Last Monday (Nov. 9), “value” stocks within the traded equity markets outpaced their “growth” counterparts by the widest margin for any single day in nearly a century. The next day saw more of the same. Investors dumped out of fast-growing technology holdings in favor of companies negatively impacted by the coronavirus outbreak for the third-largest value beat since the 1930s. There have only been two comparable rotations in history (1975, 2000), and both led to greater market shifts towards value equities, so it’s reasonable to wonder how sports-centric SPACs would be impacted if history repeats itself. Conversations with several SPAC insiders indicated if investors are going to prioritize value companies over growth companies, SPACs will eventually follow suit.
Our Take: Joe Biden’s victory in the presidential election, promising news about a COVID-19 vaccine and the anticipation of higher inflation moving forward all likely contributed to last week’s rotation. Edward King (co-CEO, Acies Acquisition Corp.) said the recent developments have “enabled people to predict with greater degree of confidence how the world is going to unfold and the timing [for those events].” But the belief that the tech sector may have run its course (at least in terms of outpacing the balance of the market) may have also played a factor in the market shift towards value names. Consumer internet and technology companies were among the biggest beneficiaries of nationwide lockdowns and the subsequent transition to a “new normal” (think: Zoom, Netflix, Amazon). Unless a portfolio manager believes long-term shelter-in-place orders are likely to be enacted again in 2021, it is hard to see how the sector could keep up the momentum it has held over the last eight months.
SPACs are flexible vehicles for privately held companies to access the capital markets. But it’s important to remember equity investors are the source of that capital. So, if the markets are going to start prioritizing value over growth, SPACs would be wise to pivot accordingly. We saw DMY Technology Acquisition II’s recently announced deal with the sports data and technology company Genius Sports was met with a tepid response (shares continue to languish around $10), not the bump the likes of DraftKings received following its reverse merger.
It’s likely to be difficult for SPACs raised with a growth focus, particularly those that have accumulated domain expertise in a specific field, to quickly abandon their approach. So, look for those SPACs to continue their pursuit of the acquisition targets they previously identified—just at lower price points (think: a company that was looking for 20x EBITDA may now only be able to command 15x based on where the comps are trading). SPACs in that position may also decide to shift gears within the same industry as a new set of opportunities emerges with the market rotation. In other words, instead of targeting a sports betting operator with high growth prospects that eats cash, they’ll look for a company that regularly throws off cash.
Established SPACs more generalist in nature will find it easier to pivot. But the market shift is likely to have a greater impact on the formation of future SPACs. King said he’s anticipating “new SPACs coming to market will be equally oriented and interested to help value industries and companies with their capital needs, so aiding the economy’s return to normality.” Ticketing, F&B and regional sports networks (which throw off a lot of cash, but lack the long-term growth prospects) are among the sports-centric businesses that have been locked out and would presumably see increased interest from those SPACs.
Generally speaking, pro sports teams have not made for good public companies. But a widespread shift towards value stocks would seemingly also make them more attractive to investors. If RedBall Acquisition Corp. can finalize its deal with Fenway Sports Group and the combined company ends up trading well, look for other pro sports franchises to try and replicate the approach as a means of capitalization. The prospect of another lockdown could lead to an abundance of pro sports ownership opportunities becoming available within the next year (more on that later in the week). For what it’s worth, Madison Square Garden Sports (+14.5%), Liberty Media Corp. (+14.5%) and Manchester United (+12.5%) all popped last week.