November 23, 2020- Electric Vehicle Company Arrival to Go Public Through SPAC CIIG Merger. Are EV-Related SPACs in a Bubble?
Blank Check Company Longview Acquisition Strikes Merger With Healthcare Startup Butterfly Network . What Does the Market Think of this Deal?
Taubman and Simon Make Amends, Recut Merger Deal to Avoid Going to Trial. How Much Was the Price Cut and is it Fair to Shareholders?
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Transcript:
Welcome investors to the Absolute Return Podcast. Your source for stock market analysis, global macro musings and hedge fund investment strategies. Your hosts Julian Klymochko and Michael Kesslering aim to bring you the knowledge and analysis you need to become a more intelligent and wealthier investor. This episode is brought to you by Accelerate financial technologies. Accelerate, because performance matters. Find out more at www.Accelerateshares.Com.
Julian Klymochko: Welcome podcast listeners to episode 99 of The Absolute Return Podcast. I’m Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is Friday, November 20th, pretty chill week in the markets. This week, we did have a number of deals in the spec space, some interesting M&A news as well, that we’re going to get into today.
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- Let’s start with the blank check deals and that EV. The electric vehicle space is still hot, hot, hot, had a couple of them this week. Electric vehicle company Arrival announced a deal to go public through SPAC, CIIG Merger, we’re going to chat about EBV related SPACs, are they in a bubble?
- Blank Check Company, Longview Acquisition strikes a merger deal with healthcare start-up Butterfly Network. What does the market think of this deal?
- And lastly, wanted to really close the file on Taubman/Simon. They made amends, recut their merger deal to avoid going to trial. We’re going to chat about how much the price was cut? How compares to precedents? And is this ultimately a fair deal for shareholders?
ELECTRIC VEHICLE COMPANY ARRIVAL TO GO PUBLIC THROUGH SPAC CIIG MERGER CORP
Julian Klymochko: But let’s start out with electric vehicle SPACs. Those two fits like a hand into glove, don’t they? It’s just been a crazy time in SPAC-ville with all these electric vehicle deals. I swear I’m starting to lose track, but the new one that we had this week, in addition to some other rumours that we’re not going to get into, but perhaps next week podcast, we’ll see, but a definitive deal that was announced this week, British electric vehicle start-up Arrival, really just continuing that trend of electric vehicle companies going public via SPAC. They announced a business combination with the blank check company, CIIG Merger Corp, in a deal that values Arrival at $5.4 billion dollars, which is significantly higher than their last valuation, which is a super interesting dynamic, but it really shows that perhaps there’s a lot of competition to get this deal done. And perhaps CIIG Merger was the SPAC that was willing to assign the highest valuation in order to get them to sign on the dotted line.
A bit of background on Arrival. It competes with Rivian, which is another EV Company. They won backing from Amazon in the electric van space. They actually received a massive order to the tune of 10,000 vehicles from UPS, which obviously is huge. Shows, proof of concept and future sales. UPS is also an investor in the company. Additional backers include Hyundai, BlackRock, Kia. It’s two main products are buses and vans. Now let’s get into the price action on this one, truly exemplifying that SPAC pop that do like to see. I mean, we do like to see this one because we’re long both the CIIG shares and warrants that we bought as a unit at a discount to nav in the Accelerate Arbitrage Fund. So, some disclosure that we are long, this deal, and CIIG shareholders, the market loving this deal. Stock popped 65% this week on news of the deal. And really this is the story of the market remaining keen on electric vehicles SPAC deals and the bubble discussion that continues to pop up over and over again. You’ve got to remember that the entire SPAC market is roughly $93 billion dollars in market capitalization and electric vehicle deals are, you know, maybe 10% of that. So, call it roughly 10 billion. And so, there’s a lot of speculative activity in there, but it’s not a large dynamic of the market. For example, if we look at the market leader, Tesla, which has a market cap of about $500 billion of which Elon has about 20%. So, call that a $400 billion market cap of the most speculative, you know, bubble money in the world, accounting for 400 billion. So, if you compare that on a relative basis on the speculative money in SPAC EV stocks of 10 billion, you know, it’s hard to go too crazy on that because on a relative basis, Tesla is like the SPAC EV bubble if there is one, times like 40, right? What are your thoughts on the SPAC EV market and this Arrival deal specifically?
