Two years ago, DraftKings went public by special purpose acquisition company and seemingly single-handedly sparked a wave of sports-related SPACs. After DraftKings’ SPAC shares rose more than 600% from the deal announcement, 162 sports-related SPACs formed, according to Sportico data. These days, however, the unbridled enthusiasm of earlier times has given way to uncertainty, with dozens of SPACs canceling IPO plans and hundreds of others finding bigger hurdles to deals.
“What’s been shown over the past year to 18 months is that not every SPAC is successful,” John J. Mahon, a partner specializing in SPACs and IPOs for the law firm of Schulte, Roth & Zabel, said in a phone interview. “SPACs have been around forever, and they have gone back into a quiet period periodically, and I think everyone has expected them to do that.”
So far in 2022, 54 SPACs have pulled the plug on plans to hold IPOs, according to SEC filings. Among them are 11 sports-related SPACs, including a $2 billion proposed IPO for Spinning Eagle Acquisition from Jeff Sagansky and Harry Sloan, the same duo that took DraftKings public. Other previously successful SPAC sponsors, such as Los Angeles Dodgers co-owner Todd Boehly, Seattle Kraken billionaire owner David Bonderman and billionaire boutique banker Ken Moelis, have also pulled proposed IPOs this year.
Still, the market appears quiet only in comparison to last year. At this point in 2021, 306 SPACs had held their IPO, compared to 57 SPAC IPOs this year. But 2022’s year-to-date volume is nearly equal to all of 2019’s blank check IPOs, according to data compiled by SPAC Alpha.
And sports-focused SPACs continue to get to market: soccer and baseball executives including Paul Conway and Randy Frankel raised $75 million in February to pursue a European soccer team; Mario and Michael Andretti had a $200 million IPO in their eponymous SPAC; and broadcast veteran Bob Prather closed a $175 million IPO to seek a sports or media entity. “The SPAC IPO issuance today reflects a more normalized cadence of deals,” said Lee Stettner, co-head of capital markets at ICR Capital, in a SPAC study the firm released yesterday.
There remain 30 sports-related SPACs still trying to hold their IPOs, including one led by Tiger Woods, plus another dozen that registered SPAC names with the SEC and may never file IPO paperwork, including a second A-Rod SPAC and a clutch planned by serial SPAC sponsor and Golden State Warriors part-owner Chamath Palihapitiya.
The toughest market of all may be for active SPACs seeking targets now. There are 609 active SPACs seeking merger partners, with 68 of them sports-related. Share prices are down across the board as investor enthusiasm has waned. It’s now typical for SPAC shares to trade at a discount to their trust value—the amount of money shareholders can elect to collect prior to a merger. A year ago, SPAC warrants—rights to buy future shares—were considered to have a fair value of $1, all else being equal. Today the average warrant trades at 47 cents. Executives at some active SPACs, speaking on background, report that potential merger partners continue to demand peak valuations to go public, despite the market weakness.
Those SPACs that can find deals are having trouble closing them, because investors are electing to redeem their shares for trust cash rather than roll their equity into the merged business. There are 117 SPACs that have signed agreements to merge but have yet to close the deals. Among them, RedBall, which struck a deal with SeatGeek in October, and B. Riley Principal 150, which expected to close a November merger agreement with the esports collective Faze Clan weeks ago.
“The average SPAC closing a deal in Q1 2022 had redemptions of 85% +,” a hedge fund manager specializing in SPAC deals told Sportico via email. The executive asked not to be named because the firm is a sizable owner of shares in multiple active SPACs. “Redemptions are so high because SPAC investors have to recycle their capital because their portfolios are already stretched thin from all the SPAC IPOs last year. And there is not enough fundamental buying interest to counterbalance those redemptions. I don’t see this changing in the next 12 months.”
The stretched market means the early post-DraftKings SPACs are likely to run into the end of their stated time period for finding an initial business combination.
The first in line is sports-focused Bull Horn Holdings, in which Baron Davis is a participant, which sees its deal window closing May 3. The company has scheduled a shareholder vote for late April to extend the window six months, until November. At such a vote, shareholders can elect to redeem their shares for trust capital potentially liquidating the SPAC. That’s not a given, because Bull Horn shares were trading at $10.10 yesterday, equal to the trust amount. The company didn't respond to a request for comment.
Eight SPACs have liquidated over the past three years, and if Bull Horn closes, it will be the first sports SPAC to dissolve since the very first sports SPAC—Sports Properties Acquisition Co., a 2007 effort by Hank Aaron, Jack Kemp and Mario Cuomo to buy a hockey or baseball franchise.
On top of all the market problems, SPACs are also facing tighter proposed SEC regulations, including greater liability for sponsors and underwriters for excessively optimistic business projections. Such rules could lead to another lull in the market as participants figure out what they can and can’t do. Any new rules most likely will apply to already active SPACs.
Still, SPAC demand dried up in 2007 and 2008, and the market returned eventually.
“At the end of the day there will always be a path for SPACs,” Mahon said. “I think some of the excitement about the structure may have dimmed slightly. I’d love to say there are 20 SPACs out there going to do deals in the sports space, but unfortunately they may have to wait.”