Broadly speaking, I’m not a fan of SPACs (special purpose acquisition companies) like Foley Trasimene Acquisition Corp. II (NYSE:BFT) stock. The explosion of SPACs over the past twelve months has made a lot of money for traders and sponsors. The ultimate outcome for investors, however, remains a concern.
Simply put, there have been too many SPAC dollars chasing too few attractive targets. And, post-merger, there have been too many rallies, some concentrated in specific sectors like electric vehicles, that have created potentially unsustainable valuations.
Meanwhile, one of the supposed positives about SPACs relative to traditional initial public offerings is the role of the ‘sponsor’. The acquiring SPAC, even after the merger, will retain ownership and seats on the board of the directors. This positions the sponsor to help guide the acquired company (usually a younger firm with often-inexperienced management) to success.
It’s starting to look like many SPACs are just a money grab. One sponsor is on its sixth SPAC. It’s blindingly obvious in retrospect that VectoIQ failed to execute rudimentary due diligence on Nikola (NASDAQ:NKLA). The more SPACs there are, the more SPACs that will do a deal — any deal — to capture the significant upfront profits.
But here’s the thing about FTAC II: it avoids a lot of the problems in the SPAC space. The target, payments play Paysafe, looks awfully attractive. Bill Foley, head of the company, over the years has created literally tens of billions of dollars in shareholder value. BFT stock is likely to add to that total.
Betting the Jockey
In 1984, William P. “Bill” Foley II led a $3 million leveraged buyout of Fidelity National Financial (NYSE:FNF). 27 years later, Fidelity National is worth $11 billion — but the companies it spawned via spin-offs are far more valuable. Fidelity National Information Services (NYSE:FIS) is a component of the S&P 500 and has a market capitalization just shy of $80 billion.
Black Knight (NYSE:BKI) is worth $14 billion, and Cannae Holdings (NYSE:CNNE) $3.5 billion. An early investment in software developer Ceridian (NYSE:CDAY), which went with the Cannae spin-off, turned into realized gains over $1 billion.
That history underpins the simple case for owning BFT stock ahead of the Paysafe merger. Betting the ‘jockey’ — in this case, Foley — has been a winning strategy for nearly three decades now. If an investor had simply invested all of her money in the Foley complex, at almost any point and in almost any way, the odds are overwhelming that she would have handily beat the market.
Meanwhile, the SPAC process seems to play to Foley’s strengths. The Fidelity companies long have had a good eye for acquisitions. Their operational acumen has been proven time and time again, most recently in the huge profits made in the leveraged buyout of Dun & Bradstreet (NYSE:DNB), which was led by Cannae.
Sometimes a bull case is based on the idea of “betting the jockey, not the horse.” In other words, a good management team can create value in even a struggling business. Bill Foley is as good a jockey as there is.
Paysafe and BFT Stock
That said, he’s riding a pretty good horse too. Paysafe is a truly intriguing business.
The payments provider operates across end markets and across geographies. On the consumer side, Paysafe provides both digital wallets and ‘eCash’ solutions for cash customers. On the merchant side, it offers e-commerce and integrated solutions, allowing businesses to record payments both in-store and online through the same system.
What might be most intriguing is Paysafe’s rolling in online gambling. The company is the exclusive provider for DraftKings (NASDAQ:DKNG) in the United Kingdom. It has a strong presence in Canada, and over 60 customers in the U.S. already.
We’ve seen the optimism toward iGaming drive up a number of stocks (including DraftKings itself). That optimism has only built since November, after positive results in a number of a state-level elections. iGaming can drive growth for Paysafe as well.
That’s just one organic opportunity. Cost-cutting and better revenue generation under Foley’s guidance can further drive profit increases. So can additional acquisitions.
Risks Worth Taking
There’s simply a lot to like here. Admittedly, Paysafe isn’t that cheap on a pro forma basis given the rise in BFT stock to over $15. This SPAC transaction is somewhat unusual in that it’s not raising capital for a young start-up, but providing cash for a private equity exit.
In fact, Paysafe will still have net debt of about $1.8 billion after the merger closes, according to the merger presentation. Meanwhile, the pro forma market capitalization now sits above $11 billion.
So, on an enterprise basis and pro forma for the merger, Paysafe is trading at about 20x its estimated EBITDA (earnings before interest, taxes, depreciation and amortization) estimate for 2022.
That’s a healthy multiple. And it’s fair to wonder why the private equity firms are willing to sell at that multiple.
But there’s a reasonable explanation: private equity firms aren’t equipped to take a company like Paysafe and get it to the next level. Bill Foley is.
History has shown that, and there seems a good chance that history will repeat with BFT stock.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.