SPACs – POSTSCRIPT RELATIVE TO OUR ARTICLE FROM LAST WEEK
Our friend, legendary economist and market strategist, David Rosenberg, included the following in his daily report today. We were wrong a week ago when we suggested $20B has been raised in SPACs this year. David says it is $51.1B and counting. Just to add another data point to this discussion, Jim Cramer, the admittedly great momentum trader that hosts Mad Money on CNBC last night was touting a recently brought public SPAC, Sports Entertainment Acquisition Corp (SEAH) that is currently sitting on a cool $400M, a rounding error these days 🙂 We don’t know when this stock market will stop going up, and blank check companies (SPACs) will fall out of fashion, but it is safe to say that all of this indicates we are closer to a top than a bottom.
From David Rosenberg’s: Early Morning with Dave, which is a great read and a relative bargain in terms of subscription price.
“even college kids are touting Spacs: Wall Street’s latest financing craze is showing serious signs of froth: “When the shoeshine boy starts sharing stock tips, it is time to get out of equities; or so Joseph Kennedy Sr is said to have remarked as he exited the market ahead of the 1929 crash. So what should investors  do  when  college  students  start  promoting  special purpose acquisition companies, or Spacs? This week it emerged that University of Pennsylvania students have created a so-called “Penn Spac” club to celebrate these new equity vehicles. Known as blank-cheque companies, Spacs raise money from investors, via a public listing, and then merge with a private company, in effect taking it public while avoiding a traditional initial public offering. The current statistics around Spacs are startling: so far this year 133 Spacs have been floated in the US, raising $51.1bn, nearly four times last year’s volume. A further 67 are waiting in the wings, according to Spac Research.
“Just remember these sage words of advice from Alan Greenspan, at his last Jackson Holy sermon back on August 26th, 2005 —this one is for the ages (Reflections on central banking): “Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”
Our Article from October 6th
BurgerFi’S PENDING IPO THROUGH SPAC (OPES), AND SPACs IN GENERAL
We call it a sign of the times and another signal of the enormous bubble in the capital markets. The last amount quoted relative to the amount raised this year for Special Purpose Acquisition Corporations (“SPAC”s) was a cool $20 billion, and a lot more is to come. In the restaurant industry, in particular, a SPAC organized by Sandy Beall (founder of Ruby Tuesday’s), including a group of well qualified restaurant industry executives, has announced an intention to raise $200M.
Investors have therefore provided $20B and counting to “sponsors” in the form of “blank checks” to go out and find a currently unknown worthwhile investment. This is a function of investors “reaching for return” in a zero interest rate environment. TINA (There Is No Alternative) is another acronym for this rationale.
- 2014: $1.8bn across 12 SPAC IPOs
- 2015: $3.9bn across 20 SPAC IPOs
- 2016: $3.5bn across 13 SPAC IPOs
- 2017: $10.1bn across 34 SPAC IPOs
- 2018: $10.7bn across 46 SPAC IPOs
- 2019: $13.6bn across 59 SPAC IPOs
- 2020: $20 Billion and counting
Here’s the problem:
Almost every private company that chooses to go public by way of a SPAC will either be a highly speculative longshot, an aspiring Nikola (NKLA) or Draft Kings (DKNG), SPACs that are currently fueling the speculative fires, or a Company with a checkered history that is unable to survive the more rigorous due diligence by a high quality underwriting firm and the SEC. You will hear stock market pundits extolling the virtue of SPACs, that the process is quicker with less SEC and underwriter scrutiny. The other justification is that retail investor are provided a great “opportunity” to participate in early stage situations. Count on the fact that every comment you hear is made by somebody who is benefiting from the process such as a SPAC sponsor or an underwriter. The more predictable “opportunity” is for the sponsors to make a huge profit (even if the Company that is acquired struggles). This is because the “sponsors” buy a large amount of shares for virtually nothing, before the public is offered their “opportunity”. The underwriters raising the capital usually receive options as well, and of course receive a hefty sales commission, both of which dilutes the public shareholders. Why would a prosperous, well managed company, with a predictable growth outlook, put up with this substantial dilution? The answer is : they wouldn’t, so companies that are acquired by SPACs are either (1) very speculative (2) troubled to a material degree or (3)the SPAC sponsors are paying an exorbitant price and the sellers can tolerate the dilution. It is worth noting that today’s SPACs usually allow the public investors to redeem their shares before a deal is completed, retaining the warrants attached to the original units, so the public has an out but is not really equipped to fully evaluate the situation. If the “music is playing” in terms of the general stock market and existing SPACs and the deal seems “interesting”, the public will most often play along.