Michael Kesslering: Yeah, you alluded to some of the competition and I just wanted to point out that the enterprise value of the deal $5.4 billion dollars, that’s assuming a net cash position of $600 million and that’s from their investor presentations.
Julian Klymochko: Certainly, they’ll get no redemptions. It seems where the price is right now.
Michael Kesslering: Yeah, yeah, there certainly won’t if it keeps up. And so, the equity is being valued at $6 billion dollars. And now keep in mind that Arrival actually raised $118 million dollars last month, just in October of 2020 from BlackRock and a few others valuing the equity at that time at a pre-money valuation of $3.6 billion dollars. So, let’s call it a post-money valuation of $3.7 billion dollars ish. And when you look at this deal being struck, it implies, you know, in the range of 60% bump in valuation from one month ago from investors. So really great work from the Arrival team, but it really speaks to the competition within SPACs for deals that they were likely, as you mentioned, Julian, this sponsor team was willing to give them the valuation that they wanted, and hey, if you’re able to get that, great on the management team.
And it’s something that we’ve talked about before, where an IPO process, this company number one would be very difficult to IPO. We’ve talked many times about that being pre-revenue, but as well, you’re just negotiating as a management team, you’re just going to go negotiate with one counterparty on your valuation. So, you’re likely able to come to a wider range of outcomes, as opposed to the IPO range of outcomes. They really narrow it down, and it’s kind of a tried and true process. When you look at the company itself, Arrival as well, they’re really looking at a different niche than some of these other electric vehicle companies with the, say buses and delivery vans most I guess the main anchor order being from UPS, but as well, they plan on using these micro-factories that are closer to areas of demand.
They say that they could be deployed anywhere within six months using existing warehouses and infrastructure. So, I really don’t know how successful this approach will be. It’s a little bit unproven at this point in time. And to me just seems like a logistical nightmare, but if they are able to pull it off, I mean, what they’re telling their process is a lot less capital intensive and less of a carbon footprint. But if they are able to make that work kind of modular development, it could be quite innovative from a production standpoint as well. So, it’ll be an interesting deal to watch.
Julian Klymochko: What I find fascinating is this valuation lift that you talked about and likely that CIIG was willing to give them the highest valuation, but that’s, at least in the short term is looking to be a smart decision because CIIG shares at another 65% on top of that. So clearly the market thought that was a cheap valuation and they’re bidding up a pretty significantly, but nonetheless, another electric vehicle deal to add to the pile of what seems like dozens at this point. But certainly, this is a hot one folks. So certainly, if you’re involved, be careful because it’s going to be volatile and you’re in for a wild ride, no pun intended, onto the next one.
BLANK CHECK COMPANY LONGVIEW ACQUISTION STRIKES MERGER WITH HEALTHCARE STARTUP BUTTERFLY NETWORK
Julian Klymochko: Longview Acquisition, the SPAC sponsored by hedge fund veteran, Larry Robbins of Glenview. He announces a business combination with Butterfly Network, an innovative digital health company. That’s working to enable universal access to superior medical imaging. Now, this is an interesting one in terms of their technology. They have this device that you can basically plug into a smartphone and the device provides medical imaging like diagnostics that you can be portable with. So, it’s super cool concept.
The Company Butterfly Network was founded in 2011 and works to enable universal access to superior medical imaging. And the fact that I’ve found interesting is that two-thirds of the world has no access to medical imaging. So, this seems like a good play for emerging markets where they perhaps, you know, don’t have easy access to these sorts of diagnostics. Now that they have it in the form of just an easy to use mobile device. Then that seems like a massive market. They indicated that the total addressable market of ultrasound is 8 billion, certainly a sizeable, totally addressable market opportunity here. The company has raised more than $400 million dollars from investors, including Bill and Melinda Gates and focuses on industrial financial details. 2020, they’re expecting a revenue of nearly $50 million. They expect that to grow to over 300 million by 2024. So, they are forecasting a revenue kegger of roughly 65%. In terms of valuation, this SPAC deal values Butterfly at 1.5 billion comes with $175 million dollar pipe financing that valuation puts them at 10.6 times 2022 revenue, which I suppose, going out to 2022 on a new business or early stage business is somewhat speculative, but nonetheless, the market liked it. Longview stock rallied over 25% on news of the deal just today. And what we have been seeing lately is, you know, that momentum tends to carry on a go-forward basis over the next, at least a few days or weeks. If we looked at the one, we just spoke about CIIG. I rallied significantly the first day but continued to rally in the subsequent days after that.
