The SPAC Squeeze is on: Sponsors with $770B in Built Up SPAC Buying Power and Sellers Demanding 29x Revenue
Dear friends and colleagues:
The pressure is building on every front for our popular new friend Mr. SPAC. For starters, the nine tech SPACs that closed deals from ’17 to ’19 are down a median of 72%. The 26 closed SPACs from the Class of 2020, back when there was less valuation pressure, are now up 38% after being up as much as 79% at year end but then selling off during a rocky earnings season. We will continue to track maiden quarterly results after de-SPACing with keen interest. The 76 tech SPACs with announced and pending acquisitions have a contracted floor price of $10.00 due to redemption rights up until they close those deals. Meanwhile, they trade at a median share price of $10.21! So what happens at closing time? Where would these stocks be in the absence of the minimum redemption price? For some perspective on these valuations, the top SAAS index is trading at 16.7x ’20 revenues while the 76 SPACs with announced deals are at 29x ’20 revenues (26 of which are pre-revenue).
Moving on to the eager, younger SPAC classmen – the recently minted SPAC IPOs – we have the problem of the SPAC Squeeze. On one side, each of these SPAC sponsors have to deploy their $300M by closing an acquisition, or lose their $10M of risk capital. Pressuring them on the other side are the sellers who are demanding a maximized auction valuation process in the hottest M&A market in history. If carried out successfully, that approach results in little cash trading hands, other than bankers fees ☺ , and an overpriced stock headed for a fall.
The SPAC Squeeze has caused a slowdown in new acquisitions with only 21 in the last four weeks versus 71 new SPAC IPOs. That in turn has caused a buildup of 363 SPACs filed and IPO’d with $771B in purchasing power. In the last 4 months, there were 212 IPOs and 76 announced acquisitions. Simple math says 5 SPAC acquisitions per week puts us at roughly one and a half years to burn off the entire backlog of SPACs, assuming no new SPAC filings, which is unrealistic. We would not be surprised to see the SPAC Squeeze put a crimp in the SPAC IPO spigot as SPAC and PIPE investors wait and watch how their mountains of SPAC money gets deployed. SPAC acquisitions on the other hand may accelerate as sponsors respond to the ticking clock on their funding.