When stock market pundits tell you “there is no bubble”, refer to the chart above, showing that “blank checks” are being written for over $20 billion in 2020, up from $1.8B in 2014.
BURGER-FI – TO BE ACQUIRED BY SPAC – OPES ACQUISITION CORP. (OPES)
We wrote about BurgerFi back on July 22nd, and that “first look” is provided here:
Six month financials for BurgerFi have been released, through June 30th, and nothing material has changed in the outlook as presented a few months ago. Stores are opening approximately on schedule, and the outlook for 2021 in terms of openings is about the same. The Company continues to emphasize their deal with ghost operator, Reef Kitchens, the US AirForce and other non-traditional partners but no financial parameters are attached to these discussions. The Company continues to project $4.3M of Adjusted EBITDA in 2020, up from $3.3M in 2019, and a sharp increase in 2021 to $10.5M. We consider that any uptick in 2020 (a “lost year”) is admirable. For what it’s worth, however, we doubt that this uptick will materialize because the six months ending June 30, 2020 showed Burger Fi (pre-merged) with about $1.5M of Adjusted EBITDA. The Consolidated OPES showed about a $1.0M loss of EBITDA, which would be difficult to “adjust” to much of a profit. It probably doesn’t matter, however, because investors will likely focus on the likelihood of the projected $10.5M of Adjusted EBITDA in 2021.
We can’t help but observe that management at BurgerFi must admittedly be beefed up (no pun intended). The Board of Directors is oriented towards real estate, important to be sure, but not sufficient to plan and oversee restaurant current operations and long term strategy.
Our focus below, for the purpose of the discussion of SPACs in general, and OPES in particular, is the equity dilution of public shareholders.
PUBLIC SHAREHOLDER DILUTION
We use BurgerFi as an example of the substantial dilution to which public shareholders of SPACs are most often subjected.
The public originally bought 10.4M shares, as part of $10.4M units (a share of common stock and a warrant) for $104M (less underwriting fees), and there were additional shares sold to institutions, also at $10. With no redemptions, and no warrant exercise the public would own 43.5% (excluding sponsor, initial stockholders, officers and directors) of the total outstanding.   Shares issued to sponsors, etc. were 2.875M (for $25,000), substantial dilution of the public’s 10.4M shares.
It gets worse in this case, however. By August 21, 2020, a great number of shares were redeemed, so the total shares outstanding were reduced to 7.9M shares (4.5M in public hands). In fact, the 6 month report, as of 6/30/20, shows $48.4M left in the OPES trust account, down from $116M after the IPO and the private placements. The 2.875M  shares sold to the insiders, for next to nothing, become more than twice the dilution relative to half the original public float,
It gets worse yet, because there is a further “earnout” for BurgerFi shareholders amounting to a total of 9.4M shares. This takes place over the next two to three years, if and when the stock trades (for twenty days) over prices ranging from $19 to $25 per share. While it can be argued that everybody will be happy if that happens, this enormous potential dilution of the public’s interest obviously affects the upside reward from that point. It could also happen that the stock trades up for the necessary 20 trading days, then retreats, but the extra shares are issued for good. The dilution is, of course, forever.
WHO WINS?
The sponsors win, as long as any deal gets done, because their 2,875,000 shares are worth $10/share to start, if only they can liquidate them at some reasonable level.
