Money Talks podcast: Frothy SPACs
Like the 207 bus from Hayes to Shepherds Bush, you don’t see a Special Purpose Acquisition Company (SPAC) for ten years and then suddenly you can’t move for ‘em, coming over here and challenging the strictures of Sarbanes Oxley by offering a quick, if somewhat opaque route to IPO amid an investor environment defined by a $3trillion dry powder cash mountain awaiting a Covid-inspired collapse in asset valuations.
Note, the bus route analogy was lost disappointingly early in that sentence.
So, this week’s podcast goes deep in to what SPACs are, how they work, why they’re popular and asks what are the implications of this new investment vehicle for the sports business and the people who work in it.
To do this, I asked Michael Broughton for help. Michael was co-founder of Sports Investment Partners, Europe’s first Investment Vehicle focused specifically on the sports industry. He has been a senior advisor to FIFA on business technology, innovation and investment strategy and is now an advisor to Acceleration Equity, focused on the acquisition of and investment into sports teams and franchises.
Our conversation took place just before the news broke of a possible IPO of the Fenway Sports Group via RedBall, the SPAC created by Gerry Cardinale and Billy Beane and is available by searching ‘Unofficial Partner’ via your usual podcast app or clicking the image below.
WTF’s a SPAC?
The rise of the SPAC brings two or three major sportsbiz themes together in one story: the interest in sport as a private equity investment class; Covid’s impact on sport and the rise of the personal brand, in this case a sort of banker-as-influencer whose reputation is key to generating trust among investors. For this reason, SPACs are often created and fronted by people prominent in a particular sector, Billy Beane for example, or Richard Branson, Paul Ryan, the former speaker of the US House of Representatives or Bill Ackman, the American hedge fund magnate.
A poke below the bonnet of many SPACs reveals just how much of the bet is loaded in favour of the people who create them. For their part, the famous face is risking his name (and there do seem to be a lot of #richwhitemen in this game btw), which may or may not be worth the hit it takes should the project go down.
Some detail from James Dean in The Times on the deal for SPAC creators:
Speed and opacity
Beyond the financial deal, SPACs offer a way for companies to get the benefits of going public while bypassing the traditional IPO process of investor roadshows, difficult questions and the prying eyes of government regulators and the SEC.
A SPAC merger lets a company go public quickly. The method can sometimes allow founders or sponsors to sell more of their holdings quicker than an IPO, which may include a lock-up period. A Spac deal can be especially attractive for a company struggling to show profits. Spac disclosures put more emphasis on putative future revenues, while IPO prospectuses require audited past financial statements.
But one person’s red tape is another’s essential safeguard, aka the regulations brought in to control the irresponsible lending that led to the last financial crisis. Also, note the bundling tendency at work, watch out for ‘SPAC cubed’.
The London Stock Exchange is jumping aboard, as it explores how to lure Spacs to the UK, and a fund that has jokingly been dubbed a “Spac of Spacs” has just emerged. Easterly Alternatives is raising a $100m vehicle to invest in up to 15 other Spacs. Anyone older than a college kid may well hear echoes of the last credit boom. Back then, collateralised debt obligations, backed by tranches of loans, were so hot that financiers started creating CDOs backed by tranches of CDOs, known as CDO squareds. Before it all ended in the 2008 financial crisis, some financiers reportedly launched a CDO cubed. If a Spac cubed materialises, keep that in mind.
See also, this commenter on Techcrunch, who’s not a fan.
Why now?
There’s no doubting SPACs role in the next stage of sport’s private equity era - Sportico has a list of current sport related versions here. More broadly, The Times estimate SPACs account for 43% of all the money raised from initial public offerings (IPOs) in the US this year. In 2020 so far 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.
Near zero interest rates make investments more attractive than saving, and the key number is $3trillion, which is the figure often quoted as ‘dry powder’, the amount of money private equity has in a holding pattern, waiting for Covid to properly kick in and make those target assets really, properly ‘distressed’.
(While we’re on #drypowder, see a piece here attempting to defend the private equity industry from accusations of fleecing tax payers for furloughs and bail outs while sitting on their aforementioned powdery piles of cash).
How much is a Premier League team worth?
