Suddenly, no one likes SPACs.
Special purpose acquisition companies with pending deals are finding investor support has largely dried up. There are 26 sports-related SPACs with merger deals in place, and every one has fallen from the price spike they enjoyed on the news. Even more telling of the lack of market support: 19 of the SPACs are below the share price they enjoyed before news of their acquisition came out. It’s a far cry from last year, when SPACs often would jump on enthusiasm for deals and keep rising. DraftKings, for instance, quadrupled from news of its SPAC merger last April through the end of 2020.
“Is the market is taking a pause? Yes,” said Leon Wagner, head of his family office, LWPartners. “Should it be taking a pause? Yes.” Wagner is a longtime Wall Street veteran, the co-founder of Golden Tree Asset Management and a former member of the Milwaukee Brewers ownership group. “I’ve been in the business a long time, and I’ve never seen a market go up 10X like it has in the past year. There are probably a lot of issuers who probably shouldn’t have access to the markets.”
The slump for existing SPACs comes as the market for new IPOs hit a wall. There were just two filings for SPAC IPOs last week, compared to an average of 40 a week in 2021. The halt came as blank check accountants and attorneys looked to adjust to an SEC staff opinion saying some SPAC warrants may need to be reclassified as an expense on the balance sheet, depending on the legalese of how they are constructed.
The problem for SPACs that have made it to the market is that retail and institutional investor support for them has grown far more cautious. One reason: Investor money is flowing toward large, established stocks, which are expected to report strong earnings numbers due to the economic rebound from the pandemic, according to David Russell, the vice president of market intelligence at TradeStation Group, a brokerage. “We are seeing a shift back to big established companies and away from small, nuanced story stocks,” Russell said. “And that environment is not good for something like a SPAC.” Essentially, investors believe they can get growth from well-established companies, like Apple and Amazon, so they don’t need to buy into more speculative businesses like SPACs.
In addition to the macro environment, SPACs specifically are finding a hard time generating retail and institutional investor support for deals—leading to the declining share prices seen now. Retail investors are feeling burned after some SPACs have shifted business plans between a deal announcement and closing, while institutional investors see no benefit to buying in early.
One problematic area is with private investment in public equity (PIPE), the vehicle wherein institutional investors buy shares in a private deal with the SPAC, providing financing to close a SPAC merger and signaling to other investors their faith in the company.
“We’re not doing PIPEs now, and there are probably 100 other firms like us in a similar position,” said the principal of a hedge fund who asked not to be identified because it may affect the fund’s business. The fund stepped away from providing PIPE financing because lock-up agreements and insider trading rules mean PIPE providers are stuck holding SPAC shares, unable to sell if they want and, increasingly, getting stuck with paper losses as share prices slump. Those willing to provide financing are demanding much better terms or they will walk away, a situation that caused RedBall’s deal with Fenway Sports Group to fall apart in December. “I’ve heard anecdotally that deals are being negotiated down in value 20% to 30%,” added the hedge fund principal.
Sports SPACs are defined broadly as blank checks that state a sports-related business as a potential target in their prospectus or ones that have a sports figure—team owner, athlete, executive—as a participant. There are 39 sports SPACs trying to price their IPO and 49 actively seeking a target, in addition to the 26 SPACs trying to close mergers, according to Sportico’s Sports SPAC Tracker.
Only a couple of deals have recently seen their market support hold up relatively well. Mudrick Capital II’s merger with Topps has powered shares up 37% since the announcement, and dMY Technology II’s merger with Genius Sports (expected to close this week) has resulted in shares doubling. Yet even those are below their price peaks, 4% and 36%, respectively. Other sports-related SPACs are faring worse. Just one example of many: Atlas Crest, led by Ken Moelis, spiked more than $7 a share immediately after announcing it would buy electric plane venture Archer Aviation. Now it has tumbled almost in half to under $10—more than 10% less than its price before the deal announcement. Quite simply, investors don’t feel the need to buy in regardless of the quality of the people and deals involved. “You need a big, fundamental buyer to support prices,” added the hedge funder. “And if Fidelity doesn’t feel any urgency, I don’t feel any urgency.”
Market participants believe the slump in SPAC shares is largely a natural evolution given how hot the market has been. “The supply of SPACs is off the charts this year,” said TradeStation’s Russell. At least 567 SPACs have filed for or priced an IPO in 2021, according to data from SPACalpha.
The reversal in the SPAC share process means there are probably some good deals to be found among announced SPAC mergers, but not without some lingering risk. “The doomsday scenario is the SEC strings this out to where the PIPE investors are no longer obligated to stand up to their PIPE commitments. I don’t see that happening, and I don’t believe that’s the SEC’s intention,” added investor Wagner. “This is really where the market should be—an investor is going to have to figure out what companies and management teams are going to perform and which aren’t.”