BurgerFi current shareholders win because they receive $30M in cash at closing, not too bad based on $3.3M of Adjusted EBITDA in 2019, a “lost 2020” and big projections in 2021. They also get $20M in shares, which hopefully can be monetized if the Company performs anywhere close to expectations. Their additional earnout of 9.4M shares would obviously allow BurgerFi current shareholders to share substantially in the upside possibilities. They will have had an appealing “bite of the apple” up front, and whatever remains of their 5M shares up front plus the 9.4M further shares will still allow substantial ownership to share the upside.
The public has a tougher road to profits, based on rational projections of stock price versus fundamentals. The current starting valuation of $10-12 per share, based on 17M average shares outstanding shown in the 6/30/20 pro forma financials, less now after redemptions, values trailing Adjusted EBITDA of $3.3M very highly, even $10.5MÂ of projected Adjusted EBITDA in 2021 adequately. If the stock should happen to get into the high teens and twenties, 9.4M additional shares will be issued, an obviously large amount of potential dilution and overhang to the public float.
CONCLUSION:
Relative to Opes (OPES)/Burger Fi, and SPACs in general:Â Caveat emptor.
Roger Lipton
We call it a sign of the times and another signal of the enormous bubble in the capital markets. The last amount quoted relative to the amount raised this year for Special Purpose Acquisition Corporations (“SPAC”s) was a cool $20 billion, and a lot more is to come. In the restaurant industry, in particular, a SPAC organized by Sandy Beall (founder of Ruby Tuesday’s), including a group of well qualified restaurant industry executives, has announced an intention to raise $200M.
Investors have therefore provided $20B and counting to “sponsors” in the form of “blank checks” to go out and find a currently unknown worthwhile investment. This is a function of investors “reaching for return” in a zero interest rate environment. TINA (There Is No Alternative) is another acronym for this rationale.
- 2014: $1.8bn across 12 SPAC IPOs
- 2015: $3.9bn across 20 SPAC IPOs
- 2016: $3.5bn across 13 SPAC IPOs
- 2017: $10.1bn across 34 SPAC IPOs
- 2018: $10.7bn across 46 SPAC IPOs
- 2019: $13.6bn across 59 SPAC IPOs
- 2020: $20 Billion and counting
Here’s the problem:
Almost every private company that chooses to go public by way of a SPAC will either be a highly speculative longshot, an aspiring Nikola (NKLA) or Draft Kings (DKNG), SPACs that are currently fueling the speculative fires, or a Company with a checkered history that is unable to survive the more rigorous due diligence by a high quality underwriting firm and the SEC. You will hear stock market pundits extolling the virtue of SPACs, that the process is quicker with less SEC and underwriter scrutiny. The other justification is that retail investor are provided a great “opportunity” to participate in early stage situations. Count on the fact that every comment you hear is made by somebody who is benefiting from the process such as a SPAC sponsor or an underwriter. The more predictable “opportunity” is for the sponsors to make a huge profit (even if the Company that is acquired struggles). This is because the “sponsors” buy a large amount of shares for virtually nothing, before the public is offered their “opportunity”. The underwriters raising the capital usually receive options as well, and of course receive a hefty sales commission, both of which dilutes the public shareholders. Why would a prosperous, well managed company, with a predictable growth outlook, put up with this substantial dilution? The answer is : they wouldn’t, so companies that are acquired by SPACs are either (1) very speculative (2) troubled to a material degree or (3)the SPAC sponsors are paying an exorbitant price and the sellers can tolerate the dilution. It is worth noting that today’s SPACs usually allow the public investors to redeem their shares before a deal is completed, retaining the warrants attached to the original units, so the public has an out but is not really equipped to fully evaluate the situation. If the “music is playing” in terms of the general stock market and existing SPACs and the deal seems “interesting”, the public will most often play along.
When stock market pundits tell you “there is no bubble”, refer to the chart above, showing that “blank checks” are being written for over $20 billion in 2020, up from $1.8B in 2014.
