January 11, 2021- Softbank’s Blank Check SVF Investment Corp Completes $525 Million IPO. What Are They Going to Acquire?
Fintech Company SoFi to Go Public Through Social Capital’s SPAC. What Does the Market Think of This Deal?
Target Snubs Buyer as Acacia Walks from Cisco Deal. Why Did its Stock Trade up so Much?
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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.
Introduction
Julian Klymochko: Welcome ladies and gents to episode 109 of The Absolute Return Podcast, I’m Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is January 8th, 2021, happy new year. Haven’t spoken to our podcast listeners in a while, but back into the mix. Markets, I mean really leaving, starting the year where we left off. Everything’s going up, a bit of a frenzy. Elon Musk now the wealthiest person in the world off that tremendous rally in Tesla stock, Bitcoin’s going up and everything started going crazy. On the deal front on the newsroom, a lot of interesting transactions announcements week. Wanted to highlight a few and note what’s going on with that.
- Off the top. I mean, SoftBank their Blank Check SVF Investment Corp, new SPAC from SoftBank, which is a super high-profile deal. They completed a $525 million-dollar initial public offering. We’re going to chat about who they may acquire with all that cash in their treasury and ready to do a deal. Obviously, SoftBank is one of the biggest heavy hitters in the private technology space.
- Next up, FinTech companies Sofi to go public to Social Capital’s SPAC. What did the market think of this deal?
- And lastly, the Targets snub the buyer as Acacia walked away from its acquisition by Cisco. We’re going to chat about why its stock traded up so much on termination of a deal? That’s typically the opposite, what happens. So super interesting dynamic on that one.
Julian Klymochko: But Mike, let’s start on this SoftBank SPAC. Heavily hyped, we’re looking forward to this one for a long time. Japanese tech conglomerate SoftBank. They launched their long-awaited special purpose acquisition company called SVF Investment. SoftBank vision fund investment in a $525 million-dollar initial public offering, which is surprising. There’s only $525 million. Obviously, demand was off the charts. And what I’ve been saying with basically every single SPAC IPO is getting upside significantly. So, when I saw their pricing last night, I thought they would have announced this morning that they actually upsized the deal, but that did not happen. I’m sure they’ll probably exercise a green shoe or over-allotment option to probably get it closer to $600 million at the end of the day. Now, if we talk about what happened today, specifically in SPAC-ville. SVF went public on a day for blank checks in which 13 went public actually, sorry, 14. We had a late one go public later in the day, bringing the tally to 14 SPACs going public in one day, raising about $3.5 billion, which is absolutely off the charts, the biggest day ever for special purpose acquisition company IPO’s record tally. So, things are definitely frenzied on the SPAC, front.
And SoftBank, they’re very well known in the financial sector, the investment space. They’re most known for their hundred-billion-dollar SoftBank Vision Fund. It’s a venture capital firm. They own stakes in Uber, DoorDash, Opendoor and one of their highest profile was WeWork, which had that infamous IPO flop not too long ago. Another interesting notable characteristic of this SPAC is it does feature a $250 million Ford purchase agreement in which SoftBank will invest a quarter billion dollars upon deal closing. Once they find that business combination, they listed in the S-1. A number of acquisition criteria. First, they’re looking for a large market opportunity, looking for a disruptor, a company that’s sustainable profitable growth with proven unit economics. So, you know, it’s not WeWork, visionary founders and strong management teams. So, Mike, what do you think? Any ideas on this one typically SPACs will go after a target, a private company, the three to five x of the capital they raise. So, say after the green shooter, they raised about S600 million. So that will peg equity value of potential target at like, say $1.8 billion to sort of the $3 billion range. Do you have any ideas of what Masayoshi Son could have up his sleeve here?
Michael Kesslering: Yeah, my guess would be that they go after a company with proven economics that kind of fits their framework and the valuation range. I also kind of have a theory that they’ll use it as an exit strategy for one of their portfolio companies, perhaps. And so Flexport could be an option there that would kind of fit the range there. Were there any ideas that you had before I get into a little bit on the actual offering of this general, some of the craziness in SPACs, do you have any guesses yourself?