So have a look at Longview, we’ve got to disclose that we are long, this one as well in the Accelerate Arbitrage Fund. I mean, it seems like we’re long everything in that fund. We have about north of 105 positions at this point in SPACville. So, what are your thoughts on this? Interesting healthcare deal. I wrote on Twitter over the past few months that I thought LGVW, Larry Robbins SPAC, Longview, it was really just, I wouldn’t say disrespected, but no one really cared about it in the market. The shares were just trading at around $9.70 and its NAV was like $10 dollars. So, if you bought it and they didn’t even get a deal and they liquidated it and then you’re guaranteed a 3% return and it seemed like no one cared about it, but those who did care were nonetheless rewarded with a 25% pop today, so pretty good one.
Michael Kesslering: Yeah, getting paid effectively to hold an option on Larry Robbins, capital allocation or not necessarily capital allocation but ability to find a suitable acquisition target, which seems like a pretty good proposition. And as such, I mean, this was our largest SPAC position. So, I mean that certainly as a shareholder certainly feels good to see when it’s up 27% on the first day of trading and Julian, you did mention the kind of momentum effect, I guess, after announcement of some of these hot deals. And I would like to note something that we were looking at all throughout the day. Today is that 27 million shares traded today in Longview as well, which is about two thirds of their float. So that’s an interesting dynamic as you see the float turnover in the days after announcement.
Julian Klymochko: And we’re seeing a turn from hedge fund arbitrageurs to more so retail speculators.
Michael Kesslering: Retail speculators, as well as there are some, I’m sure, some longer-term investors as well. So, a combination of the two certainly more long-term than a traditional merger arbitrageur, SPAC arbitrageur.
Julian Klymochko: What I find interesting is that Cathie Wood’s Ark has been buying one of Chamath SPAC. The one that did the deal with Opendoor, I believe that IPOB. Like you do have active managers coming into these posts deal at a massive premium. I believe Opendoor is trading at like a hundred percent premium to nav, and they’re still coming in and buying because they liked the opportunity.
Michael Kesslering: Yeah, I mean, it’s a premium to nav, but if you have a view on the proforma entity, perhaps it’s buying at what they perceive to be a significant discount, I mean, that’s, I assume what the rationale would be. Interesting to note in both deals that we highlighted today on today’s podcast that 100% of their current shareholders are rolling over their equity positions. We’d really like to see that in a SPAC deal, you love to see, you know, you don’t have existing investors keeping their skin in the game effectively. But as well, you have the Bill and Melinda Gates foundation, Baillie Gifford, you know, pretty high, well-renowned investors. And what I also found interesting is that when you look at a lot of these transactions, it is very much assumed that the sponsor team is just, you know, they’re just the capital and a shell for the company to go public. But when you heard Butterfly CEO talk about, Larry Robbins and the whole Longview team, they really talked about his connections in the industry especially within the healthcare industry that was really expected to help them moving forward and that he’s already opened up some doors for them. So, I think that’ll be something interesting as we move forward, looking at sponsors is just having the vehicle when there is an oversupply isn’t enough where you really need to be adding something more of value to investors. You look at any of Chamath SPACs I mean, right there, he is a marketing machine. So that’s something over and above the actual shell that they offer. And some of these SPACs do have something to offer. So, end of the day, we love to see the bump in price and hope that it continues to move forward as it turns out of their float.
Julian Klymochko: Yeah, that SPAC pop, truly exemplifying this upside optionality in SPAC arbitrage that we constantly talk about. And I always coined the phrase, the “heads we win; tails, we win big’ and that’s really just the name of the game in SPAC arbitrage, where you can get this great equity upside, double-digit return, but with the risk profile of treasury bills. So, you know, it’s a great trade that obviously we like and we’re fully loaded in our Arbitrage Fund within SPACs. But Mike, you really hit the nail on the head with respect to Larry Robbins. The guy has a great track record and a fabulous network. So, I just couldn’t believe the stock was trading so cheap because it seemed highly likely that he would strike a good deal and certainly, it appears that he did. You also have a good point, you know, they’re just not looking to earn their promote and leave. I believe Robbins’s hedge fund, Glenview, is participating in the PIPE financing. So, he’s actually paying $10 per share for stock and looking to add to value within the corporation’s growth. So that is another super interesting aspect of the deal that investors should take note because I mean, that just adds to the confidence.
