November 30, 2020- SPAC GigCapital2 Abandons Bolder Deal to Combine with UpHealth. Why the Change of Heart?

Salesforce in Talks to Acquire Slack For More Than $20 Billion. What is the Strategic Rationale Behind the Rumoured Deal?

Rapper Jay-Z Strikes Cannabis Deal with Canadian SPAC Subversive Capital Acquisition. Why is Hova Going Public?

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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 101, one of The Absolute Return Podcast, I am Julian Klymochko. 

Michael Kesslering: And I’m Mike Kesslering. 

Julian Klymochko: Today is November 27th, 2020. Winding down the month of November, which is certainly a notable one. Some wild moves, some interesting deals and a lot to talk about on the podcast this week, we’re going to chat about a specific, really interesting SPAC deal and some underlying drivers of this transaction. Specifically, this one is. 

    • GigCapital2, they abandoned their deal for Bolder to instead combine with UpHealth. Why the change of heart on this deal? We’re going to talk about the dynamics as it was approaching a potential redemption date.
    • Some M&A news. Salesforce in talks to acquire Slack for more than $20 billion dollars. What’s the strategic rationale behind this rumour deal that could be announced next week?
    • And lastly, we’re going to chat about rapper Jay-Z struck a cannabis deal with the largest Canadian SPAC out there, Subversive Capital Acquisition. Why is Hova going public?

Julian Klymochko: But Mike, let’s start out with this GigCapital2 deal, which I find super interesting for a number of reasons to summarize this situation, blank check acquisition company GigCapital2 to announce that it’s combining with two private companies. One is UpHealth, one of the largest national digital healthcare providers. The second Cloudbreak health. A telemedicine and video medical interpretation solutions provider. In a deal that will represent a 1.35 billion proforma enterprise value. Once this deal is complete, it’s the latest in the string of M&A SPAC deals to capitalize on the growth of telemedicine really spurred by the COVID-19 pandemic. We’ve seen health firms such as Hims telemedicine company, SOC Telemed, both of those recently struck going public transactions with blank check companies. So, it’s just a continuation of this trend that we’re seeing in SPAC space. Obviously be electric vehicle transactions are super-hot, but we are seeing a decent amount of interest and healthcare technology deals.

What I found really interesting about this transaction it’s notable because GigCapital2, the SPAC, they abandoned a previously signed letter of intent for a transaction with Boulder Industries, which was a manufacturer of sustainable industrial products because shareholders found that merger underwhelming, and that’s important for a number of reasons. Number one, I want investors to note that GigCapital2, deal for Boulder was only an LOI, a letter of intent. Now I say, you know, I wouldn’t trust or do anything with a letter of intent. It’s basically just a piece of paper that you can light on fire. So, it’s certainly not a definitive agreement, a deal isn’t done, or, you know, set in stone prior to closing, unless it’s a definitive agreement. So, I always take a letter of intent with a grain of salt because often those tend to fall apart as it did in this one.

And one of the main drivers of that, my theory is that an important date was coming up for GigCapital2, so they initially IPO in June, 2019 and their termination date, what’s coming up next month and they weren’t going to get a deal done by a termination date. So, what they need to do in that scenario, they need to stage a shareholder vote in order to extend the deadline. And as they have that vote, they need to offer shareholders the option to redeem their shares for the trust value or the net asset value, which is currently $10 and 10 cents. Now, after they announced the Boulder transaction, GigCapital2, shares were consistently below $10.10. And what that indicates is that most of the holders like us and other hedge funds were going to redeem at the December 3rd vote or specifically two business days prior to that, I believe the election deadline was on Monday.

So, it’s a fairly simple calculation. You look at the share price of GigCapital2, if it’s trading below $10.10, you redeem it. If it’s trading above $10.10 then you don’t. Now with the Boulder Industries deal, it was trading below $10.10. They could read the tea leaves. They knew they’d lose a large chunk of their $174 dollars million in trust due to the redemption. So, they did something drastic abandoned the Boulder deal. Instead went with this transaction for both UpHealth and Cloudbreak. I mean, not a huge winner. GigCapital2, shares were up 1.6% on news of these two deals. However, it is important because the stock is now trading at $10.25 per share, which is greater than $10.10. So most hedge funds will end up staying with the stock. Cause I mean, it is above net asset value. So, if they were going to redeem, then they’d rather just sell the shares here. Cause you’re going to get 1.5% more, so that’s important. But otherwise, I just find it kind of funny how they’re constantly just switching deals and really looking for a flavour of the day of which telemedicine certainly are one of the myriads of flavours that investors seem attracted to these days. And Mike, what are your thoughts on this? Interesting it’s SPAC manoeuvre.

Michael Kesslering: I mean, you look no further than just the simple incentives, right. As you had mentioned. There is a upcoming deal, if they aren’t able to eventually find a deal and do have to liquidate the trust completely. Their capital at risk is completely gone.

Julian Klymochko: And that is 4.9 million bucks. They put it into a unit that if they have to terminate that goes out the door as does their promote. So certainly, they’re well incentivized to get a deal done.

