I’ve written a series of articles about SPAC stocks (special purpose acquisition companies) that recently announced their target merger deals. Thus, this week, we’ll examine five more SPAC stocks with agreed-upon merger deals announced in the past three weeks. In addition, I have added two bonus SPAC situations worth a look.
Moreover, you should also read my previous article on in-the-money warrants of announced SPAC stock deals. Often these warrants, solely for announced deals, are very valuable and offer more leverage than the underlying SPAC stock.
Overall, SPACs are now clearly on the rise in 2020. According to Spacanalytics.com, 47 SPACs have announced merger deals this year so far worth $11.77 billion. In addition, there are 134 SPACs looking for an acquisition, worth $46.52 billion.
Bloomberg says that SPAC stocks are clearly the new “status symbol” for hedge funds and “big money.” However, the problem is the best private companies are going with the largest hedge funds that sponsor the largest SPACs. In turn, the pickings are getting slimmer.
So this week, I highlight five new and fairly large deals, including two that are raising around $1 billion in agreed mergers. In fact, one deal has an implied enterprise value of $16.1 billion, the largest SPAC deal value to date.
One of the advantages of these announced mergers over IPOs is that the private company describes the merger transaction valuation metrics. Regular IPOs do not do this. This provides investors an edge in deciding whether to invest in the SPAC prior to the reverse merger closing.
That said, here are the four announced deals, and one rumored deal:
- SwitchBack Energy Acquisition Corp (NYSE:SBE) – Target: ChargePoint
- Gores Holding IV (NASDAQ:GHIV) – Target: United Wholesale Mortgage
- Legacy Acquisition Corp. (NYSE:LGC) – Target: Onyx Enterprises Int’l
- Social Capital Hedosophia Holdings Corp. II (NYSE:IPOB) – Target: Opendoor Labs
- Flying Eagle Acquisition Corp. (NYSE:FEAC) – Target: Skillz
- Mountain Crest Acquisition Corp. (NASDAQ:MCAC) – Target: Playboy
- Insurance Acquisition Corp. (NASDAQ:INSU) – Target: Shift Technologies
Let’s dive in and look at these SPAC stocks.
SPAC Stocks With Recent Merger Deals: SwitchBack Energy Acquisition Corp (SBE)
Target Company: ChargePoint, Inc.
Market Capitalization: $490 million
On Sept. 24, SwitchBack Energy Acquisition Corp. announced it would merge with ChargePoint in an enterprise value (EV) deal worth $2.4 billion. The equity value of the combined companies at $10 per share is $3 billion, and they end up with $648 million in cash.
ChargePoint is a leading electric vehicle charging network in North America and Europe. The company is not profitable, and does not expect to be until 2025. However, it says that no more funding will be needed before it reaches EBITDA (earnings before interest, taxes, depreciation, and amortization) profitability.
Additionally, ChargePoint enables existing public and private companies and organizations to convert parking spaces into charging points for EVs. That said, they make money off of their software and equipment.
Reading through their slide presentation, you can easily see their growth trajectory. However, the lack of profitability is noticeable. Nevertheless, pages 33 through 35 of the presentation are very useful.
It shows that the company estimates the discounted present value is between $4.1 and $9.3 billion. This is 180% higher at the mid-point ($6.69 billion) than the deal’s $2.4 billion enterprise value. The latter assumes a $10 price for the equity.
However, since SBE stock has risen to $12.80 (Sept. 24), the implied equity value and enterprise value is up 28% to $3.07 billion. Therefore, the discounted present value of $6.69 billion is 118%, not 180% higher than the present value.
But, so what? That still means that SBE stock is still worth more than twice its present price. And therefore, it’s a solid option for investors.
Gores Holding IV (GHIV)
Target Company: United Wholesale Mortgage
Market Cap: $535 million
On Sept. 23, Gores Holding IV announced it would merge with United Wholesale Mortgage in an EV deal worth $16.1 billion. That makes it the largest SPAC deal to date.
Once the deal closes in the fourth quarter, GHIV stock will change its symbol to “UWMC.” United Wholesale Mortgage is the No. 1 largest wholesale mortgage lender and the No. 2 mortgage lender in the U.S. UWM underwrites and provides closing documentation for residential mortgage loans originated by independent mortgage brokers, correspondents, small banks and local credit unions.
Additionally, UWMC will receive $425 million from Gores Holding IV. Also, institutional investors will put in $500 million in a PIPE (private investment in public equity). That said, some of this money will pay for transaction expenses.