Michael Kesslering: Absolutely, and then just another one last point on SPACs in general, I mean, ton of issuance this week, I’m sure we’ll be talking about it in future podcasts, but having the John Malone SPAC, you’ve had here, and I’m also a big Malone fan boy. So, both of us are very excited about that. Then you had rumours as well, over the last couple of days of Perella Weinberg the investment boutique investment bank potentially looking to list via SPAC. The only thing I’d like to note on that is I find it shocking that of all the investment bankers involved in the deal that would be both advising Perella Weinberg and then within the company itself. There has been no leaks on which SPAC is looking at them as a target. So, I find that quite interesting. Typically, investment bankers and lawyers, lips are usually a little loose in revealing some of these details. So, it’s interesting to note.
Julian Klymochko: Yeah, it’s cool that you mentioned that John Malone SPAC because not only am I a big fan, but I think it really legitimizes the asset class. And you’ve heard a lot of criticism, some of it perhaps warranted, but some of it just kind of hating on the asset class, but when people see John Malone is doing a SPAC, then, you know, the peanut gallery just shuts up. Cause, you know, they can’t really say anything after that because the guy is an absolute legend in business. So, it’ll be super interesting to see how that one trades and when it does, we’ll certainly be interested, but getting your hands on an allocation will be incredibly difficult, so wish us luck.
TAUBMAN AND SIMON MAKES AMENDS, RECUT MERGER DEAL TO AVOID GOING TO TRIAL
Julian Klymochko: Wanted to tie things up on some M&A news. We spoke of the recent drama between Simon and Taubman, who initially struck a deal pre COVID for Simon to acquire mall owner Taubman at $52 and 50 cents cash per share. COVID hit malls shut down. Simon did not want to pay that anymore. So, they sued to terminate the deal. They were about to go to court on Monday of last week and the Sunday evening before re cut a deal at $43 dollars cash per share, that was 18% lower, but certainly it seems like, it’s larger than we’ve seen these COVID precedents. For example, Forescout/Advent, we saw Tiffany/LVMH, which was just a low single digit price cut. Then we saw Advanced Waste Disposal, which was roughly about 8%. And I believe Advent/ForeScout was 12%, if I’m recalling correctly, don’t have my notes on me, but certainly we have seen an elevated number of repricing’s for deals that were announced pre COVID and the buyer threatened to sue, but none of them actually made it to court. They all settled for our price cat, which on the target side, I mean, Taubman stock was trading in the $30 dollars, mid-thirties range.
So, you know, it makes sense to take $43 dollars per share. It’s certainly understandable that Simon would want a lower price and that the board of directors of Taubman would agree to that just given the rapidly changing dynamics in the mall ownership space, given the pandemic, and it’s probably adjusted values over the long-term and just removes the uncertainty of litigation, even on a file like Tiffany or ForeScout where they said their business had fully recovered by Q4. Still to get rid of that litigation. Typically, it’s worth a few hundred basis points, price cut. So, this recut deal will save Simon about 800 million bucks. So definitely worth the price of trying to go to court and making a bit of a mess of it. But nonetheless, they’re backed on friendly terms, looking to close the deal quickly. Taubman shares rally to 8.5% this week on the news. Obviously, we’re happy, we are long in the accelerated arbitrage fund where basically just talking the book, this entire podcast.
Michael Kesslering: Yeah, it certainly has been, we’ve promised that it won’t be like that every episode. But yeah, this has been a rocky road for investors. And I think one thing that really factored into this is number one, you’re just seeing most of the deals get recut, but as well, reports really did seem to indicate that the judge as they were preparing to go to trial was really, really pushing both sides to settle out of court. And that’s something that you typically do see in these scenarios were, the last thing that the judge wants is for this to go to trial as well. And when you look at it this as well, it’s an interesting dynamic too, where the Taubman family is actually staying on as a 20% partner. I assume these sides have overall reconciled.
