SPACInsider contributors Matt Cianci, Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among inflation-resilient companies. We look at why they are compelling and why each could be a fit for a blank-check merger.
What’s scarier: a global pandemic or inflation? We’re about to find out, as bullish hopes for the emerging post-pandemic economy are increasingly being lassoed down by fears of inflation and rate-hikes. The CBOE’s volatility index, VIX, hit its highest point last week since last March.
On that particular peak, March 4, 2020, the US recorded a total of 36 COVID-19 cases and all of the worst was yet to come with the virus. And yet, for investors, May 13, 2021 was roughly as scary, according to the VIX.
SPACs really didn’t need one more source of market malaise, having already hit a slump due to regulatory uncertainty and a certain amount of saturation that was the asset class’s own doing. But, while there is little that SPAC teams can do about macroeconomic trends themselves, they can adjust their target search to feed the market what it wants in this particular environment.
Unfortunately, SPACs by their nature tend to seek out high-upside targets that naturally come with a high degree of volatility as well. If that is not what investors want on the menu right now, there are twists on some traditional SPAC plays that may hit both birds with one combination.
Sierra Pacific Industries
Trees! Trees aren’t scary. With inflation lurking, commodities are a sanctuary, and timber is one of the most stable options out there. Now, there did just happen to be a wild run on timber futures this month with speculators looking at supply chain crunches and playing games.
But, that’s why timber’s stability isn’t in futures contracts, but the forests themselves. Most take a generation to grow and longer than that to harvest. Sierra Pacific Industries (SPI) manages over 2 million acres of timberland in California and Washington and is the fourth-largest lumber producer in the US, according to Forisk Consulting.
And, the winds of capital are blowing through those trees. The ninth-largest producer by the same list, PotlatchDeltic (NASDAQ:PCH), is up 16.9% on the year. Rayonier (NYSE:RYN), a REIT with 2.7 million acres of timber, is up 27.6% YTD, while lumber and wood composite processor UFP Industries (NASDAQ:UFPI) is up 42.9%.
All benefit from an expectation of continued homebuilding growth as well as investors hoping to stash cash into something sturdy.
But SPI is a lot more than an extremely plentiful woodpile. It has used technology to maximize its efficiency in one of humanity’s oldest industries. Up to half of “wood waste” left over from milling used to be discarded as mills turned trees into boards. But, SPI uses an array of sensors and lasers to optimize cuts and uses every leftover flake or fiber for something, whether turning it into paper products or supplying it as a source of bedding for livestock.
All of SPI’s sawdust fuels the boilers for its steam-powered machinery or goes into biomass co-generation stations at their mills. This activity, plus the fact that its uncut timber is actively scrubbing CO2 from the air, make it a strong magnet for ESG investment as well. Since 1990, SPI estimates that its trees have removed the CO2 equivalent of emissions from 24.8 million motor vehicles from the air.
This ESG element makes it potentially attractive to a wide array of SPACs, but American Acquisition Opportunity (NASDAQ:AMAO) stands out as a particularly apt fit. It is hunting for “land and resource holdings companies” with green elements to them.
American’s trust size of $105.1 million may be about the right size to get a deal done as well. SPI is a family-owned business and may be wary of suits showing up to take a piece of the farm, but they may be more persuadable if it is a small stake.
SPI’s timberland is about 26% smaller than Rayonier’s, which has a market cap of $5.2 billion. A proportionate valuation would therefore value SPI at roughly $3.8 billion. At that mark, American could bring a decent-sized PIPE to a deal and still give the owners the upside of a public listing while leaving the family with 90% or more of its equity.
But what if you want commodities exposure, but just want cooler commodities? Well, those ESG benefits from a public SPI might be someday available as a traded commodity packaged by Xpansiv.
Xpansiv was originally founded in San Francisco, but since its 2019 merger with CBL Markets, it has been most active and headquartered in Australia. The duo combined to provide an exchange market for ESG commodities ranging from Australian Renewable Energy Certificates (RECs) to carbon offsets and differentiated fuels. It also provides analytical tools to help fund managers to assess the ESG exposure of their portfolio and outside options in hard numbers.
Last month, it announced a partnership with blockchain network Daml to transform raw physical commodity data into tradeable ESG products. It also entered the UK and European markets by acquiring OTX in March. OTX operates a unique exchange of compulsory stock obligations (CSOs). CSOs are bilateral contracts used by energy companies to comply with EU regulations requiring they maintain certain levels of fuel in reserve, not unlike commodity futures contracts.
This rapid expansion of course leaves out one valuable piece of geography – North America. Financial Review reported in January that Xpansiv was looking at a 2021 IPO on the Australian Stock Exchange. But, given how quickly it has been moving since then, why settle for a minor exchange?
Should the new administration put through more climate legislation, US-based fund managers may be even more pressured to increase ESG exposure, while also seeking tools that increase their confidence that each ESG play is bankable as well.
It has raised about $78.5 million to date, including from strategic investors BP (LSE:BP), S&P Global (NYSE:SPGI) and Macquarie (ASX:MQG). Many SPACs could be looking to take Xpansiv to an America exchange, but AMCI II, which has filed for a $175 million IPO but not yet listed, is an intriguing fit as its CFO Patrick Murphy formerly served as managing director of Macquarie’s commodities division.
Whether inflation rises or not, investors can be reasonably certain that humans will be traveling and renting again, with landlords little concerned with what the consumer price index is doing. Many SPACs have already made deals with this thesis in mind, but not all have reaped immediate windfalls as a result.
Gores II (NASDAQ:GMII) announced a much-hyped $2.2 billion combination with lodging startup Sonder in late April, but has not roused the market with it, falling to a Thursday close at $9.89. This is a surprisingly muted response to the Gores team, which has had some of the past year’s most valuable deals.
Generally, the market is interested even when a Gores SPAC has gone in a less flashy direction, as Gores V (NASDAQ:GRSV) did when announcing a deal to combine with the Ardagh Group’s aluminum recycling division. Gores V still closed yesterday at $10.22, well above other SPACs with deals in hand from hotter sectors.
Some of the market misgivings about Sonder may have been more about its valuation or questions of whether it could hit its robust projections. Blueground operates a similar model but is more compact and has fewer variables at play.
Blueground Co-founder and CEO Alex Chatzieleftheriou is a former consultant with McKinsey who felt the market was missing an option for firms to have predictable rate for sending out an employee to a client location over an extended period of time. His company operates as a property manager that pays building owners for 100% occupancy rates no matter what and gets consistent tenancy by keeping corporations with frequent travelers on tap.
For companies, Blueground is 30% to 50% cheaper than having an employee expense a hotel four to five days a week and Blueground’s average stay is six months. It now has properties in eight US cities, five European locations and Dubai, but plans to expand to a total of 50 cities by 2023.
The company also has a fintech element as it lends to building-owner clients to pay for renovations and furnishings to keep units up to date. With lending rates following inflation, this revenue as well as its management fees should be unharmed, if not outright benefiting from an inflationary environment.
This stability in occupancy benefits both its clients and Blueground itself, and it said it had grown revenues by 200% in 2018, ahead of a $50 million Series B in 2019. This brought its total outside funding to about $77.4 million, but it has not held a round since.
Sonder plans to use the proceeds from its deal with Gores II to rapidly expand its geographical footprint. While, this may not be the best approach for Blueground’s model, it could likely put capital work further deepening its service model with customer companies and lending offerings to property owners.