SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among esports companies and the sector’s adjacencies. We look at why they are compelling and why each could be a fit for a blank-check merger.
Few SPAC deals stir the market right on announcement these days, but the short list is: electric vehicles (EVs), social media platforms launched by former Presidents and, as of this week, esports.
Every SPAC that has announced a deal since the last week of July and closed Thursday trading at or above $10.60 fits into one of those categories – GGPI, DWAC and BRPM. The leader among these is of course Digital World for reasons that just might be less about its business sector than the particular individual at the center of the project.
But, B. Riley Principal 150 (NASDAQ:BRPM) comes firmly in second for price performance of recent deals, having announced it was combining with esports media platform FaZe Clan on Monday. It closed yesterday at $10.97. Unlike EVs, esports media remains a small market at present as it is expected to cross $1 billion for the first time in 2021. But it makes up for that in growth, as it is expected to nearly double to $1.8 billion in 2022 and this snapshot only looks at the gaming itself, while plenty of adjacent sectors feed into it on the software and hardware side.
Much of the growth anticipated for the future of the market is also set to come from consumers that are far from their prime spending years. FaZe Clan itself estimates that 80% of its audience is made up of 13 and 14-year-olds. The media landscape is going to look very different once Gen Z consumers come of age and become the most coveted media demographic.
Networks of influencers and streaming media content creators have taken the place of traditional television and movies for many younger viewers and, by the power of their young audience, they are likely to start crowding out old-model outlets in the years to come.
SPACs looking to follow Principal 150’s lead are likely to find themselves talking to 100 Thieves (the company, not the occupation).
Even more than FaZe, 100 Thieves has worked to translate their e-sports competitive gains into traction as a lifestyle and apparel company. This sensibility has been propelled by their ties to musician Drake, who has been a co-owner in the company since 2018. Its recent competitive results in tournaments with League of Legends, Fortnite, Valorant, and Counter-Strike have brought it in about $4 million, but the apparel side gives the company a firmer footing as a business.
The company has already attracted a number of sponsorships ranging from Boston Beer Company to Gucci and Lexus. But, it is also working to boost its ability to push products in the sectors where its own brand has credibility. Earlier this month, it acquired boutique gaming keyboard-maker Higround to serve “as an accelerator” for the brand, but the marketing synergies between the two are obvious as well.
100 Thieves have raised just $60 million in public outside rounds to date since its 2017 founding, but there are plenty of initiatives SPAC capital could be put towards. In 2020, the company lost out in a very public courtship of e-sports streaming star Ninja, who ultimately signed an exclusive deal with Twitch. It was more successful in signing YouTube stars 2Hype last year, who brought 18 million subscribers to the platform via their basketball-themed challenge videos. But the esports side of the business already raised it to the 5th most valuable esports company of 2020, according to Forbes, right behind FaZe.
A SPAC transaction could give 100 Thieves the cash to lasso headlining talent to its agency or continue to roll-up gaming-specific computer hardware companies and leverage its brand to make this a premium gaming lifestyle play on both the apparel and hardware side.
Drone Racing League
But, if SPACs are going to be getting in early on all this, why not a whole league?
The Drone Racing League (DRL) is for sure an early-stage opportunity, valued in its last capital raise in December 2020 at just over $200 million, according to Pitchbook. But, a lot has happened since then.
For one, the league now has its competitors piloting their drones through neon-lit obstacles in first-person views via VR headsets. An expansion of this setup to give the audience a (virtual) driver’s seat to the action appears to be close at hand, but could be accelerated with investment. The league’s streams that have already gained syndication on NBC’s platform, which would likely be all too happy to integrate new tech to its Peacock offerings if available.
DRL also secured a buzzy sponsorship in September, with cryptocurrency Algorand signing a deal with the company reportedly worth $100 million. Like its video-game-playing peers, the Drone Racing League also dabbles in hardware.
DRL designs and manufactures the drones used in its events which can reach speeds of up to 90 mph, and it is increasingly making the same machines available for consumer purchases. The overall drone market is expected to hit $58.4 billion by 2026, and while racing drones may only ever occupy a slice of that market, that may be plenty for a first-mover.
What about the games that these esports competitors are playing, though? The video game developer market is a heavily consolidated business at the top, but there are potential targets among the makers of the most popular competitive games.
Bungie had been an indie game-maker before being acquired by Microsoft (NASDAQ:MSFT) in 2000. It then played a major role developing in Microsoft’s smash hit Halo franchise before being spun off in 2007. On its own again, it has launched the Destiny franchise which has largely come to supplant Halo as a leading multiplayer shooter.
The market has also changed since the initial release of Halo. Back then, Microsoft was happy to take a loss on the production costs of its Xbox consoles as long as players kept buying enough $50 games like Halo to make back the margins. Now, independent studios like Bungie charge subscription fees to players to access new levels as well as spot fees to customize one’s avatar, turning popular games into something more akin to a software-as-a-service (SaaS) product.
The Destiny game has also become a go-to arena for the competitive esports scene, and access to public markets could help Bungie leverage more capital for innovation. Plus, if retail traders are able to get behind Gamestop (NYSE:GME), why wouldn’t they have enthusiasm for the company that is stocking its shelves with games?
In the second half of 2021, it has taken a buzzy hook for SPAC deals to be immediately well received for better or worse. And, while SPAC deals with mobile game developers have been hit or miss in the market, the eyes of younger traders are firmly fixed on the prestige competitive games that Bungie is well positioned to put out.
A SPAC deal now could also come at a time of strategic opportunity as Bungie’s top competitor Activision Blizzard (NASDAQ:ATVI) has slumped 15% on the year amid trip-ups in certain game launches and internal scandals.