Last Tuesday, Bloomberg reported Horizon Acquisition Corp. II—a SPAC led by Los Angeles Dodgers minority owner and former Guggenheim President Todd Boehly—was “in talks” to take Sportradar public. Sportico followed up five days later, reporting the blank check firm has an agreement in place to do just that at a $10 billion valuation. Speculation suggests the SPAC will need to bring $2.5 billion to the table to get the deal done. Attempts to reach Horizon went unanswered and Sportradar declined to comment on the figure. However, if accurate, that would mean Horizon, which raised $525 million from its IPO and over-allotment sale, still needs to raise a $2 billion-plus PIPE (private investment in public equity). With $HZON shares flat since the possibility of a merger first broke, that could be a challenge.
Our Take: While we don’t know for a fact that PIPE investors (think: large cap financial institutions) haven’t already committed to putting up the money at closing, it seems unlikely. Typically, a sponsor who has sold a PIPE would announce the deal and take a victory lap discussing all of the high-profile names they are bringing in.
When news of a deal leaks, the market reaction to that information can certainly validate the valuation (i.e. the price runs up). Such a positive response would theoretically help sell the PIPE since investors benefit if the market value of the company rises in connection with the news of the deal.
But the flip-side of this is a scenario, in which the stock price does not serve to validate the valuation and in turn adds to the difficulty of selling the PIPE. In such a case, the party trying to get such a deal done could attempt to renegotiate the deal price and/or attempt to secure the PIPE by using a portion of the sponsor’s economics to give the PIPE investors comfort in their investment. For the record, the reason Horizon or any SPAC needs more money than they have in trust is because there are costs associated with the SPAC process. In addition, often shareholders of the target company (i.e. Sportradar) may be getting liquidity in connection with the deal, and some SPAC shareholders may elect to redeem their shares in connection with the vote.
In this case, $10 billion dollars is a huge valuation. It’s six times what dMY Technology Group II is buying into Genius Sports at, and should the deal close, the Horizon-Sportradar merger would be the largest SPAC valuation ever awarded to a sports-related company. So, it’s not particularly shocking that retail investors have reacted tepidly to the leak. However, as long as the price holds above $10.50 (it was $10.81 at yesterday’s close) and the PIPE can be secured, then the deal is likely to get done. The price needs to stay in the $10.50 range because of the redemption risk. The closer the share price gets to the trust price, the more shareholders are likely to redeem. If too many shareholders redeem, there may not be enough cash to close.
Bankers will tell you that if a SPAC sponsor manages to get the PIPE sold, it is validation of the deal for all parties—including the retail investor. However, we—and everyone else—have taken note of recent volatility and weaknesses in high-flying stocks and read about a potential shift from high-flyers into more value-oriented stocks. In that scenario, today’s PIPE investors are placing a bet on market conditions (i.e. the investors’ willingness to pay exorbitant sums for the prospect of growth), not necessarily the underlying company. It also seems highly unlikely the r/Wallstreetbets and StockTwit crowd is looking to the institutional mindset of Fidelity, Wellington and T. Rowe Price to validate their views.