Are SPACs at risk?
The SPAC news has been rather muted the past few days, and while it promises to ramp up starting tomorrow with two shareholder votes to complete combinations (GSAH and BWMC), it has left us all some time ponder some of the other world events currently happening. And you can’t throw a stick without landing on something about the “novel Coronavirus”. It remains to be seen if the virus becomes a global pandemic, but its presence has already had a substantial impact on a number of industries. Aviation and tourism, most significantly. So what does this mean for SPACs?
Many will point to the SARs epidemic as a guide where there wasn’t a significant, lasting hit to the global economy, but in the past 15 or so years, we have become far more dependent on China. For instance, the LA Times noted that there were only 100 Starbucks locations in China in 2003, when SARs arrived, but in 2020, that has grown to 4300 locations, half of which are currently closed due to the Coronavirus outbreak. Most likely, there will be some economic repercussions to the economy, the question is, how much of an impact and for how long? However, what does that mean for SPACs currently searching for targets and more importantly, what about the SPACs with announced combinations?
Let’s consider Far Point Acquisition Corp. (FPAC), which announced their combination with Global Blue, on January 16, 2020. Global Blue, which is a “strategic technology and payments partner empowering merchants to capture the growth of international shoppers“, was an extremely well received deal, with the share trading all the way to $11.30 upon announcement. It’s since come down a bit (which is a typical pattern), but currently trading around $10.75 per share. However, Global Blue is highly dependent on international travel. In fact, as you can see in the slide below (taken from FPAC’s presentation), 40% of international shoppers are from China (zoom in, since it might be tough to read). And yet, between the outbreak of the virus and Jan. 31st, nearly 10,000 flights were cancelled and this was during the Chinese New Year when many citizens travel during the holiday break (and a prime time to shop internationally). Plus, the list of airlines restricting travel has gotten increasingly longer as the virus has taken hold. No matter how you slice it, this has to be painful on some level for Global Blue.
So the larger question is, how does this affect the currently structured deal. Well, their transaction multiples are probably going to increase as they’ll most likely need to adjust down their 2020E projections, but keep in mind that their peer group will need to do the same. However, none of the companies in their peer group are as dependent on international travel as Global Blue, so unfortunately, Global Blue is going to feel it a little more. The result possibly being that Global Blue might start to look a little expensive. Nonetheless, its doubtful Global Blue will want to re-cut their deal since once we get past the Corona Virus (it can’t last forever), its still a great company. They’re not going to want to go public with a cut to their valuation and there is no penalty or termination fee if they walk away. As a result, re-striking the deal seems unlikely, so investors may need to ask themselves if they’re willing to take a little (possible) short term pain for long term gain.
Alternatively, FPAC still has four months left until they expire mid-June, but their outside-date is August 31, 2020. FPAC could theoretically just ride this out and even extend until conditions improve and investors feel more comfortable with the transaction.
However, what about the SPACs currently searching for targets? Notably, the SPACs with a focus on companies in Asia or China? There’s a case to be made that the economic impact to companies in the region means SPACs could acquire some really good companies at a price they wouldn’t have been able to achieve pre-virus. However, the problem with a SPAC is always timing. When does this virus start to wane and can you get a deal done before you run out of time. Extending gets expensive.
Something else to consider: Once China is over the hump with dealing with the Coronavirus, the government will be especially motivated, for both economic and social reasons ,to throw a whole lot of additional stimulus at their economy. And if we want to look at previous outbreaks again as a guide, markets rebounded in a big way (see chart from the Financial Times (FT.com), below)
The wild card is if this becomes a long and protracted, global pandemic that results in a significant hit to company business models. It’s not out of the question and we’ll need to keep an eye on companies like Global Blue and Meten Education. For now, it looks to be mostly short term risk for the announced SPACs with targets directly affected by the outbreak. It will be interesting to see how the SPACs address it and if further iterations of presentations incorporate the coronavirus into their marketing materials. For now, it’s wait and see.