Julian Klymochko: Yeah, it’s tough to say, like they do have that Ford purchase agreement, so I don’t think they’ll use it as an exit because they’ll basically just be having to reinvest capital into the deal. But nonetheless, I mean, they’ve really liked semiconductors lately you know, with what they’ve been doing with Nvidia. So, I wouldn’t be surprised to see something in the semiconductor space. The other areas that could be of interest are you know, anything online. I mean, they love online software companies or even in the sort of virtual health space. So, we’ll see, no real names in mind at this point, because like, you know, the field is really wide open in terms of what they can do. There’s literally like hundreds, if not thousands of potential transactions, but I’m certain it won’t be Wag, which was a dog-walking start-up that they backed and actually sold their stake for pretty much half of what they invested.
Michael Kesslering: Back to the company and I wasn’t considering the Ford purchase agreement. So yeah, in that case highly unlikely that they wouldn’t be going with an exit for a portfolio company. But one interesting thing that I thought was that in the original S-1, which was filed just before Christmas. They were originally going to have a quarter of a warrant per unit. They then revised it to a fifth, and really that’s not surprising in the slightest given the sponsor friendly financing environment and just the overall clout that SoftBank has. Like right from day one, we knew this was going to be a massively oversubscribed deal. So, it makes sense that they would cut back the warrant dilution. But I’m also surprised as you are that they didn’t upsize the deal by my count of the SPACs that IPO today. Today, there was 6 of the 14 upsize their offerings. And you know, I imagine this is kind of a platform that SoftBank is looking to start now similar following in Chamath’s footsteps.
Julian Klymochko: And won’t be the first.
Michael Kesslering: Yeah, won’t be the last and yeah, just in general. Yeah, like, I mean up 20% today, that’s also not much of a surprise. I figured there would be a fair amount of demand, but just in general, in SPACs, you know, from the trading desk, you know, talking to brokers, it sounds like of these deals that are being announced kind of between that, right before Christmas to coming to today, it sounds like really most deals are 5 to 10 times oversubscribed. Brokers are being flooded with requests from generalist hedge funds that are really, just looking to quickly flip these IPOs, which is a little bit frustrating from the perspective of a fund manager that focuses on the space. That you’re having all these generalists come in. But it also sounds like some of these funds are playing a little bit of a dangerous game where they’re giving indications of interest that is multiples of what they would be willing to accept. Just assuming that they’ll get their allocations paired back. And that can get a little bit ugly if they do end up getting a full allocation. So, you know, that’s certainly something to watch out for, but just craziness in the SPAC market right now. It’s certainly kept us busy.
Julian Klymochko: Yeah, and you know, the average premium is high, about 20% and SPACs on average, they traded up about 7% on the first day. So obviously I’m not surprised that you have, you know, quick money hedge funds getting in for a quick flip and then forcing others to pay significantly higher. But I mean, now that I think of it, this SVF did talk about its focus on artificial intelligence. So, I think most likely they’ll do an AI deal. So, if I were to guess. I’ll throw three names out there. Samsara, Zoox, or Nuro. Those are my predictions. We’ll see what happens. They have two years to do a deal. This one, market loving it. SVF up as much as 27.7% settling in at roughly a 20% premium, which is pretty massive for a company that just adds cash in the bank. So, investors here are paying $12 dollars for $10 dollars of cash and hopes on a heavily favoured business combination, but certainly quite the frenzy and this highlights that in brand names, special purpose acquisition companies on their IPO’s. And I should disclose that Accelerate Arbitrage Fund was lucky enough to get a teensy, tansy allocation to SVF through this IPO at 10 bucks. So certainly, we’re lucky and happy about that. Obviously, would I like more? But we’ll take any scraps thrown in our direction. Interesting deal, Mike, I think you’re right, in terms of, will SoftBank launch more of these? It’s a thesis that many firms are turning to SPACs as a manufacturing operation. We’ve seen it from many out there. Social Capital, CF, Cantor Fitzgerald, other firms like Gores Holdings. You’re seeing it from TPG, Apollo, et cetera, et cetera. So, a lot of these are just turning into straight manufacturing, operations and SoftBank will likely be the same.
