Marblegate Acquisition Corp. (NASDAQ:GATE) has entered into a definitive agreement to combine with a number of affiliated LLCs sharing the DePalma name.

The Delaware-registered DePalma companies are holders of New York City, Philadelphia and Chicago taxi medallion assets.

The combined company is expected to trade on the Nasdaq and close in the first half of 2023.

Transaction Overview

Marblegate has about $10.2 million in cash remaining in its trust after seeing 96.6% of shares redeemed as it extended its deadline to July 5, 2023, in December. This deal values the target companies at $750 million, plus the $5 million minimum cash condition.

The parties have not yet filed an investor presentation and some details are yet to be made public on this combination, but Marblegate’s profile page will be updated as more information comes available.

DePalma’s assets are valued to be the product of all of its taxi medallions multiplied by their collateral value. New York City medallions are to be the majority of this value as the terms require that total Chicago and Philadelphia medallion value shall not exceed $18 million.

Following close, Marblegate Asset Management, a hedge fund affiliate of the SPAC’s sponsor, will enter into a management services agreement (MSA) with the combined company. This agreement has not be filed in full, but it is described in the parties’ 8-K as:

“(i) evaluating, managing, performing due diligence on, negotiating and overseeing the acquisition and disposition of New MAC’s and its subsidiaries’ assets, (ii) evaluating, managing, negotiating and overseeing the origination, structuring, restructuring and workout of taxi-medallion loans and other loans held by New MAC (other than typical daily loan servicing activities), (iii) managing New MAC’s and its subsidiaries’ day-to-day business and operations in complying with any regulatory requirements applicable to them in respect of their business activities, (iv) evaluating the financial and operational performance of any of New MAC’s subsidiaries, (v) providing a management team to serve as executive officers of New MAC and/or its subsidiaries, including providing day-to-day financial, operational and other executive management services (vi) identifying, evaluating, managing, performing due diligence on, negotiating and overseeing the provision of debt or equity financing as well as the acquisition of all or a portion of target businesses or assets, in each case, by New MAC, and (vii) performing any other services for and on behalf of New MAC and its subsidiaries to the extent that such services are consistent with those that are customarily performed by the executive officers and employees of a publicly listed company.“

Quick Takes: So, an important point in understanding this transaction is understanding the history and relationship between the two sides up until this point.

Taxi medallions were originally issued by US cities to stabilize the taxi market. Requiring that every yellow cabbie own one was meant to provide quality control for drivers and a protective barrier of entry for cabbies who opted to make it a career.

But, the artificial scarcity of official medallions also led to massive inflation in their cost as supply lost pace with demand, to the point that medallion prices rose to over $1 million in 2014. Naturally, not every would-be cabbie had that kind of seed cash to start their driving career and so most took out loans to pay off the medallion over time.

Where some saw a crisis in the making, hedge funds saw opportunity and Marblegate Asset Management started buying up medallions and became the largest lender for medallion loans – largely through buying a sizeable tranche of failing loans from the National Credit Union Administration.

The problem remained thorny from a public policy standpoint, because even if the city were to supply more medallions to the market and reduce their now-commoditized price, this would put many cabbies underwater with their loans taken at higher prices. Ultimately, the market brought its own blow to the situation with the rise of ride-hailing services that swiftly cut into the taxi market share.

Therefore, those medallions no longer guaranteed a membership in a shared monopoly, but they did come with sometimes hundreds of thousands of dollars in debt. Similar to student loans, the clearly untenable situation required some compromise between lenders and borrowers and a variety of incremental schemes have been announced by the last two mayoral administrations.

Most recently, in August 2022, the city announced a debt relief program restructuring all medallion loans to a maximum principal balance of $200,000 with interest rates capped at 7.3%, monthly payments at $1,234 and all loans guaranteed by a city loan loss reserve fund.

Apparently, with some degree of certainty now applied to the assets, Marblegate is ready to get out of the game, in part.

In the past, when buying loans, it did so with Delaware LLCs, usually bearing the last name of characters from the 70’s and 80’s sitcom Taxi. It has been on record as a purchaser through (Elaine) Nardo Acquisitions and (Louie) DePalma Acquisitions.

What this SPAC deal appears to amount to is Marblegate using its SPAC to convert its medallion holdings into liquid, publicly-traded equity, while it will maintain the ability to reap management fees for running the entity’s day-to-day.

For sure, the existing loans are worth something, and with enough public information, Marblegate may be able to persuade more investors into this business. But, it does carry the sense being in the extra innings of a play that has passed, with the ongoing risk that political pressure will push the city into further relief compromises that would scrape more principal off the top.

Marblegate’s SPAC S-1 does perhaps give some hints at its strategy moving forward, however. The SPAC said it would seek out targets undergoing a restructuring in “often-opaque, under-covered enterprises”, noting, “corporate balance sheets are often restructured by swapping old debt for new equity or new debt and equity. Original lenders frequently lack the ability to serve as the company’s new owners, manage the enterprise or execute an exit transaction.”

The prospectus also specifically nodded to the market opportunity posed by US companies undergoing bankruptcy. Much of the SPAC’s management is made up Marblegate execs, but its president, Paul Arrouet, brings additional debt experience as a six-year senior managing director of Bear Stearns’ Distressed/High-Yield Trading and Sales Department until 2008.