Since DraftKings started trading April 24 after going public by merging with a special purpose acquisition company, its shares have rallied 174%. That eye-popping success has played a part in luring another three dozen sports-related SPACs to market. Since May, new SPACs have filed to raise a collective $34 billion, with one-third of that from sports SPACs or SPACs led by sports executives.
Yet while the pace of SPACs seems to be continuing unabated—October saw the largest-ever month for SPAC formation, in dollars—blank check firms are starting to experience some weakness. Recent SPACs from New York Islanders owner Jon Ledecky, Miami Dolphins vice chair Matt Higgins and former MGM executive James Murren are among those IPOing for less money than they filed to raise. The downsizing isn’t sports-specific: After Spartan Energy, from executives at global money manager giant Apollo, upsized its IPO by 20% in 2018 and recently closed on buying an electric vehicle maker (one of the most-desired investor targets), its follow-up SPAC, Spartan II, was forced to slash its IPO size by 38% this week.
“Having a significant number of SPACs successfully IPO in August, September and October—and [given the large] size of those IPOs—just soaks up a lot of the demand in the marketplace for new SPAC IPOs,” said John Mahon, a partner and IPO specialist at Schulte Roth & Zabel in Washington, D.C. “New SPAC IPOs that are coming probably face a bit of a challenge differentiating themselves and finding a way to appeal to the smaller pool of capital available at the moment.”
SPACs that are already public are finding themselves being squeezed too. Institutional investors that kick in additional “PIPE” capital to fund an acquisition by a SPAC are said to be pushing hard for better valuations on one side of deals, while target companies are pushing for higher valuations on the other side. Some popular targets, like Sportradar, initially considered going public by SPAC but now are weighing a traditional IPO, indicating a bit of the shine is off blank check deals. “I’ve talked with very senior Wall Street investment bankers that represent some of the most promising companies, and they say, ‘I would happily entertain an offer from a SPAC, but it’s the last form of capital I’m going to go after,’” said one hedge fund manager contemplating launching a blank check firm. “A strategic buyer has a balance sheet. Private equity has dedicated capital. A SPAC has contingent capital—it may or may not happen depending on if they get it approved.” Since SPAC shareholders have the chance to get their initial capital back if they dislike a proposed acquisition, enough redemptions can torpedo a deal.
Yet it would be a mistake to assume recent action is a sign of a bubble bursting—rather, SPACs are seeing the emergence of solid deal negotiations by all parties involved, according to Don Duffy, president of ICR, a company that advises executives on raising and executing SPACs. “You saw the market get very hot, and I think a lot of people are equating SPAC issuance to irrational exuberance and it really isn’t,” he said. “Once you find a target, you have to sell that deal. You’re seeing discipline in the market.” A crucial component for success lately has been a SPAC sponsor’s commitment to invest additional capital later on, a promise Atlanta Braves and Formula One owner Liberty Media included in its proposed SPAC announced last week, for instance.
The market is also discovering which situations are most ideal for SPACs, and which aren’t. Some types of businesses, like real estate, don’t seem well suited to SPACs, while others—technology, health care and sports—seem ripe for continued SPAC interest, according to Duffy. “Everything around technology in sports, if they’re big enough businesses, have to look at this as a potential alternative to an IPO. And I would bet that in 2021, you’re going to see somebody take a sports team with a SPAC,” he added.
For one, Duffy explained, the SPAC approach allows team owners to quietly seek out public deals without risking bad publicity if they can’t find one. Being public also could allow majority owners to let limited partners cash out more easily by selling to the public. Most importantly, SPACs would allow for structuring a deal that provides team owners with a level of control they may not be able to pull off with an IPO. For example, RedBall and Fenway Sports Group are discussing a deal to issue a minority of the sports conglomerate’s equity to the public, leaving control with John Henry and avoiding detailed disclosures of Red Sox financials.
“A sports team, if you look at the history, has been an appreciating asset. It doesn’t generate a lot of income, but it has this potential for fan base and fanfare,” said Duffy. “My gut is there are owners who want to equitize their balance sheet and still control a team but let fans participate.”
That means there should continue to be a place for SPACs, especially in sports. “The SPAC model has evolved over the years, and the sophistication of participants has increased over time,” added attorney Mahon. “As some of the SPACs that priced [recently] complete their business combinations, investors in those vehicles will look to recycle their capital into new SPAC launches.”