FINTECH COMPANY SOFI TO GO PUBLIC THROUGH SOCIAL CAPITAL’S SPAC
Julian Klymochko: Onto the next interesting SPAC deal we saw this week. It was actually a merger where high profile, this is actually like a really high-profile deal because it was Sofi, which has a really good reputation in the kind of private FinTech space. Sofi struck a deal to go public by our Chamath Palihapitiya SPAC Social Capital Hedosophia V, a lot of words there. That values the FinTech firm at nearly $9 billion, so an $8.7 billion dollar deal. A bit of details on SoFi, they’re basically have an app that does everything financially that you could ask for. They projected about 1 billion of adjusted net revenue this year, or projected that it would be profitable on an EBITDA basis for 2021. Interesting to note on this one, pretty large pipe financing, I believe over a billion dollars of which…
Michael Kesslering: Yeah, 1.2.
Julian Klymochko: Yeah, 1.2 billion. And I believe Social Capital or at least Chamath is chunking up some cash to go into that, and some background. Sofi was last valued at 4.8 billion. So almost half in May, 2019, when it raised $500 million dollars from Qatar Investment Authority, also in 2017, they tried to sell themselves for well, they’re looking for an $8 to $10 billion dollar valuation, didn’t get it. Then they are getting it now. And I mean, after the massive pop in Social Capital stock today 48.8% this week on news of the deal, certainly it’s worth well in excess of 10 billion now implied by the stock price and Social Capital. I mean, Chamath, I don’t think there’s anyone who’s played this current market better than him, aside from Elon Musk. Who’s now the wealthiest in the world, but Chamath is honestly making like probably over $1 billion dollars per year through his SPACs. He has six of them, this is his fourth deal, three other deals he’s done. Opendoor, Clover Health, and Virgin Galactic. He still has two additional SPACs in the market yet to announce a deal, but I’m sure investors have high hopes for those Mike, what are your thoughts on this Sofi deal?
Michael Kesslering: Yeah, and just further to your comments around Chamath. And I mean, he’s just perfect for the SPAC structure as well. Every deal he’ll provide his one pager of his investment notes, which is very interesting for anybody either experienced or inexperienced when you’re looking at getting into investing, just how an investor such as himself looks at deals.
Julian Klymochko: Yeah, the elevator stock pitch, basically that he puts out on Twitter.
Michael Kesslering: Exactly, it conforms to the idea that you need to be able to understand things at least the bare outline of an investment piece is on one page, but every deal he’ll go on CNBC, they’ll be pitching the company, pitching himself. I think he’s perfect for the SPAC structure. And really is kind of the face of SPACs. But, as well, like in this deal, I mean the CEO of SoFi, they actually had a pretty interesting Bloomberg interview last night where he was describing the reasons, why it made sense for them to go public via SPAC. And he basically had three reasons. The first being the ability for them to sit down investors for a little bit longer period of time to pitch them on the merits of the company relative to an IPO, he described how they spent the last two weeks in discussions with pipe investors. And as you’d mentioned, Julian that was a very large pipe. They had BlackRock, Altimeter and then also a little Canadian player. They had healthcare of Ontario Pension Plan who were all involved in the pipe financing. That was the first, second being the deal certainty, the ability of them to negotiate with a smaller number of counterparties, really the negotiation he described it, it was just with the pipe investors and the SPAC sponsors. He then described how over the next period of time, there’ll be marketing, describing the merits to a wider institutional community. But not initial valuation gets down to really just a few counterparties as opposed to an IPO where you’re really looking at a bunch of different counterparties and all of them have different incentives. And then finally, just from their ability. And we’ve talked about this before, the regulatory arbitrage. They were able to go into a lot more detail regarding their projections and especially in their business line breakdown for investors. That’s just something that you can’t do in an IPO roadshow. You’re really limited to the S-1. But I thought that was very interesting. He really laid out the rationale for a target co to why they would pursue a SPAC listing. But really when I looked through their investor deck as well, what I was seeing was a lot of claims around a lower than industry customer acquisition costs. And you will remember that they do go after kind of like the affluent millennial that sort of segment of the population. They believe that segment of the population hasn’t really been well served by the incumbent financial players in the financial sector, the banks basically so they’d view themselves as competitor banks where really a lot of their presentation just describes a lot of their profitability and lowering of customer acquisition costs coming from cross selling.
