…..with a 1/4 warrant. Have we reached “Peak SPAC”?

(The below article was previously released in Monday’s SPACInsider Newsletter)

As many of you know by now, last Friday evening saw Conyers Park II Acquisition Corp. file for a $400 million IPO focused on the North American energy sector.  However, the Conyers Park II filing included a real shocker…for the very first time ever, a SPAC debuted with only a 1/4 warrant.  We all knew a SPAC would try this eventually, but even still….you had to do a double take.  Have we reached “Peak SPAC”? Well, there’s a lot to unpack here, so let’s start with some background on Conyers Park.

The first Conyers Park debuted as a $375 million SPAC (with a 1/3 warrant) back in mid-July of 2016, eventually topping out at $402.5 million after their over-allotment was exercised.  After announcing their combination in April of 2017, Conyers Park I closed in July, almost exactly one year later.  That combination was with Atkins Nutritionals, Inc. which, post-combination, became Simply Good Foods (SMPL).  As a point of reference, SMPL closed Friday at $24.08 and it is arguably, one of the all-time, best performing SPAC combinations. A very good deal. And the good news is, all the same exact managment team members are back for Conyers Park II.  Albeit, the Board of Directors is different this time around.

So who are the team members?  Well, as Executive Chairman, we have James Kilts, who is the Founding Partner of Centerview Capital Consumer, founded in 2006. Additionally, Mr. Kilts’s background includes having previously served as Chairman of the Board, Chief Executive Officer and President of Gillette from 2001 until it merged with The Procter & Gamble Company in 2005.  He was also President and Chief Executive Officer of Nabisco, Executive Vice President of The Philip Morris Companies and President of Kraft USA and Oscar Mayer. If you’re focusing on the Consumer sector, it really doesn’t get much better than this.  Although, I’d love to see a Kilts vs. Metropoulos throwdown in a consumer heavyweight battle.  Rounding out the team are David West, as CEO, and Bruce Ratzan, as CFO, both of whom also have extensive and impressive CVs in the consumer and private equity sectors.

So now that we’ve set the table, let’s talk about the current Conyers Park II’s structure and that eye popping 1/4 warrant.

As you can see above, these terms are clearly not going to make SPAC investors happy. Although, maybe that was the point.  Meaning, perhaps we’re at a crossroads with SPACs where the Conyers team (and Churchill II, to a certain extent) are looking to sell their IPOs to a different class of investors….i.e., sector investors, private equity investors, long only.

Hear me out…a real bifurcation in the product is building, which seemed to truly manifest with Churchill II, where A++ teams no longer want or need the “rented money” previously provided by SPAC investors needed to bridge that 24 month gap where the vehicle is still just a shell. The popularity now of SPACs is such that sector investors, who previously weren’t comfortable investing in them, are now much more familiar with vehicle.  As a result, due to a team’s truly stellar credentials and a verifiable and proven, prior SPAC combination, teams can now look to private equity and sector fundamentalists to bridge that gap.  A++ SPAC teams no longer need (or want) to make SPAC investors happy.  In fact, that was already sort of proven out with Churchill II, when SPAC investors all over the Street were bemoaning their extremely meager allocations.  Which, if the numbers I heard are true (less than 10% for many), for a $600 million deal that means the lions share of that book was given to non-SPAC players’ hands.

As a result, we could be witnessing a very real evolution of the product where traditional SPAC investors are relegated to only “yet unproven” or lesser quality deal teams. While that sounds extreme, so are the complete set of terms Conyers Park II is providing. By that I mean, it’s not just the 1/4 warrant alone in Conyers Park II that is leading me to believe this is true. It’s the fact that they’ve ALSO thrown in the warrant call for shares with a $10.00 trigger (which caps the value on the already puny 1/4 warrant) AND they can remove $1 million of interest earned on the Trust for working capital.  So it’s actually a one-two punch to the gut.  Not only is there very little value to the warrants now, and certainly not enough to get SPAC players interested, but they’re also reducing the potential redemption value to the share!  So to recap: no real value to the warrants + limited amount of yield = no traditional SPAC investors.  SPAC investors just got ghosted.

Here’s the thing, this IPO has not priced yet, but Deutsche Bank and Goldman Sachs would not have filed these terms if they weren’t reasonably certain that they could sell it. You don’t debut a “never-been-done 1/4 warrant” at $400 million without already hatching some chickens, not just counting the eggs. So, I have little doubt this deal is going to get done at these terms.  As a result, we’ll have Churchill II and Conyers Park II, or $1 billion in SPAC proceeds, in mostly non-traditional SPAC hands. If there is a third SPAC along these lines, well, two times is a coincidence, three times is a trend.  Then we’ll have confirmation.

Having said all that, this isn’t as terrible as it sounds.  There is always going to be a need for traditional SPACs and SPAC investors.  If the above bifurcation were to happen (or is happening), I highly doubt a future scenario where a team that has never done a SPAC before, automatically can command 1/4 warrant or be able to sell to a non-traditional SPAC investor base.  They’re still going to need to prove themselves first.  And that means, SPAC investors will still be able to get involved in excellent deals with quality teams, it’s just that they may only get to see them one time – with their first SPAC.

To be clear…very, very few teams will be able to command a 1/4 warrant as well as be able to sell the majority of their IPO to non-traditional SPAC investors.  In reality, we are talking (at least right now) only one, maybe two SPACs a year that can command these terms.

HOWEVER, in the short term what it does do is raise the bar for everyone else.  Now, teams that previously would have gone out with 1/2 warrant, are now going to be looking around saying, “hey, why do I only get a 1/2? I should have a 1/3”.  Except, it should probably be the opposite – they should really on get a 1/2.  Why? Because we have had an extremely limited number of 1/3 warrant deals that have performed well.  In fact, the only two that have performed well recently have been 1/2 warrants deals – Churchill I and Haymaker I.  Both of those deals have traded to ~$15.00 and neither struggled with “the burden of a 1/2 warrant”.

Alternatively, of the 1/3 warrant SPACs that are currently announced or completed so far in 2019:  CIC is trading at trust value ($10.23), TPGH  at $10.40, GTYH at $6.85, and TH at $9.10.  So none of them are doing all that well.  And let’s not forget the $1 billion behemoth, Silver Run II, which had a 1/3 warrant and closed their deal in 2018 with Alta Mesa Resources (AMR). That one closed Friday at $0.15. That’s not a typo, it’s really 15 cents. A nearly complete destruction of capital.  In fact, of ALL the 1/3 warrant deals that have completed in 2018 and 2019, only two were winners….TPG Pace Energy (MGY) and Gores Holdings II (VRRM).  1/3 of a warrant should truly only be given to a select few, elite teams.

All told, the 1/4 warrant is a big deal and we’re not fully going to know if this is “Peak SPAC” for awhile yet.  However, right now, there are going to be a lot of eyes on Conyers Park II, waiting to see what shakes out.