Michael Kesslering: Exactly, and so I don’t mean that in the sense that there’s anything wrong, that they’re responding to the incentive. Investors just need to understand the incentive structures that are in place for sponsors and deal within that system. They’ll basically take this as a pop. It is trading at a premium. It’s not an outstanding SPAC pop, like some of that we’ve seen in the past. But I guess an interesting case study is to look at the original GigCapital because this is the second iteration from this SPAC sponsor group. And they actually IPO back in December of 2017 with a little less fraught, the SPAC markets. But then they announced their transaction with Kalera which was then closed in November of 2019. And throughout that time, it kind of traded at a similar premium to where GigCapital2 is currently.

But if you look at the post-SPAC entity. Kalera has had some pretty crazy volatility. It has been a pretty interesting time for them in their space and they are an AI driven chatbot service basically is what they do. But they have kind of steadily traded down to under $4 dollars in June. 

Julian Klymochko: Ouch. 

Michael Kesslering: But has now bounced back to not about $9 and 40 cents as of today’s close, which is just an absolute whipsaw. If you look at the chart, it’s not really a COVID whipsaw, if you look at the timing of the bounce back and the decline. But anyway, like just the example of once you do get past the time where you have the ability to redeem as a shareholder, these stocks do become incredibly volatile. 

Julian Klymochko: Yeah, it’s a different asset.

Michael Kesslering: Look out for, absolutely. But anyway, it is a little bit of a pop, it’ll allow arbitrageurs to sell at a profit if they choose to do so.

Julian Klymochko: I think one other interesting aspect that investors should note about this GigCapital2 deal is this one actually gave up a full warrant per unit on IPO. And that’s notable because the common shares are trading at $10.25, 2.5% uptick since the IPO. However, the warrants are trading above $1.9. So that is total unit value of around $11 and 35 cents. That’s a significant return, a double-digit return after the IPO on a deal that isn’t really getting a ton of praise from investors. So, it’s certainly important to note, don’t just pay attention to the shares or just the warrants, but also the combined unit basis when judging SPAC economics. So, we’ll monitor this one. For disclosure, we are long shares of GigCapital2 in The Accelerate Arbitrage Fund. Obviously bought those a quite a while back when they’re trading at a nice discount to their net asset value.

SALEFORCE IN TALK TO ACQUIRE SLACK FOR MORE THAN $20 BILLION

Julian Klymochko: Wanting to get into some M&A news, actually more like an M&A rumour.

We have Dow Jones Industrial Average member Salesforce reportedly in talks to acquire messaging apps, Slack for more than 20 billion in a bid to expand its product footprint and effectively compete against Microsoft. And when I think about this, it’s like, damn you know, what could have been from AOL messenger or ICQ or Blackberry messenger? Like all these companies were basically Slack before Slack, right? Like how good was Blackberry messenger? And they completely just screwed that entire thing up which is a shame, but nonetheless Slack super popular these days. Real simple chat client that many, many people use. Now, this deal if completed. What represent one of the largest software acquisitions in history comparable to IBM’s 34 billion acquisition of Red Hat in 2019. Microsoft’s 27 billion takeover of LinkedIn four years ago. Facebook’s $19 billion deal for WhatsApp six years ago, but that’s really part for the course for Salesforce.

They’re a very acquisitive company. For example, they acquired MuleSoft for 6.5 billion in 2018. And at that time that was a company’s biggest deal ever. And then last year they spent 15.3 billion and a deal to acquire Tablo the data visualization company, obviously Slack shareholders loving this. Shares rallied nearly 45% this week on the news, Salesforce shareholders, not too happy down about 6% this week, as I indicated, this is speculative, just a rumour at this point as reported by the wall street journal. And if a deal is announced, I mean, it could be announced in the coming days. Mike, what do you think of this one? Think we’ll see it official?

Michael Kesslering: Yeah, I think the day to watch for here would be next Tuesday, and that’s the data watch because that’s when Salesforce is reporting their Q3 results. And that sometimes can be a common time for companies to announce acquisitions. As though they’ll already be doing a call and whatnot. But really with Slack, I mean their product has really evolved. And in the sense that they started out with just a very simple and good, and I’m using simple in a very complimentary sense is that they started off with a communications platform, simple chat but now moved into really trying to embed into businesses workflow. They have partnerships with Dropbox, Salesforce as well. If you compare Slack to Microsoft teams, as I’m sure many of our listeners are familiar with the Microsoft team’s app is Microsoft teams really is just for within your own company chat within your intercompany, intercompany chat, whereas Slack, you can have different channels, amongst many different companies. It’s a wider ecosystem. So interesting from that sense. When you look at the dynamics right now between Salesforce and Microsoft, and it’s very clear that Salesforce is kind of coming after Microsoft, really trying to take a bite out of more of the Microsoft service lines, you look back to 2016 when Microsoft outbid Salesforce for LinkedIn this could be a little bit of revenge that they’re looking at Slack. Both companies have added interest in Slack in the past. Given all the antitrust worry with Microsoft, that they’re able to get this acquisition without second bidder, another competing bidder, because other than Microsoft Julian, do you see anybody else that would another potential bidder?