So, I don’t think there’s anything crazy new in their business model. But I mean, really it comes down to execution and if they are able to truly have lower customer acquisition costs that will be a moat for them moving forward. But other than that, not a whole lot of comments around SoFi themselves. Really just interesting that this is just another solid company, at least a very well-respected company and highly valued company that’s coming to market through a SPAC that this just wasn’t the case a couple of years ago in the SPAC market. And it’s really interesting to see the quality of deals coming to market.
Julian Klymochko: Yeah, you’re totally right. That quality is improved dramatically. And one interesting dynamic that I wanted to note is the importance of marketing and promoting a stock these days, and many companies’ kind of live and die by that. And it really shows the value of having a pitch man, which is effectively what Chamath is, which is what Elon is. You know, Elon Musk is the greatest stock promoter that the world has ever seen bar none by order of magnitude. And that has tremendous implications on the fundamentals of a business because of this reflexive nature. For example, Tesla, it’s so highly valued that they can just do a $5 billion dollar at the money offering into the market to raise capital anytime that they want, like they did two $5 billion dollar ATM offerings last year to raise $10 billion dollars. Like you don’t have GM raising 10 billion, you don’t have Ford raising 10 billion. None of them can because they don’t have the fan base. Their stock is ineffectively promoted, but a guy like Elon. And then in the SPAC space, a guy like Chamath, this is where the structure really works. If you can get a backer, like Chamath to promote the stock. Like first thing, the stock was up 4.8 billion in May of 2019. So less than two years ago, it was worth 4.8 billion. And then, you know, Chamath does a deal at 8.7 you know, promotes the stock, effective PR, effective social media. And now given the 50% rally in the SPAC shares today, it’s probably worth 13 billion and that’s tremendous because then they can tap the market and effectively have unlimited access to capital at an extremely low cost of capital. And that gives them a tremendous competitive advantage. And this momentum, that’s a very difficult for competitors to go up against. Like so many car manufacturers didn’t compete against Tesla because they just didn’t really have the capital or the investors that allowed them to lose money. I mean, investors demanded profitability, but on the Tesla side, they just didn’t care. And the stock only went up and up and up and a similar dynamic on many of these start-up firms in which they go up against the incumbents. But the incumbents have investors that don’t care about promotion. Only care about profits and dividends, but these start-ups, they are mostly valued just off effective promotion. And I’m not saying promotion in a bad way, like the classic pump-and-dump, but good promotion in terms of marketing of the stock through good social media and PR to get it at a premium valuation. What a premium valuation translates to is a very low cost of capital and much lower cost of capital compared to competitors. Especially in this market it is probably the biggest competitive advantage that a company could have. And that really shows why Chamath is so successful and his Social Capital SPAC vehicles.
Yeah, sure. He’s making billions of dollars per year, but he probably earns that because he can lower a company’s cost of capital by so much. Look what Elon Musk has done. Tesla’s worth almost a trillion dollars and from a fundamental perspective, I mean, they should be valued at a fraction of GM, but now they’re like a huge multiple GM, right? So, you know, that’s basically one of the key aspects to this whole kind of SPAC business, and it extends beyond that. For many, many companies it is so important to keep that in mind. And one of the true benefits of having, you know, some of these social media and PR heavyweights behind your company, behind the stock, because of a tremendous competitive advantage, but enough of that.