A piece of string question, but the market is giving some broad indicators (albeit, basing valuations on leaked media stories is v.hazardous to say the least).
That said, the talk around the RedBall-FSG story is as follows:
RedBall, which raised $575 million in August to buy businesses in sports and sports-related media and data analytics, plans to raise an additional $1 billion to purchase a stake that will total less than 25% in Fenway Sports Group and value it at $8 billion including debt, some of the people said.
Last year, private-equity firm Silver Lake purchased a $500 million stake in Manchester City and the City Football Group that valued the umbrella group at $4.8 billion.
Intriguing snippet in the above WSJ story suggests that FSG will use an IPO to go on it’s own acquisition spree in a City Football Group style. This tallies with previous Money Talks guest Kyle Charters of Inner Circle Sports, who suggested that there’s a received wisdom among p/e that a proven model for running European teams is emerging, with FSG as the template.
As a public company, Fenway could look to buy up more clubs in Europe, where a number have been on the block, according to a person familiar with the matter.
Further down the Premier League, Newcastle Utd were valued at £300million before the Saudi takeover failed to happen.
Questions arising for future Money Talks podcasts
What are the implications of sports teams being bought via a SPAC?
Is there anything to learn from the Nikola SPAC? (yes, I think there may be btw)
How do SPACs impact investor/owner behaviour?
Are billionaires the only people who can afford to think long term?
How does the Liverpool IPO story link to the recent Project Big Picture scoop by the Telegraph’s Sam Wallace, in which Liverpool and FSG play a major role?
The Unofficial WhatsApp Group on Project Big Picture
Names omitted to protect the innocent.
[18:14, 11/10/2020] Richard Gillis: I’d love to know the group’s view on this story as it unfolds. I think Matt’s right here btw
[18:28, 11/10/2020]: One thing worth noting is the adjusted voting structure - big six plus three longest serving teams will be able to push through anything
[18:37, 11/10/2020]: Right at the end but def not the least important!
[18:41, 11/10/2020]: You could argue that’s not that different from now albeit not in an above the board regulation kind of way.
[18:42, 11/10/2020]: One thing is for certain. All 92 professional clubs in this country don’t survive unless there is a substantial change in financial approach. Question is how important is it that they all survive and what do you have to give up to enable that to happen.
[18:45, 11/10/2020]: Big question for me once we come out of the other side is does football learn the lesson of its largely one dimensional business model and seek to diversify or does it continue with BAU?
[18:46, 11/10/2020]: It’s interesting DCMS has been so quick to dismiss this given we know they want to see change in football and they don’t want to provide their own bailout to that particular sport. They need to leave themselves wriggle room...
[18:48, 11/10/2020]: One suspects the DCMS view of the world is pretty low down the priority list when it comes to the decision makers on this. Pro Football has never really cared what a toothless government thinks of it regardless of which party is in power.
[18:49, 11/10/2020]: I’m sure that’s right. But their reaction changes the narrative that will go far and wide about whether this is ‘good’ or not and from their perspective they can’t have it all ways...
[18:49, 11/10/2020]: They want to see PL cash go outside the PL to help...
[18:50, 11/10/2020]: Agree the kneejerk response isn’t helpful. They wanted football to help itself and now they don’t like the plan. Can’t have your cake and eat it.
[18:50, 11/10/2020]: This goes on all the time in the background. All the time. Ask yourselves who stands to gain from this being leaked now.
[18:50, 11/10/2020]: Exactly
[18:50, 11/10/2020]: Even if you don’t love it, work to try to influence it. Instead a flat hammering doesn’t exactly give much room for that
[18:51, 11/10/2020]: The opportunism is pretty clear!
[18:51, 11/10/2020]: And a model that is vanishing fast at that.....wonder how much of this is prompted by the Big boys already seeing the billion+ reduction in the next cycle in a few key markets.
[20:05, 11/10/2020]: Nothing like English football to start a crisis out of a crisis. Opportunism from the big clubs at a time the EFL and the economy is on its knees. There has been a "League Cup commercial coup" before this, as it was estimated to account for 50% of the broadcast deal and could be better sold to overseas broadcasters by the PL.
[20:09, 11/10/2020]: The 50% stat is accurate.
Ends.
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