In the last couple months, I’ve written a series of articles about SPAC (special purpose acquisition companies) stocks that recently announced their target merger deals. These alternatives to IPOs This week, we’ll examine five new SPAC stocks with agreed-upon merger deals announced.
In addition, I have provided a bonus idea about a SPAC that is considering and negotiating a potential merger.
This past week, the New York Times Dealbook section published an interesting piece on SPACs from Professor Steven Davidoff Solomon at the UC Berkley School of Law. He argues that there are no “losers” with the way SPACs are being done today. However, there are indications that the SEC is looking into the disclosure issues relating to the SPAC boom.
I have to say that the more I look at SPAC stock presentations, the more I am impressed with their forecasts and valuation disclosures. It’s frustrating that most IPO documents do nothing to help investors analyze or value the proposed public offering. However, SPAC stocks with announced mergers provide detailed presentations that provide both financial forecasts and peer comparisons. I provide links to these presentations from each of these announced mergers so you can peruse them too.
This week, there is one deal that is a first. It involves a SPAC that effectively will merge with two different companies at the same time. This deal will be very interesting.
One more thing. I am going to start including the percentages that the public, the sponsor, and the target company shareholders will have in each deal.
Here are this week’s announced mergers of private target companies and SPAC stocks:
- FS Development Corp (NASDAQ:FSDC) — Merger target: Gemini Therapeutics
- CC Neuberger Principal Holdings I (NYSE:PCPL) — Merger target: E2Open
- Replay Acquisition Corp (NYSE:RPLA) — Merger target: Finance of America Equity Capital
- Churchill Capital II (NYSE:CCX) – Merger target: Skillsoft
- AMCI Acquisition Corp (NASDAQ:AMCI) – Merger target: Advent Technologies
Let’s dive in and look at these companies.
SPAC Stocks With New Mergers: FS Development Corp (FSDC)
Merger Target: Gemini Therapeutics
Industry: Age-related Macular Degeneration Therapy
Pro Forma Market Capitalization: $479 million
To be honest with you, the slide presentation provided by the company appears to be overly complicated. It is too hard to understand unless you are a doctor or medical student. For example, I wanted to find a slide that explained what the addressable market is that Gemini Therapeutics is trying to address. I couldn’t find it. If you find it, let me know.
I do appreciate that on page 29, the company simplified the transaction. It shows that the public will own 26%, the sponsor 11%, and Gemini shareholders 46% of the combined company. Moreover, PIPE (private investment in public equity) investors, providing $95 million, will own 17%. The company will receive $200 million in total and the company will have a market cap of $479 million.
However — and this is unusual — the company provided no forecasts of revenue, earnings, and cash flow. Most SPAC mergers provide this along with comparisons with peer companies.
I would stay away from this deal. Something is off here. I suspect that it may have a difficult time getting approved by its shareholders.
CC Neuberger Principal Holdings I (PCPL)
Merger Target: E2Open
Industry: SaaS Supply Chain Software
Pro Forma Market Capitalization: $2,156 million
On Oct. 14, E2Open — a large software company that specializes in subscriptions for supply chain management — agreed to merge with CC Neuberger Principal Holdings I (PCPL). The new symbol will be ETWO when the deal closes in
According to the Wall Street Journal, the company was taken private by Insight Partners, a private equity fund, in 2015. The cloud software company has over 1,000 large blue-chip customers in at least five verticals, including technology, industrial, consumer, transportation, and miscellaneous.
According to the slide presentation, the private equity company will still end up still owning 38% after the merger, along with receiving $638 million of the $1.1 billion raised in the deal. The public will own 20% of the combined company. The tech company founders will have 7%, the PIPE investors 25%, and the SPAC sponsor will get 7%. This was available in just one slide, at the bottom of page 7.
The deal values the combined company, assuming $10 per share, at $2.57 billion in enterprise value. Its pro forma market cap is $2.156 billion, as E2Open will receive $434 million which it will use to reduce its debt to $500 million.
The presentation is well put together and provides forecasts of the company’s profitability on page 49. E2Open is profitable. It made $69 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) in the fiscal year ending Feb. 2020. They expect to make $121 million in 2022.
That puts the stock on a forward EV-to-EBITDA multiple of 22 times. On page 45 of the presentation, E2Open says its peers have a median ratio of 34.7 times. This means that the stock is undervalued by 58%. Its EV-to-sales ratio implies E2Open is 53% too low compared to its peers. The average upside is then 55.5%. So it looks like good value.
Replay Acquisition Corp (RPLA)
Merger Target: Finance of America Equity Capital
Industry: Mortgages, Reverse Mortgages, Fixed Income
Pro Forma Market Capitalization: $1,941 million
On Oct. 13, Finance of America Equity Capital, billed as an “end-to-end lending and service platform,” agreed to merge with Replay Acquisition Corp (RPLA). The deal has an implied or pro forma equity value of $1.9 billion at the price of $10 for RPLA. The stock is slightly higher than that now, at $10.15 per share.