Julian Klymochko: I mean, $20 billion or more, that’s a fairly sizable chunk of cash that not too many can afford. And the strategic nature, I don’t think Slack would have fit all that well into many other potential competitors of that size.

Michael Kesslering: Perhaps Zoom in an all paper deal.

Julian Klymochko: Yeah, I don’t know. I mean, it’s hard to go against Salesforce unless you’re a giant like Microsoft, so I’m sceptical, but you never know. This is M&A, and anything can happen. What is interesting that I wanted to comment on this file is how Slack developed, because it was initially developed as part of a video game and that video game ended up being a failure, but they pivoted from making this video game to trying to further develop this chat app.

Michael Kesslering: They pivoted twice too. They actually fail twice on the video game, which is crazy.

Julian Klymochko: Yeah, and so now they’re looking at a $20 billion dollar exit, so certainly shows the value of perseverance and just trying your best. So that’s an interesting one. I suspect we’ll see an official announcement by next week. And once that comes, we can further dig into it. If it does become a definitive agreement. 

RAPPER JAY-Z STRIKES CANNABIS DEAL WITH CANADIAN SPAC SUBVERSIVE CAPITAL AQUISTION 

Julian Klymochko: Lastly, I want to chat about one of the funniest deals I’ve seen in a while. We got 99 problems, but going public ain’t one, as rapper Jay-Z struck a deal with Canadian SPAC Subversive Capital Acquisition Corp on a cannabis and hemp venture. What’s happening here is that Subversive Capital, the largest cannabis SPAC in history, and I believe the largest Canadian blank check company of which there are only about nine, they announced they have entered into definitive agreements with Jay-Z, Shawn Carter, entertainment powerhouse, rock nation. A company called Caliva, California’s most trusted cannabis brand and a leading direct to consumer platform and Left Coast Ventures, predominant cannabis and hemp company with low-cost manufacturing and a diversified portfolio of brands. They’re putting these altogether kind of a mishmash, but they’re going to form a company called The Parent Company, TPCO Holding Corp. So basically, Subversive Capital is merging with private CO’s Caliva and Left Coast Ventures, bringing Jay-Z on. They’re doing these two deals for $282.9 million dollars and $142.2 million for Caliva and Left Coast respectively in a transaction that will create California’s largest cannabis firm. Jay-Z is joining the company as chief visionary officer to guide brand strategy. And if we want to look at the price action on this one, cannabis obviously has been a very tough space ever since it peaked and then crashed in 2018. Investors have kind of lost interest, and haven’t seen, I’ve seen a bit of a bounce, but nothing too crazy. Market was lukewarm on this one. Subversive Capital shares rose 1.4% this week on news of the deal. Mike, what do you think? Think it be successful?

Michael Kesslering: It’s certainly interesting and entertaining. I mean, it’s a very complex transaction, In the SPAC world typically gets me a little bit squeamish about the prospects of it. I feel like complexity can be in these sorts of deals can be kind of a bad thing. But yeah, I mean, Jay-Z will be the brand. They have interesting involvement in their private placement with Rihanna, Yo Gotti, Meek Mil that’s pretty cool. But I mean, the remaining company they’re pursuing a really aggressive roll up strategy in the California cannabis market. And I mean, roll-up strategies do carry a significant amount of execution risks. So, I have no doubt in terms of their branding. It seems like they certainly have some interesting branding, but executing a roll-up strategy is fairly difficult to do well and not to get too aggressive and just be overpaying for companies. And so that’ll be the interesting thing to follow is just how they deal with that. But the one thing in particular is you had mentioned Julian, that this was one of the largest SPACs in terms of their cash and trust. So, they will have a very healthy balance sheet to pursue this strategy with the additional what is it? $37 million dollar pipe as well. They’ll have you know, well over $500 million, assuming that the stock price keeps up to pursue this.

Julian Klymochko: Yeah, we’ll see where the price does end up because there are at risk for redemptions given the shares didn’t rally. I mean, you look at the cannabis sector and it’s no surprise that most US SPACs with cannabis mandates have switched to completely different industries like electric vehicles because the cannabis sector has just been so dead that it seems like not even Jay Hova can resurrect it, but we’ll monitor this one. See how it goes in terms of why Jay-Z is doing it? I believe he’ll receive about 5 million shares on the deal, which are worth about 15 million bucks. Not bad work. If you can get it, congrats on Jay Z on that one, looks like it could work out well for him. That about wraps it up for us on episode 101 of The Absolute Return Podcast. If you enjoyed it, always check out more at absolutereturnpodcast.com definitely leave us a review on Apple and the other podcast platforms. Follow us on Twitter, Mike, where can they find you?

Michael Kesslering: @M_Kesslering.

Julian Klymochko: And you can find my tweet handle @JulianKlymochko. We wish you all the best in your investing and we’ll chat with you soon. 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.

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