BURGER-FI – TO BE ACQUIRED BY SPAC – OPES ACQUISITION CORP. (OPES)
We wrote about BurgerFi back on July 22nd, and that “first look” is provided here:
Six month financials for BurgerFi have been released, through June 30th, and nothing material has changed in the outlook as presented a few months ago. Stores are opening approximately on schedule, and the outlook for 2021 in terms of openings is about the same. The Company continues to emphasize their deal with ghost operator, Reef Kitchens, the US AirForce and other non-traditional partners but no financial parameters are attached to these discussions. The Company continues to project $4.3M of Adjusted EBITDA in 2020, up from $3.3M in 2019, and a sharp increase in 2021 to $10.5M. We consider that any uptick in 2020 (a “lost year”) is admirable. For what it’s worth, however, we doubt that this uptick will materialize because the six months ending June 30, 2020 showed Burger Fi (pre-merged) with about $1.5M of Adjusted EBITDA. The Consolidated OPES showed about a $1.0M loss of EBITDA, which would be difficult to “adjust” to much of a profit. It probably doesn’t matter, however, because investors will likely focus on the likelihood of the projected $10.5M of Adjusted EBITDA in 2021.
We can’t help but observe that management at BurgerFi must admittedly be beefed up (no pun intended). The Board of Directors is oriented towards real estate, important to be sure, but not sufficient to plan and oversee restaurant current operations and long term strategy.
Our focus below, for the purpose of the discussion of SPACs in general, and OPES in particular, is the equity dilution of public shareholders.
PUBLIC SHAREHOLDER DILUTION
We use BurgerFi as an example of the substantial dilution to which public shareholders of SPACs are most often subjected.
The public originally bought 10.4M shares, as part of $10.4M units (a share of common stock and a warrant) for $104M (less underwriting fees), and there were additional shares sold to institutions, also at $10. With no redemptions, and no warrant exercise the public would own 43.5% (excluding sponsor, initial stockholders, officers and directors) of the total outstanding.   Shares issued to sponsors, etc. were 2.875M (for $25,000), substantial dilution of the public’s 10.4M shares.
It gets worse in this case, however. By August 21, 2020, a great number of shares were redeemed, so the total shares outstanding were reduced to 7.9M shares (4.5M in public hands). In fact, the 6 month report, as of 6/30/20, shows $48.4M left in the OPES trust account, down from $116M after the IPO and the private placements. The 2.875M  shares sold to the insiders, for next to nothing, become more than twice the dilution relative to half the original public float,
It gets worse yet, because there is a further “earnout” for BurgerFi shareholders amounting to a total of 9.4M shares. This takes place over the next two to three years, if and when the stock trades (for twenty days) over prices ranging from $19 to $25 per share. While it can be argued that everybody will be happy if that happens, this enormous potential dilution of the public’s interest obviously affects the upside reward from that point. It could also happen that the stock trades up for the necessary 20 trading days, then retreats, but the extra shares are issued for good. The dilution is, of course, forever.
WHO WINS?
The sponsors win, as long as any deal gets done, because their 2,875,000 shares are worth $10/share to start, if only they can liquidate them at some reasonable level.
BurgerFi current shareholders win because they receive $30M in cash at closing, not too bad based on $3.3M of Adjusted EBITDA in 2019, a “lost 2020” and big projections in 2021. They also get $20M in shares, which hopefully can be monetized if the Company performs anywhere close to expectations. Their additional earnout of 9.4M shares would obviously allow BurgerFi current shareholders to share substantially in the upside possibilities. They will have had an appealing “bite of the apple” up front, and whatever remains of their 5M shares up front plus the 9.4M further shares will still allow substantial ownership to share the upside.
The public has a tougher road to profits, based on rational projections of stock price versus fundamentals. The current starting valuation of $10-12 per share, based on 17M average shares outstanding shown in the 6/30/20 pro forma financials, less now after redemptions, values trailing Adjusted EBITDA of $3.3M very highly, even $10.5MÂ of projected Adjusted EBITDA in 2021 adequately. If the stock should happen to get into the high teens and twenties, 9.4M additional shares will be issued, an obviously large amount of potential dilution and overhang to the public float.
CONCLUSION:
Relative to Opes (OPES)/Burger Fi, and SPACs in general:Â Caveat emptor.
Roger Lipton