It’s not surprising in the Year of the SPAC that investors are feasting on gaming-related initial public offerings such as Landcadia Holdings II (NASDAQ:LCA). LCA stock lets you buy into the second special purpose acquisition company from billionaire Tillman Fertitta, owner of the NBA’s Houston Rockets.
SPACs are hot and online gambling continues to grow in popularity. Hence, the media talking up Landcadia’s merger with Fertitta’s Golden Nugget Online Gaming business isn’t surprising.
However, before you jump on the LCA bandwagon, you might want to consider what else is currently out there in the gaming realm. I think you’ll be pleasantly surprised.
SPACs Typically Have 18 to 24 Months to Do a Deal
Assuming a 24-month period for consummating a business combination, SPACs priced units in October 2018 have hit crunch time. Any of the 2019 class still has some breathing room, and those that went public in 2020 have loads of time.
Of the 46 SPACs launched in 2018, 30 have already completed transactions, 12 have announced combinations, three are still searching, and one has been liquidated. That’s a pretty high completion rate (91%) if you include all 12 announcements. The completion rate in 2019, including announcements, is 53%, and it’s 7% for 2020.
The two most important factors for any SPAC, in my opinion, is the management team performing the search and the focus of this search. The narrower, the better. And while that might seem too restrictive, it’s time-consuming to carry out an M&A search, so the clearer the target, the better the results will be.
Think of it this way: If you’re a group of 10 people looking to go out to dinner, the easy way to come up with a restaurant is for everybody to throw in their suggestions. However, if you want to have that dinner, it’s probably better to say “we’re looking for a Mexican place” and decide from there.
So, let’s assume that your particular focus as an investor is on the gaming industry. You’re immediately drawn to LCA stock because of Fertitta’s industry experience through his ownership of Golden Nugget.
However, in Fertitta’s case, his first SPAC in 2016, Landcadia Holdings, has been an unmitigated disaster. And while the tide might turn in the future, the opportunity cost of sinking your capital into a SPAC for four years or more with nothing to show for it is disappointing.
Which is why you need to be extra careful about which SPACs you consider.
Options Other Than LCA Stock
I went to IPO expert Renaissance Capital’s website and searched for the word “gaming.” I came up with nine entries, including LCA. Some of these have already been completed.
The oldest of the SPACs on this list is the I-AM Capital Acquisition Company. It raised $50 million in August 2017. It was combined with Smaaash Entertainment in May 2018. It acquired Simplicity Esports and Gaming (OTCMKTS:WINR) in December 2019. It is consolidating eSports gaming centers across the U.S. The results to date have not been good.
Of the most recent on this list in terms of an IPO, you’ve got IG Acquisition (NASDAQ:IGACU), which raised $300 million on Sep. 30. Some of the people behind this SPAC have decades of casino, private equity, and technology experience behind them. They might not have the Fertitta name, but they’ve been around the block.
Like the Landcadia offerings, the target is businesses in the gaming, leisure, and hospitality realm. These businesses should have an enterprise value of at least $750 million. Considering most combinations have enterprise values that average four times the funds raised by the SPAC, and the average is getting higher by the day, I would say the ultimate target will have an enterprise value closer to $1.2 billion or higher.
Another gaming SPAC looking to raise funds is Gaming & Hospitality Acquisition Corp. According to Bloomberg, the SPAC has filed confidential paperwork with the Securities and Exchange Commission to raise $150 million to acquire a gaming-related business with an enterprise value between $500 million and $1 billion.
In a deal similar to the one DraftKings (NASDAQ:DKNG) executed, Z Capital, the private equity firm behind the SPAC, will take Affinity Gaming, the portfolio company it’s owned since 2017, merge it with the SPAC, and then find a target to buy.
I’ll want to know more, but it’s an interesting move.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.