Top 3 SPAC Targets – Recession-Proof Companies

SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among companies set to see increased demand among companies that could prove resilient of even benefit should the US tip into recession. We look at why they are compelling and why each could be a fit for a blank-check merger.

There have been rumblings on a number of fronts since late last year that after taking a nice skip and a jump coming out of COVID, the economy could be headed for another recession with just two many macro pressures to keep the party going.

Deutsche Bank officially called it this week, announcing that it expects a recession in the US and the euro zone area within the next two years.

But, there’s not only money to be made during boom times. Plenty of industries are recession-proof and in fact the companies in those spaces frequently have the sorts of qualities that SPACs would do well to target in the current environment. These are generally cash-generating businesses with fairly predictable futures in-line with their past performance and SPACs could all benefit from a stretch of deals that are less exciting but that live up to their ambitions.

In general, the companies that have good years during recessions range from the obvious in the form of discount consumer staples to the grim in the form of funeral homes, which see more work whenever economic growth stagnates. If one is looking for omens, Service Corporation International (NYSE:SCI), which operates about 1,900 funeral homes and cemeteries in North America, is up 15.1% over the past month.

99 Cents Only Stores

Meanwhile, Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) are up 18.5% and 7.6%, respectively over the same period but they aren’t the only discount retail chains around.

Los Angeles-based 99 Cents Only Stores have grown to 350 stores in California and Texas with experience on both sides of the market fence. Founded as a mom-and-pop in 1982, the chain IPO’d in 1996, but was taken private again in 2012 in a $1.6 billion buyout by Ares and the Canada Pension Plan.

Like many LBO targets, it has been working to restructure its debt in the years since and Oaktree Capital Management converted liens it had offered the company into a 27% stake in 2019 with Ares and the Canadians holding the rest, according to Pitchbook.

On the precipice of a period of likely growing demand, now might be a good time for all three of these shareholders to have some flexibility with their investment in the company and a SPAC deal could bring them liquidity options.

Also, at a time when there is uncertainty as to whether SPAC targets will be able to disclose projections, it never hurts to be a company in a category that is universally expected to benefit from prevailing economic conditions in the medium term.

It is also not a purely legacy player as it has been making a push into mobile recently with an app providing special discounts and loyalty rewards. Such a presence has become a basic necessity for retail companies in 2022, but proceeds from a SPAC deal could potentially propel these efforts further into buy now, pay later (BNPL) options or deeper loyalty integrations.

Misfits Market

But not all potential recession winners sport legacy business models. Not only are millennials more likely to order basic staples for delivery, but the pandemic accelerated this shopping behavior.

A July 2021 study found that 93% of Americans buy household staples online with 68% doing so through a subscription service, about two-thirds of which said they had been doing so for two years or less.

Supply chain realities make it easier for companies to warehouse and dispense non-perishable personal care and home goods this way, but there are still companies trying to make it work with the trickier perishable slice of the market. Delanco, New Jersey-based Misfits Market is working to make the produce aisle available for consumers ordering in this fashion.

It can’t be easy to drive high margins by sending commodity vegetables to buyers through the mail, but Misfits has found an edge by sourcing “ugly food” – fruits and vegetables that are unusual shapes and sizes and are normally discarded rather than sold through farmers’ normal channels. As it has grown, its buying power has also allowed it to get a discounted supply of prettier foods too and it now includes organic options as well as vegan meat alternatives.

Overall, Misfits thinks its model can hit at white space retail currently isn’t reaching in the food deserts of cities, suburbs and rural areas that don’t have a fresh produce aisle close at hand. As such, a collaboration with a traditional retail grocer wouldn’t be out of the question down the road.

It raised $225 million in a Series C-1 round led by SoftBank Vision Fund 2 in September, which brought its total outside equity capital raised to $526.5 million and its valuation to $2 billion. Given these ties, it could make for an intriguing target for SVF Investment Corp 2 (NASDAQ:SVFB), which is led by two SoftBank executives including Munish Varma who has focused on tech investments into evolving consumer behaviors throughout his career in private equity.

Mark Cuban Cost Plus Drug Company

Recession or no recession, people also don’t get to skip their medicines and SPACs have already been involved in efforts to keep medical expenses down in a number of ways. Much of this has been through biotech SPACs funding new discoveries, but many of those may wind up ultimately rolled out to consumers through the same system that tends to inflate prices at a variety of points on the chain.

Although it has a mouthful of a company name, the Mark Cuban Cost Plus Drug Company is doing important work at the less profitable stage of pharmaceutical development. Once patents run out and those medicines can be produced generically by anyone, few companies are willing to pick up the lower-margin dirty work to produce them at lower prices.

But that is Cost Plus’ focus and it has rolled out a number of generic medications at prices as low as 2% of the existing price. As its name conspicuously indicates, it is backed by billionaire Mark Cuban and thus has not had to tip its financials on the capital raise circuit much since its founding in 2016.

But, any company with the internal capacities to formulate and supply hundreds of medications must have already achieved some meaningful scale. At a time when retail excitement about SPACs also appears to be waning, a company aligned with a popular business figure could also be just the thing to spark it back to life.

Oaktree Acquisition Corp. II (NYSE:OACB), meanwhile, has a pending $2.25 billion combination with Alvotech, which takes the Cost Plus’ general approach one step further. It attempts to reverse engineer biosimilar medicines that generate the same effects as patented medicines with differing formulations and therefore can be sold without violating patent laws.

It has not yet set a vote date for completing its transaction, but it could potentially provide an positive example of what a SPAC path would look like to tempt Cuban away from alternatives.