Overall, the Gores Group is one of the more prolific SPAC deal makers. It has already completed three SPAC mergers, including one with Hostess Brands (NASDAQ:TWNK) in Oct. 2016 with a $1.6 billion market cap.
The other two closed deals are: Verra Mobility (NASDAQ:VRRM), closed in Oct. 2018, $1.5 billion market cap, and PAE (NASDAQ:PAE), closed Feb. 2020, now with a $749 million market cap. You can study these deals to see how well they performed.
In addition, Gores Metropoulos (NASDAQ:GMHI), another Gores SPAC, recently announced a $2.9 billion EV deal to acquire Luminar. I described this deal in an earlier article.
The GHIV Deal Seems Cheap for SPAC Stocks
This deal with United Wholesale Mortgage is much larger than any other deal it has done. The 44-page slide presentation is well put together. And the estimates provided on the last two pages are a major advantage SPAC deals have over the dry prospectuses IPO deals usually provide.
It shows that that UWMC will make over $3 billion in adjusted EBITDA. That means its $16 billion post-money EV is only 5.3 times projected 2020 EBITDA.
However, EBITDA is expected to fall next year. And the deal still seems about 25% to 30% too cheap. Moreover, apparently, it expects to pay a dividend. That is very rare for SPAC stocks.
Additionally, the deal highly favors the current owners and employees of UWMC. They will retain 94% ownership. Nevertheless, this public’s 6% stake in the $16 billion EV ($15 billion market cap) still implies a minimum $900 million market value for the GHIV stock. Right now, its market value is only $554 million, so GHIV stock is still very undervalued, even before the deal closes.
SPAC Stocks With Recent Merger Deals: Legacy Acquisition Corp (LGC)
Target Company: Onyx Enterprises Int’l Corp.
Market Cap: $141 million
On Sept. 21, Legacy Acquisition announced it will merge with online car parts company Onyx Enterprises in a $337 million EV deal. Once the deal closes, the combined companies will be renamed Parts iD, Inc. A new symbol for the renamed company has not yet been determined.
The deal will end up with the combined company having $55.5 million in cash. Moreover, it looks cheap. As I pointed out above in the previous section, one of the advantages of SPAC deals is that the company typically will provide valuation metrics. IPO documents don’t do this.
On page 10 of the investor slide presentation, Onyx shows how cheap the deal is structured. It says that the proposed transaction represents a ratio of 13.9 times its expected adjusted EBITDA for 2021. It says that the comparable industry ratio is twice that at 26 times.
Moreover, its EV-to-sales ratio is 0.7 times, versus the industry 1.2 multiple. Therefore, based on the company’s valuation metrics, LGC stock, if it stays at close to $10 per share, has an upside of 70% to 100%.
Therefore, I suspect that LGC stock, and whatever new symbol it converts to after the merger, should do quite well.
Social Capital Hedosophia Holdings Corp II (IPOB)
Target Company: Opendoor Labs
Market Cap: $816 million
On Sept. 15, Social Capital SPAC, run by venture investor Chamath Palihapitiya said it would merge with Opendoor Labs. Opendoor is an online real estate firm backed by SoftBank (OTCMKTS:SFTBY). Opendoor buys up properties, fixes them and then resells them. It started losing money from the pandemic, and decided to raise capital by going public with this SPAC deal.
The $4.8 billion enterprise value transaction will provide $1 billion to Opendoor, which made $4.7 billion in revenue last year. Opendoor sold over 18,000 homes through its online portal in 2019.
I must say that reviewing the transaction details is very interesting. For one, both Opendoor and Social Capital provided separate slide presentations, which is rare. Second, the Social Capital presentation is very simple — just one line per page. I found that quite effective.
Third, the deal economics are pretty sound. The post-closing combined entity will end up with $1.5 billion in cash and securities on the balance sheet. This implies that the equity value is $2.5 billion, at $10 per share.
Page 44 of the slide presentation shows how the deal is undervalued. For example, the final fully diluted number of shares outstanding after the merger will be 630.7. The company says at $10 per share the market cap will be $6.307 billion.
Since there will be $1.539 billion in cash on the balance sheet, this is subtracted from the equity value to net a $4.768 billion enterprise value. And since the company made $4.7 billion in revenue in 2019, this puts its valuation at a cheap 1 times EV-to-sales valuation. Moreover, estimated sales for 2023 will be 9.8 billion, so it is at 0.5 times 2023 sales.
But IPOB has already risen to $15.89 as of Sept. 24, up 58.9% from its $10 IPO and where the deal is priced. Therefore, the implied equity value is now $10.02 billion, and the implied enterprise value is $8.482 billion. So it is not as cheap. But is still implies a low 0.87 times 2023 sales.
