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Posted on 16 June 2021
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Currently, there is no week without its SPAC announcement.
The data speaks for itself: according to Pitchbook, 325 SPAC deals were issued during Q1 2021, versus 276 SPAC deals for 2020 and 83 in 2019. However, it’s interesting to notice that only 79 SPAC acquisitions were fully completed in 2020. Largest (as of today) SPAC fundraising reached a $4B in July 2020 (made by hedge fund manager Bill Ackman).
(Source: Refinitiv, illustration by Financial Times)
In short, a Special Purpose Acquisition Company is a “blank check”. The company, created by a “sponsor”, has the purpose to get listed on the stock market. The sponsor raises money from investors (through the newly created vehicle) with the only objective to make an acquisition of a private company, called “the target company” (in a 2-year timeframe maximum). As a consequence, those acquired companies become public companies. In exchange for launching a SPAC, sponsors typically receive 20% of the listed company.
This model isn’t new, but gained strong interest during the past months. The recent market volatility encouraged this asset class, since SPAC deals allow going public in a shorter period of time than IPOs or direct listing (hence diminishing uncertainty about liquidity perspectives), this mechanism is opposed to traditional IPOs or direct listing. Still, target companies must be approved by regulators (and go through detailed financial reporting), so SPAC’s value is more about the timeline and the quick liquidity perspective of going public for target companies. This is especially true when considering that, unlike traditional IPOs, targeted companies can make forward-looking financial statements, which are more easy to show tremendous growth, being more attractive to investors.
SPAC fundraising is all about the reputation of the “sponsor”, the person forming the SPAC, since its a “blank-check” mechanism, you must deeply trust the manager to pour money as an investor, which propose to buy units of the company (like buying shares of an IPO-ing company). The total fundraising is often not enough to cover the acquisition cost, this is why sponsors must partner with traditional investors, such as private equity, to round-up the deal and complete the acquisition. The SPAC often seeks a PIPE (Private Investment in Private Equity) deal. Here, the sponsor negotiates the selling of the target company directly with private equity investors. Notable deals involving a PIPE deal include Nikola, the EV company.
In France, well-known sponsors formed a SPAC: Xavier Niel, Matthieu Pigasse and Moez-Alexandre Zouari. On the day 2MX Organic (their SPAC) IPO-ed, its shares price was 30% higher. At the end of the day, total fundraising reached the €300M milestone. 2MX Organic’s strategy is acquiring companies in sustainable goods (both production and distribution). However, as of the writing of this article, the SPAC didn’t perform any acquisition, its shares price is 5.75% below its opening price for the IPO.
Bernard Arnault eyes financial services, in partnership with Tikehau Capital, Jean-Pierre Mustier and Diego de Giorgiva. A new SPAC should be announced soon to invest in 4 segments of the financial industry: asset management (traditional and alternative), fintechs, insurance and related services, enterprises in financial services.
Below a quick “how-to” about SPAC:
(Source: CB Insights)
Since March 2020, 45 SPACs deals have happened in the mobility industry, according to Baris Guzel from BMW i ventures. Median size of the companies is $275M, the biggest being CCIV, for acquiring Lucid Motors, with a $2.1B size (which is a total fail). Pitchbook’s data for Q1 2021 indicates that 43 US mobility tech companies merged with SPACs, representing a total valuation of $104.1B as of March 2021. Mobility seems to be a sweet spot for SPAC (as of early June 2021 YTD, there are 22 SPAC deals, compared to 23 in the entire 2020), especially for EVs, AVs and eVTOL, but why?
If you think about EVs and the stock market, Tesla surely comes to your mind. In 2020, Tesla’s stock price rose by 695% YoY, becoming the largest auto manufacturer in the world in market capitalization. The company became kind of a “benchmark” in terms of multiples. Another factor for making mobility tech companies attractive to SPAC is the overall trend for sustainable investing, which is also one of Biden’s administration priorities. Those startups are betting on sustainable modes of transportation (electric, hydrogen), which are benefitting from a strong momentum for EVs sales and exploration of innovative logistic solutions.
Another way of thinking about the trend for making mobility tech startups public through a SPAC is to consider it as venture investing. Those companies, while showing good-looking charts about their growth and future financials, remain unprofitable. It’s a good option for raising huge amounts of cash in a short period of time. Forbes illustrates by stating, about aerial mobility startups going public through SPACs: “Not surprisingly, most of these deals look like venture investments. Only one of these companies has received funding beyond Series C, few are profitable, and several have no meaningful commercial revenues”.
SPAC allows cash inflows into companies that need large amounts of capital to scale their operations, facing a long period before generating meaningful value, and mobility companies belong to this category.
If you’re not convinced about the “VC-like” of SPACs in mobility, please note that some valuation multiples are based on forecasted revenues in 2027 (QuantumScape).
Examples of mobility tech startups going public with SPACs include Bird (deal size of $2.3B, which plans remaining unprofitable until 2023) and Cazoo (deal size of $7B, which plans remaining unprofitable until 2024).
Some companies benefited from the SPAC boom, landing great valuations when going public. However, despite great beliefs from investors about their operational know-how, truth is most mobility tech companies remain risky, and their valuations can look like rollercoasters.
Even if the vast majority of SPACs are listed in the US, mobility in Europe is scrutinized by those investors. Levere Holdings priced at $250M for its IPO, with the goal of investing in the EMEA mobility sector. Martin Varsavsky (CEO) and Yasmine Fage (COO and Director) are managing the company with the ambition of building an ecosystem with public authorities, automakers and platforms.
SPACs represents an exit path for VC-backed mobility tech startups. Given its success (at least for the day mobility tech companies are going public through a SPAC), we could expect VC investors to continue investing in those companies. Talking about investors, BlackRock is involved in 15 SPAC deals since March 2020 (as of the beginning of June 21) on the “PIPE-side”.
Despite the trend for SPAC, there are serious downsides about this asset-class. The main one is that SPACs could, eventually, be superior to the number of private companies that want to go public, creating a risk of a bubble. Another one is SPAC’s success still lies in their sponsors’ reputation, true experts and skilled ones are not, by definition, unlimited. As of June 2021, there are 420 SPACs searching for an acquisition.
SPACs dedicated to quite young startups also represent a risk for investors, but it’s linked to the underlying asset (startups are, by definition, very risky). In mobility, examples include fail-to-deliver companies such as Nikola. Nikola priced at $10 the day it went public through a SPAC, its stock dropped below (April 2021). Investing in stock markets is always at risk, but what’s interesting here is those companies are promising great results, even though they are not mature from an operational point of view. Nikola promised production of 600 semi-truck, and cut it to 100 units.
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