Julian Klymochko: Certainly, some sour grapes, probably at the Friday meetings.
Michael Kesslering: Yeah, yeah, a little bit. But you know, what, Julian, what do you think, do you think it was, you mentioned where Taubman was trading. Do you think that did have an impact on the actual amount of recut that that happened, the discount that they took that being in the high double digits? Do you think that was factoring in? Or what do you think the main factor was for why it was her priced so much lower than some of the other ones we’ve seen?
Julian Klymochko: Yeah, certainly the share price is a good targeting, right? So, it gives an indication of shareholder expectations and ultimately, it’s the shareholders that vote for or against the deal. And the board of directors worked for the shareholders. So, at the end of the day the board gets a proposal at 43 or perhaps, you know, they met in the middle and they look at their share price at 37. And they’d say, look, you know, that’s a good premium for shareholders better than what the market’s pricing in. So might as well remove that risk and reward shareholders and see where it goes. So, yeah, I certainly think that provides a directional, you know, the target for where they should end up because of the stocks trading at 37, the board isn’t going to argue to an except a repricing at 30, right. Unless they’re like on the verge of bankruptcy or something that the shareholders don’t know.
So nonetheless, they do want to see it higher than the current share price. And certainly, some large shareholders were probably calling them up and rattling their cages, be like, look, you got to settle this thing in the low forties, today’s premium to where the shares are at and we’ll vote for it and be happy about it. So certainly, the shareholders were shareholders. I think it’s a good result. All things being equal, certainly, Taubman was facing a tough slog if they did lose in court. And the other interesting thing to consider is this concept of material adverse effect or material adverse change, same thing, MAE or a MAC clause, which is really notoriously difficult to prove in court. In fact, in the history of M&A, it’s only been utilized once to get out of a deal. And that happened a number of years ago where the company was actually, you know, just kind of a in long-term decline and did face, you know, something completely material.
So, in all of this court litigation that we’ve seen in M&A over this latest deal cycle from COVID, it really tells the strength of the definitive merger agreement, how difficult it is for buyers to get out of it. And not a single one was able to approve a material adverse effect in order to get out of the deal on basically a hundred percent of them they were able to settle. On the ones that we mentioned in today’s podcasts. They all settled at a recut deal price on other ones, they just parted ways. And the buyer paid the target a significant chunk of change. For example, we saw on Gilat Satellite, they accepted about $70 million dollars, which was a large portion of the market cap to part ways. And also, Refco got a multimillion-dollar settlement after their buyer walked away. I guess there is one that remains outstanding, and that is the Cineplex deal, which fell apart. But the buyer, I mean, they’re nearly bankrupt. They don’t have any money. So that’s perhaps why they didn’t settle is because they just don’t have the money to, so they have no choice, but to, I guess, gamble it out in court.
Michael Kesslering: Absolutely, and before we wrap up here, we do have a special event coming up next week. I mean, we are coming to our hundredth episode, so we’re coming to the century mark. So, we have had a few more interviews with a special guests over the last little while here. And we’re hoping to keep that moving forward into the next hundred episodes.
Julian Klymochko: Yes, so certainly tune into number 100. And in fact, all the podcasts definitely provide us some feedback. We love to hear it. Questions, concerns, comments definitely send us an email. Check us out on Twitter, Mike, what’s your handle?
Michael Kesslering: It is @M_Kesslering.
Julian Klymochko: And you can find me @JulianKlymochko. You can check out more podcasts @absolutereturnpodcast.com. Definitely leave us a review. Tell your friends, colleagues, and family about us. And until next week, we wish you all the best in your investing. Cheers.
Thanks for tuning in to the Absolute Return Podcast. This episode was brought to you by Accelerate Financial Technologies. Accelerate, because performance matters. Find out more at www.AccelerateShares.com. The views expressed in this podcast to the personal views of the participants and do not reflect the views of Accelerate. No aspect of this podcast constitutes investment legal or tax advice. Opinions expressed in this podcast should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information and opinions in this podcast are based on current market conditions and may fluctuate and change in the future. No representation or warranty expressed or implied is made on behalf of Accelerate as to the accuracy or completeness of the information contained in this podcast. Accelerate does not accept any liability for any direct indirect or consequential loss or damage suffered by any person as a result relying on all or any part of this podcast and any liability is expressly disclaimed.