The company is going to raise $250 million through a PIPE investment. Blackstone will end up with 70% of the company. The company operates in four areas: mortgages, reverse mortgages, commercial-real-estate loans, and fixed-income investing. The company claims its lending platform “seamlessly connects borrowers with investors.”
The Wall Street Journal reported that although Blackstone will receive the money raised in this SPAC merger, Finance of America had good reasons to do the deal. They told the WSJ that they would be able to more easily raise the capital they need to grow as a public company. They choose the SPAC route rather than an IPO after talking with Replay Acquisition Corp.
The public will own 15% of the company, and PIPE investors will have 15% of the company. The sponsor will own just 2%. Blackstone gets $518 million and 70% of the public company shares.
This is another deal where the company not only spells out its forecast earnings but shows how much it is undervalued. On page 26 of the slide presentation, “Significant Upside to Forecasts Using Alternative Market Inputs,” the company shows how its 2021 forecast price-to-earnings ratio is just 7.4 times.
Moreover, on page 28, the company compares its P/E ratio to its peers. Their P/E’s range from 5.9 times to 32.5 times earnings. The slide presentation shows that with certain assumptions Finance of America’s pro forma market cap will be well below the average of its peers. Using these assumptions, the stock could be 50% to 100% undervalued. This stock looks like a good value.
Churchill Capital II Corp (CCX)
Merger Target: Skillsoft
Industry: Digital Learning (Will also buy Global Knowledge Training)
Pro Forma Market Capitalization: $1,274 million
This is a three-way deal. Churchill Capital II will merge with Skillsoft in a $1.3 billion transaction. Immediately following that, the company will buy Global Knowledge Training for $233 million. Both companies are involved in digital learning and IT and professional skills development.
The Oct. 13 announcement of the deal cuts right to chase. It says that the implied valuation at 2 times revenue and 8 times adjusted EBITDA “represents more than a 50% discount to peers.” That implies that the stock could rise 100% if it goes to the comparable peer valuation.
This three-way deal is unique in the world of SPACs. Moreover, The CCX public company shareholders will own 65% of the combined company. That is a very high percentage compared to most other deals, where the public company owners usually have less than a quarter of the total. For example, Skillsoft shareholders will only own 22% of the total.
That is a sign of weakness in the negotiating position for Skillsoft. The entrepreneurs in the deal will not be in control of their own company. The SPAC sponsor will be in control.
Moreover, the presentation indicates that the combined company will end up having a large amount of debt ($463 million) on its balance sheet. I do not think that is a good way to start out a merger. Nevertheless, the potential upside in this deal is very interesting.
AMCI Acquisition Corp (AMCI)
Merger Target: Advent Technologies
Industry: Hydrogen Fuel Cell Technology
Pro Forma Market Capitalization: $494 million
On Oct. 13, Advent Technologies, a fuel cell company, agreed to merge with AMCI Acquisition Corp (AMCI). The deal value is $358 million on a post-money enterprise value basis, with AMCI stock at $10 per share. As of Oct. 16, the stock had risen about 3.1% above that price.
At least Advent shareholders will be in control of their company, having 52% of the total shares. The deal will raise $122 million for Advent allowing it to ramp up production.
So far, Advent is not profitable. The slide presentation has forecasts that show that the deal is priced at 2.9 times 2024 forecast revenues. The company says that the peer average is 18.4 times revenues.
Moreover, Advent says in its presentation that its 2024 forecast EV-to-EBITDA ratio will be at 23 times EBITDA of $23 million. On page 4 of the presentation, it says that its peer average multiple is 97.9 times.
Frankly, these peer comparisons seem a good deal too high. Moreover, this is a Nikola (NASDAQ:NKLA) type company. The company is a business plan, with no revenues right now. In other words, there is a very high degree of speculation with this deal.
The stock could rise after the merger goes, though, just like NKLA did. So, I am somewhat reluctant to say stay away. On the other hand, no serious value investor would put any large percentage in this stock. This is a gamble.
Rumored SPAC Stocks Deal – Redball Acquisition Corp (RBAC)
Target: Red Sox baseball team
On Oct. 9, The Wall Street Journal ran an article, “Red Sox Owner in Talks to Take Sports Holdings Public.” Apparently, Boston Red Sox owner John Henry is considering merging with Redball Acquisition Corp (NYSE:RBAC). Redball raised $575 million in August and has Billy Beane (of Moneyball movie fame) as one of its partners.
The article says that RBAC would raise an additional $1 billion. The total investment in the baseball company would only result in a 25% stake for public investors of RBAC.
That would be a nice payout for John Henry. And he would not even have to give up control. The deal is still in discussion, according to the article. Look for something down the road. The stock, as of Oct. 16, is at just $10.27 per share. This could be an interesting presentation, as the owner will have to provide financials and forecasts if it goes through.
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.