It’s tough to recommend an SPAC (special purpose acquisition company) like VG Acquisition (NYSE:VGAC) VGAC stock before a merger deal is announced. So much remains unknown.
After all, the point of a SPAC is to find a merger target, and bring that target to the public markets. Simply put, SPACs offer an alternative to the IPO (initial public offering) process. IPO investors, however, know who the company going public is. Pre-merger SPAC investors don’t.
Even if we know the target but not the terms, valuation is not just difficult, but impossible, to determine. SPACs don’t acquire 100% of the business with which they merge.
Existing shareholders keep a chunk of ownership. Nearly all SPACs have a concurrent private placement that raises more capital; those investors, too, get shares. Obviously, valuation is very different if SPAC shareholders wind up with 70% of the merged company — or 17%.
VGAC stock adds another wrinkle: it closed Friday at $12.94. One of the attractive features of SPACs is the ability for an investor to ‘redeem’ their shares before the merger closes at the original price (in this case, and most cases, $10 per share). Don’t like the deal? Redeem the shares and even gain a tiny bit of interest in the process.
But an investor buying VGAC in the open market near $13 can’t redeem for that price. They still get $10 if VG Acquisition makes a deal they don’t want to stick with.
All told, there are caveats here — caveats worth detailing up front. Even with those caveats, however, VGAC looks attractive. Based on what we do know, there are a few ways this can play out. Most look like they can provide upside, even from $13.
23andMe
After VG Acquisition’s IPO in October, some investors had a guess as to who the SPAC’s merger target might be. VG Acquisition was founded by billionaire Richard Branson, who conveniently had a private company that made sense for a SPAC deal.
At the moment, however, it appears VG is looking to go in a different direction. Bloomberg reported last week that VG was in talks with DNA-testing company 23andMe.
According to the outlet, the deal would value 23andMe at roughly $4 billion. If that turns out to be the case, VGAC stock looks like a buy. Bear in mind that Ancestry.com sold last year for $4.7 billion in a deal agreed to in August. Equity valuations have risen since then.
23andMe itself, according to Bloomberg, raised capital more than two years ago at a $2.5 billion valuation.
23andMe did hit a rough patch in 2019. Early last year, the company laid off 14% of its workforce. But it’s worth understanding what a “rough patch” means: estimated industry growth of 20% in 2019. As with a lot of consumer tech companies, it’s likely 2020 results were stronger due to consumers stuck at home because of the novel coronavirus pandemic.
The current VGAC stock price suggests a pro forma valuation closer to $4.5 billion, depending on the exact terms of the deal. That seems at worst reasonable, and at best awfully attractive. Given pandemic tailwinds, cost-cutting, and peer valuation, a $5 billion price tag or higher hardly seems out of line based on what we know.
Virgin Orbit
Now, a deal with 23andMe isn’t done. As we’ve seen elsewhere, initial talks don’t mean a deal is guaranteed to happen.
As I mentioned, before the 23andMe news some investors believed there was an obvious target for VG Acquisition: Virgin Orbit. The satellite launch service too is a part of Branson’s Virgin empire. That empire’s ‘other’ space company itself went public via the SPAC route back in late 2019, and remains attractive more than a year later.
Obviously, it’s possible this deal doesn’t get done. VG may see 23andMe as a more attractive target. There are potential conflicts of interest for Branson, who would be on both sides of the trade.
But if it did, I have to believe investors would see it favorably. Space stocks on the whole have done quite well in recent months, and for good reason. Investors remain willing to take on risk in exchange for growth. As long as that trend holds up, and the deal is reasonable, VGAC probably would spike if the market’s initial speculation proves valid.
The Other Path for VGAC Stock
Of course, it’s possible neither of these companies winds up being the final target. VG Acquisition doesn’t need to be in a rush.
But there’s something I’d keep in mind, no matter who the target winds up being. Investors in this SPAC, and in any SPAC, have to trust that management is making a smart deal on smart terms.
That’s obviously a lot easier to do when investors are on the same side as Richard Branson, a man who has succeeded in so many industries in so many eras.
Indeed, we’ve already seen investors do quite nicely when joining Branson as the target of a SPAC merger. I don’t see why the results would be any different on the other side of the deal. That’s the simplest reason for being bullish toward VGAC stock, even with some of the upside already priced in.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
