Analysis: How Wall Street's hottest dealmaking trend fizzled

M3-Brigade Acquisition II

16/09/2021 14:00

By Anirban Sen and Krystal Hu
    Sept 16 (Reuters) - Los Angeles Dodgers co-owner Todd Boehly
made a lucrative offer last March that Sportradar Group AG
 SRAD.O  founder and CEO Carsten Koerl could not pass up.
    He proposed a merger with his special purpose acquisition
company (SPAC) Horizon Acquisition Corp II that would have
valued Sportradar at $10 billion. That was 110 times the
adjusted cash flow of the Swiss sports gambling data company in
2020 of 76.9 million euros ($90.4 million). Most of its peers
were valued at less than half that multiple.
    Yet Wall Street's mood was about to sour toward SPAC deals,
then its hottest dealmaking trend. Sportradar instead went
public this week through a traditional initial public offering
(IPO) that valued the company at just $8 billion.
    This account of the deal deliberations is based on
interviews with four people familiar with the matter and on a
Reuters analysis of Sportradar's financials. Spokespeople for
Sportradar, CPPIB and Horizon did not respond to requests for
comment.
    Boehly's SPAC deal would have taken Sportradar public in New
York without the need for a heavily regulated IPO, which
restricts companies' ability to give lofty financial projections
to stock market investors. 
    Koerl and Sportradar's other top investor, Canada Pension
Plan Investment Board (CPPIB), believed Boehly could deliver on
Sportradar's frothy valuation expectations because investors
were fascinated with SPACs at the time. Some 91 companies had
gone public in the United States through SPACs in January,
versus 27 companies for IPOs, according to Dealogic. 
    Investors invited to participate in a private investment in
public equity (PIPE) transaction backing the deal balked at the
price sought and its comparison to other successful SPAC deals
such as that of sports-betting platform DraftKings.
    While Sportradar boasted rapid revenue growth, it also made
aggressive assumptions about some U.S. states legalizing
gambling. The company trimmed its valuation expectations to $9
billion but still failed to attract many investors.
    Sportradar decided in June to abandon the SPAC deal and
registered for an IPO in July. It debuted on Nasdaq this week.
 urn:newsml:reuters.com:*:nL4N2QG333
    The SPAC market deteriorated rapidly over the summer,
according to Reuters interviews with more than a dozen capital
market professionals and a review of market data. Now, SPAC
deals that get inked often do so by offering sweetened terms on
their PIPE. SPAC managers also have accepted less-generous
compensation. 
    Other companies that abandoned SPAC deals for IPOs in recent
weeks include digital ad platform Outbrain Inc and F45 Training
Holdings Inc, a fitness chain backed by Hollywood actor Mark
Wahlberg, according to people familiar with the plans. Both
companies did not respond to requests for comment.

    RAISED TOO MUCH MONEY
    Investors have been spooked by many SPACs' poor financial
performance and a regulatory crackdown led by the U.S.
Securities and Exchange Commission over their disclosures. Only
32 companies went public in the United States through SPACs in
July, versus 57 IPOs.
    In January, SPAC shares had rallied 28% on average on their
first day of trading. But in July, SPAC shares rallied less than
1% on average on the day of the deal announcement, much less
than the 30% rise on the first day of trading after an IPO,
according to Dealogic.
    Many SPAC investors are selling their shares in the open
market or exercising their right to redeem them once a deal is
announced. SPAC managers have had to put more of their own money
into the deals, forfeit lucrative compensation or abandon the
attempted mergers altogether.
    "We as an industry raised too much money too quickly. The
party is over for the moment. There aren't enough investors who
understand SPACs and want to invest in them," said Douglas
Ellenoff, a SPAC lawyer with Ellenoff Grossman & Schole LLP.
    
  For an interactive graphic, click here: https://tmsnrt.rs/3lif0sN
    
    POOR STOCK PERFORMANCE
    The stakes are high. Some 438 SPACs that have raised over
$130 billion in total for mergers have yet to find deals, and
will be forced to return that money to investors if they do not
ink a merger within two years of their IPO. Even if they agree
to a deal, there is no certainty they can execute on it.
    "What you are seeing now is a market adjustment, and it is
incredibly challenging," said Jocelyn Arel, a partner at law
firm Goodwin Procter LLP. 
    The SPAC market bonanza allowed some companies to list that
would have been snubbed by IPO investors. The companies were
instead backed by hedge funds and private investors keen to
place speculative bets. 
    This bonanza has fizzled. Some 94 SPACs of the 131 that have
announced mergers since October 2020 are trading below their $10
IPO price, according to data compiled by IPO expert Jay Ritter,
a professor at the University of Florida. This indicates low
investor expectations that they will be successful or will be
completed at all.
    The average redemption ratio for deals completed in
July-August stood at 50%, up from the 24% average for the 40
mergers completed in April-June, according to SPAC Research. 
    "It is now common for a SPAC IPO that raised $200 million to
have only $40 million left in trust after most shareholders
redeemed before the merger was completed," Ritter said. 
    When telecommunications services company Syniverse
Technologies LLC agreed to merge last month with SPAC M3-Brigade
Acquisition II Corp, it had to offer most of its $265 million
PIPE in the form of convertible preferred stock that pays a 7.5%
dividend, rather than common stock. 
    The SPAC managers agreed to restrictions to selling their
stock for up to a year, and made vesting of 30% of their shares
contingent on them trading 25% above the deal price for 20 days
in a month.
    Syniverse declined to comment. M3-Brigade did not respond to
a request for comment.
    "We clearly hit an inflection point and it was probably only
a matter of time before the market slowed," said Christopher
Barlow, partner at law firm Skadden, Arps, Slate, Meagher & Flom
LLP. 

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PIPEs get smaller as SPAC market deteriorates    https://tmsnrt.rs/3lfyEpg
Interactive link    https://tmsnrt.rs/3lif0sN
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 (Reporting by Anirban Sen in Bengaluru and Krystal Hu in New
York; additional reporting by Echo Wang in New York
Editing by Greg Roumeliotis and David Gregorio)
 ((mailto:Anirban.Sen@thomsonreuters.com; (within U.S.+1 646 223
8780; outside U.S. +91 80 6182 3583) Twitter: @asenjourno;))