Moreover, the warrants (NASDAQ:IPOB.WT) now look very interesting, since they are in-the-money. Their exercise price is $11.50, but they trade for $4.75 per warrant. That implies that they are only 6.4% higher than the intrinsic value. But once the deal closes, the warrants offer a huge upside.
You can read more about how in-the-money SPAC warrants work for announced mergers in my previous article on this subject.
However, that is not to say the whole “iBuying” of real estate is not without its critics. The Wall Street Journal reviewed this SPAC deal skeptically on Sept. 16. The author, Lauren Forman, pointed out that the financials show that Opendoor will not make money even on an EBITDA basis until 2023.
Moreover, Opendoor is following its competitors Zillow (NASDAQ:Z) and Redfin (NASDAQ:RDFN) in their business model of sales of services and related products. On that note, Forman says that faith in the iBuying business model “may be a little too blind” for investors.
However, she simply doesn’t get the value proposition here. Zillow trades for $23 billion in market cap. Analysts forecast just $4.89 billion in revenue next year. But Opendoor already made $4.7 billion in 2019 and will make $9.8 billion in 2023.
That implies IPOB / Opendoor should trade at least 118% higher than today’s price. Zillow’s market cap of $21.8 billion divided by Opendoor’s implied market cap of $10.02 billion (see above) is 118% higher. But Opendoor should be equal since it has similar revenue.
Therefore, look for this stock to double before or after the deal closes.
5 SPAC Stocks With Recent Merger Deals: Flying Eagle Acquisition Corp (FEAC)
Target Company: Skillz
Market Cap: $997 million
On Sept. 2, mobile gaming company Skillz agreed to a reverse merger with a SPAC called Flying Eagle Acquisition Corp (FEAC). The deal results in an equity value of $3.5 billion for Skillz after the deal is done. In addition, the combined company will have $250 million in cash on the balance sheet.
Investors looking at the deal should study the well put together Skillz slide presentation, especially pages 33 and 34. First of all, this deal is a little different from the normal SPAC reverse merger.
For example, shareholders in Skillz are going to receive all the cash, $690 million, on FEAC’s balance sheet. Only the $250 million in PIPE proceeds at the close will stay on the combined company’s balance sheet. Usually, the SPAC cash stays in the combined company’s coffers.
Second, the deal is valued at 6.3 times 2022 forecast sales. Skillz is estimating it will make its first profits then of just $8 million. But the deal is valued at $3.5 billion in equity.
That is all you need to know. The deal is very expensive, and so far FEAC stock has not risen more than 15%.
Skillz points out in its slide presentation that its comp ratios are better than the average. My take is that this deal requires a lot of faith and future cash flow discounting.
Given that the founder will retain a 20 times super-voting controlling stake, I believe there are other deals more equitable to investors.
Bonus Deal: Mountain Crest Acquisition Corp (MCAC)
Target Company: Playboy (maybe, this is just a rumor in the financial press)
That’s right. I thought I would include this SPAC, simply because of the novelty of the target company. Playboy went private at $207 million, but apparently, Mountain Crest Acquisition Corp (NASDAQ:MCAC) is in talks to do a reverse merger at a $425 million-plus enterprise value.
At least that is what some articles say, mainly in Reuters. Be careful to avoid this speculation. My take is that is always best to wade through an announced deal details first.
Additionally, Reuters said that the deal would include $100 million in a PIPE transaction.
Bonus Deal: Insurance Acquisition Corp. (INSU)
Target Company: Shift Technologies
Market Capitalization: $247 million
This deal should close on Oct. 13, when shareholders will vote on the merger between Insurance Acquisition Corp. (NASDAQ:INSU) and Shift Technologies.
Shift Technologies is an online used-car sales company. Shift operates in two states, California and Oregon. It focuses on the low-end, used-car market, where prices are 45% lower than those of VROOM (NASDAQ:VRM) and 10% less than Carvana (NYSE:CVNA).
Shortly after the merger closes, once approved by the SEC, the NASDAQ symbol of the combined companies will switch to SFT. The merger deal was originally announced on June 29.
The problem is the company does not project any sort of profits even through 2022. However, the company’s slide presentation shows great growth projections in sales and “adjusted gross profits.” So, if you are willing to invest in a non-profitable company, this might work for you.
Summary: 5 SPAC Stocks With Merger Deals
The table below shows a summary of the details of these five deals.
Some of these SPAC stocks have significant upside potential, as I have pointed out. Moreover, in at least one case it might be worthwhile to check out the in-the-money warrants (i.e., for IPOB).
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.