Eric’s Top 3 SPAC Targets – FinTech

Eric’s Top 3 SPAC Targets – FinTech

SPACInsider contributor Eric Weidemann this week compiled his three favorite potential SPAC targets in the financial technology space. We look at why they are compelling and why each could be a fit for a blank-check merger.


TransferWise

FinTech has traditionally been one of SPACs’ favorite sectors but it has been a while since we’ve seen a sizable deal in that space. Fifteen SPACs that are currently searching for a combination target have specified either fintech or business services as their focus, with two more filed to list in the near future.

It is likely that at least one of these has picked up the phone to give TransferWise a call. The London-based international money transfer service has had a hot couple of years receiving a $5 billion valuation following a $319 million secondary share sale in July. This represented a 43% hike in its valuation since May 2019.

The 10-year-old company has raised $1.1 billion to date, according to Crunchbase, and has been profitable since 2017. But, if it is considering going public this year, a SPAC may prove to be a smoother path than an IPO due to the pandemic’s disruption of international remittances and travel.

Courtesy of TransferWise

TransferWise announced that about $54.3 billion (62%) of the roughly $86.6 billion it transferred in the 12 months ending March 31, 2020 crossed an international border. It took in about $26.3 million in pre-tax profits from about $391.2 million in revenue during this period.

While this represented over 100% year-on-year profit growth, this fiscal period ended just as the COVID-19 pandemic was kicking off.

The pandemic caused lockdowns and layoffs in many industries staffed by foreign workers, drying up a major source of remittances, while international travel – another major driver for international money transfers – largely halted. Early in the crisis, the World Bank predicted annual remittances to fall by about 20%.

Even with diversified offerings, this disruption could have been enough to put TransferWise in the red, as its announced pre-tax profit margin was about 6.7% last fiscal year.

TransferWise’s competitive edge has been in keeping low fees, which it achieves by building its own infrastructure in local markets – an approach requiring both time and money. If the unicorn wants to maintain its trajectory, now could be the right time for a trip to the public market via a SPAC.

From a SPAC’s standpoint, the temporary COVID-19 disruptions are likely to put TransferWise in a price range they are unlikely to see again once the virus passes.

The remittance industry is still expected to grow at a CAGR of 17.2% from 2020 and 2026 despite the current headwinds.

CommonBond

Another increasingly digitized financial sector facing uncertainty from COVID-19 is student loans.

CommonBond, which provides alternative student loan products through a digital platform, has raised $1.6 billion in total according to Crunchbase, but has not run an equity round since its $50 million Series D in March 2018.

Numerous layers of uncertainty surround CommonBond as student loans are a hot political topic two months out from a general election. And, it remains unclear when the pandemic will abate to a point where all college campuses can go completely back to normal.

Commonbond pic

That hasn’t stopped SPACs from combining with the dip on college life, however. In August, Megalith Financial Acquisition Corp (NYSE:MFAC) announced its definitive merger agreement with BankMobile, which provides digital banking services and payment services on college campuses.

Despite the bumpy road universities have faced with outbreaks and closings, Megalith’s $140 million deal continues to be positively graded by the market with the SPAC trading at about $10.30 early today.

As for CommonBond, as they said to the Graduate, I’ve just got one word for you … “bond ratings.” In June, CommonBond securitized an additional $225 million in loans at a AAA rate with the support of Goldman Sachs as structuring agent, co-lead manager, book-runner, and co-sponsor. Barclays, Citi, BMO and Guggenheim Securities served as co-lead managers.

That brought the company’s total securitized loan amount to over $2 billion in the middle of the pandemic and it went into August with three-year revenue growth of 327%.

If CommonBond wants a degree in public markets, it is sure to face tough quizzing in the IPO process given current market conditions but could find a long line of SPACs happy to buy the coming recovery of higher ed.

Robinhood

As Eric notes, there would be something poetic about a SPAC taking Robinhood public considering their trading platform is likely where many retail investors have started investing in SPACs. Watching the retail-driven price surges of an announced Robinhood-SPAC deal would just be, as the kids say, so meta.

Robinhood would not come cheap, however, as the seven-year-old investing app received a $11.2 billion valuation in its $200 million funding round in August. This came on the heels of news it had added 3 million new customer accounts in 1Q-2020 and roughly doubled the amount of money it makes on trades in Q2.

Courtesy of Robinhood

Ultimately, a deal for Robinhood would likely look like Gores Holdings IV’s $16.1 billion combination with United Wholesale Mortgage (UWM) last month, which saw UWM shareholders retain 93.6% of their equity in the transaction due to its scale relative to the Gores IV trust and PIPE.

That said, Robinhood’s stated mission of fundamentally changing investment and democratizing equities trading seems like exactly the sort of wagon Bill Ackman would like to hitch himself to. His SPAC, Pershing Square Tontine, and its $4 billion trust with up to $2 billion in forward-purchase agreements could potentially strike a deal with Robinhood that would land with a more traditional trust-to-enterprise value ratio.

Meanwhile, the Robinhood story would also seem to scratch many of the “big idea” itches of serial SPAC leader Chamath Palihapitiya, who brought three new SPACs to market this week. The largest of these, Social Capital VI, raised $1 billion in its IPO and Palihapitiya has consistently been able to pull together outsized PIPEs to bring deals home. He did this in September, raising a $600 million PIPE to accompany a $414 million trust in a $4.8 billion transaction to combine with digital home market place OpenDoor.

OpenDoor bears some similarity to Robinhood in that it has digitized the traditionally paperwork-intensive and fee-heavy process of homebuying by cutting out some middlemen and bringing tools directly to consumers via an app.

Despite having some strong winds at its back, Robinhood does have some rocky waters ahead with the uncertainty around the upcoming US elections and some concerns over how well it is educating its young customer base of investors about what they are really buying with their clicks.

It has also faced technical issues with trading outages that have led to it receive roughly four times more complaints to US consumer protection agencies than its competitors. Robinhood has responded to increased regulatory probing by hiring a slew of lobbyists and former regulators to engage with Washington on its behalf.

A SPAC combination could end up being the best way for Robinhood to lock in an increased valuation ahead of the election while it continues to play defense on a pair of PR and regulatory fronts.

Its other alternative – a sale to a financial services peer – would also likely prompt intense regulatory scrutiny as we’ve seen with Charles Schwab’s $26 billion acquisition of TD Ameritrade and (to a lesser extent) Morgan Stanley’s $13 billion bid for E*Trade. Morgan Stanley is also likely to be busy digesting its just-announced acquisition of asset-manger Eaton Vance.