FAST Acquisition Corp. II – WRITING A NEW BOOK WITHIN THE “SPAC” SPACE
It is obvious that the excitement surrounding Special Purpose Acquisition Companies has waned. After hundreds of BILLIONS were raised over the last several years, there were zero SPACs funded last week. The average SPAC that accomplished a Business Combination is trading down something like 35% from the $10 issue price. Still, according to Nomura Securities, there are 132 SPACs trying to get funded, to the tune of $22B. and there are 580 SPACs seeking acquisition targets, with $152 Billion in trust. This bankroll, with leverage, could produce well over $500 billion in purchasing power, however:
Since the general market, most notably the speculative sector, is down substantially, current SPAC shareholders may be tempted to cast a negative vote relative to a proposed deal and retrieve their capital completely, which would be a “win” in this environment.
FAST II ACQUISTION CORP (FZT.U AND FZT) – ADJUSTING ACCORDINGLY
Our readers know that we have consistently been skeptical of the activity in the SPAC space, but “help is on the way”. In particular, the Sponsors of FAST Acquisition Corp. II (FZT and FZT.U) have made some material adjustments to the basic structure of their prospective Business Combination, all of which are materially beneficial to the public shareholders. We have followed all three SPACs (FST, FZT and VELO) that were formed by this Sponsorship Group and their holding company, &vest, since we have known some of &vest’s principals for decades. The just announced proposed deal between FZT and Falcon’s Beyond is intriguing, to say the least, and we will report on the fundamentals over time. Relative to the SPAC space, and the new less speculative stock market, the SPAC structure, as reformulated by FZT principals, is worthy of description. Beneficial as it is for shareholders, therefore useful as it will prove to be for SPAC sponsors, it is described below. References to the FZT/Falcon’s Combination are intended to be illustrative of the new SPAC “structure”, not a detailed description of this particular deal. We will report more regarding the operating fundamentals of the proposed Business Combination as time goes by.
A BETTER STRUCTURE FOR INVESTORS
If you can forgive the metaphor: Everybody knows that the SPAC castle has burned down, but from the ashes an ember sometimes continues to burn. Our readers know that we are not generally a fan of SPACs because too often:
- The credentials of the Sponsors are often more of a “celebrity” than an operating nature and the operating principals at the selling company are sometimes selling and/or leaving.
- The resultant starting valuation is many years ahead of the near-term fundamentals.
- There is uncertainty as to whether the SPAC investors will agree to the proposed Business Combination, and the presence of their funds may be necessary for a closing.
- There is substantial downside risk if the earnings are late or less than expected, because the starting point may be more of a “plan” than a “existing business”.
- There is often substantial dilution of the public shares by earnout incentives that depend on short term stock price rather than longer term results. If there is a short term move in the stock, the dilution can take place though the stock price quickly falls back and the fundamentals are still far in the future.
In this case, at this time with so much disillusionment regarding SPACs, the Business Combination between FZT and Falcon’s Beyond provides a number of fundamentally attractive features. Moreover, Sponsors and Underwriters of FAST Acquisition Corp. II have adjusted the deal structure to help eliminate the above negatives:
- The Sponsorship group and proposed Board of Directors have outstanding brand building credentials in the hospitality/restaurant/retail industries. Included are &vest’s Doug Jacob (co=founder of &vest), Bill Hinman (partner of &vest and former Director of the SEC’s Division of Corporate Finance), Sandy Beall (partner of &vest, founder of Ruby Tuesday’s, founder of Blackberry Farm and Blackberry Mountain) and others. The operating partnership with prestigious Melia’ Hotels speaks for itself. Furthermore, the “sellers” are accepting stock and staying, putting their entire business careers into the new venture. Lastly, an affiliate of the seller will contribute up to $60M to the new company, $20M of which is already in place.
- The first project, in Punta Cana, Dominican Republic, opens in early 2023, within months of the Business Combination and calendar 2024, with $150M of projected EBITDA, will be little more than a year away. Melia’ Hotels will be contributing existing hotels, situated on attractive resort real estate, as part of their contribution to the 50-50 jV, providing brick and mortar value to the new Company. Lastly, even if projects should be delayed for some reason, indications of success will not be long in coming as the Punta Cana project inaugurates the new effort in a very few months.
- This transaction will likely move forward, even with substantial SPAC redemptions. The projects are largely pre-funded, an affiliate of the seller will provide up to $60M, and Melia’ operating credibility and contribution of brick and mortar should provide a range of financing alternatives.
- The risk is fundamentally less than normal here because brick and mortar hotels will be contributed by Melia’ as each project moves forward. In addition, the downside risk is reduced because half of the public’s common shares will be exchanged into an 8% convertible preferred stock.The Sponsor is also forfeiting 20% of their “promote”, to be reallocated between Private Placement and non-redeeming public investors. Depending on redemptions, the effective discount (stock dividend) will be from 6.1% to 8.1% from a theoretical $10.00 purchase price.
- The potential dilution from earnout shares is a non-factor because that would take place only after one year, triggered in tranches at the much higher levels of $20, $25, and $30/share, at which point public shareholders will have already made substantial returns.
It’s possible that the FZT/Falcon’s Beyond deal would take place with or without the adjustments detailed above. In our mind, however, the new structure provides a much more balanced approach between “organizers”, operating principals and the public investors and is no doubt a function of &vest’s navigation of the SPAC market over the past few years. There is less of a “promote” for the organizers and underwriters, the exit for the operating principals is longer term in nature so more dependent on building the business, not just the stock price, so the reward/risk profile is far more attractive for public investors. We look forward to following the progress of the above described transaction as well as developments in the general SPAC space.