above. Why is LOCL trading above $8 while AppHarvest (APPH) is below $5?
2. BeachBody (BODY). $1.81 (and more importantly, a ~$650M market cap) doesn’t look cheap enough for a money-burning fitness platform that pivoted into bikes just as Peloton (PTON) saw its business crash. Looks like a short to zero or at least through the inevitable reverse split announcement.
3. AST SpaceMobile (ASTS). Plans to offer satellite-based broadband in developing markets, a business model that somehow a) has plenty of competition and b) has never really worked. ASTS is back above $10, having more than doubled since late January. Much of the gains have come since the company announced a deal with SpaceX - but that deal simply gets AST’s satellites into space. Looks like a classic case of retail investors once again not quite understanding what they own.
4. AdTheorent (ADTH). ADTH has rallied almost back to $10 after plunging following the December merger close. We recommended AppLovin as a long this week in part due to its machine learning and data capabilities providing a bulwark against adtech changes wrought by Apple (AAPL). ADTH might be a short amid that chaos if its capabilities aren’t up to snuff.
5. EVgo (EVGO). EV charging play somehow trading at 100x-plus revenue, with a market cap of $3.25 billion. Market seems to be treating EVGO as best in class, or close. As with ADTH, if de-SPACs are again getting too much credit, there’s plenty of room to short.
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This figure includes PAE Inc., which went public in February 2020 and was bought out at $10.05 in a deal that closed two years later. In a way, this is perhaps the worst SPAC of them all; it appears sponsor Gores Holdings made almost $70 million for generating 50 basis points of returns in a roaring bull market. But go on about evil short-sellers stealing money from retail investors.
That began in Illinois in late 2020, when we lived just across the Wisconsin border. I now get to Virginia on occasion from our new home — and I bet in the states in between during the process of moving. I’ve wagered on ~15 different platforms and my returns suggest I’ve run easily more than $1 million through the sites, the overwhelming majority of which came through promos/odds boosts/signup bonus options.
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