TARGET SNUBS AS ACACIA WALK FROM CISCO DEAL
Julian Klymochko: Interesting news on the M&A space, cause typically we see a buyer walk away, but here the tables have turned. We have a target walking away from a deal. We Acacia Communications. Got to disclose, we are long of this one in the Accelerate Arbitrage Fund. They announced that their deal from Cisco, they struck an initial deal in July, 2019 at 2.6 billion. And at the time it represented a 45% premium. But since then, that was like a year and a half ago. Its semiconductor peers have rallied pretty significantly with the market. This deal was initially supposed to close in summer 2020, you got hung up on Chinese approval. And the outside date, the so-called termination date was January 7th. Acacia board clearly looked at the comps and say, hey, you know, this current deal price undervalues us. We’re not going to extend this. We’re going to terminate this deal. Lo and behold stock trades up 10% on the news because fundamentals buyers are buying this and say on a relative basis, it’s cheap here.
And so smart move by the board of directors to terminate this deal because they viewed it as undervalued in the context of the merger agreement stocks continues to trade well now at a 13.6% premium to the initial deal consideration. Obviously, Acacia shareholders liked this one, Cisco not so much, they actually went to court trying to block Acacia from abandoning this plan merger, between the two companies. So, this one turned into a potential litigation case, which we’ve seen quite a bit of over the past year, but what we’ve seen with respect to LVMH, Tiffany Simon and Taubman are buyers trying to get out of deals because they paid too much. So, this one’s quite interesting in that it’s the opposite effect where you have a target trying to get out of a deal now that they view that they’re being taken out on the cheap. So, it’s pretty cool to see as an investor because they’re actually benefiting from it instead of getting punished. But Mike, what are your thoughts on this really interesting M&A situation?
Michael Kesslering: Yeah, very, very weird situation and timing I guess what’s critical here is, as you had mentioned that the outside date has been moved a couple of times. It was extended in July of 2020 to October, and then finally to January 8th and the extensions were just because of Chinese approval. Not that it hadn’t been obtained yet, and I guess Cisco right now is arguing through the courts was that they had SAMR approval
Julian Klymochko: SAMR Chinese approval.
Michael Kesslering: Yes, yeah. Sorry, State Administration for Market Regulation as that’s the acronym. But yeah, so they had approval or had conditions met for approval on January 7th then the outside date being the eighth, merger has not been completed. So, you would think that Acacia would be within their rights to then terminate. But you know, with this going to court, from what I’ve been seeing, kind of on the sell side, it seems like the market believes that the most likely situation is a revised offer. It sounds like Cisco still does view them as strategic. Obviously, they do. They’re taking them to court, trying to force them to honour the initial terms. So, they still obviously view them as strategic. Would they be willing to pay a higher amount per share kind of in the $85, $95 range? I don’t know. But it does seem like it’s likely to be settled outside of court with a higher revise price, but as well, I would just note prior to the transaction that Acacia was trading out of 26 times 40, EBITDA multiple. Right now, they’re trading at 18 times. You know, is it reasonable to think that it rerates to their previous multiple? Well, probably not, but as the peer group is in the low teens, but does an indication that you know, that there is upside potential and that just furthers the case that Cisco might be willing to bump their offer.
Julian Klymochko: Yeah, and what we’ve seen is that acquired its use litigation strategically, or at least the threat of litigation to get what they want. So, this one, I think what Cisco trying to do is be like, look, we’ll take you to court unless you settle. And I think settle is just a higher price on a deal. You know, it seems like Acacia had the right to terminate, but instead of going through all this litigation, Cisco’s like, fine. We’ll just pay you more. And whatever that is, obviously it will be higher than the current share price because what the current share price implies is shareholder expectations. So that’s something to keep in mind, but we’ll keep watch on this one, see how it turns out. Very topical situation and an interesting case study that investors should study and how it ends up.
So, a lot of interesting news happening this week. Happy to be involved in a lot of these and super dynamic market, a ton happening in both the SPAC and M&A space over the past week. And we definitely expect that to continue just with a ton of M&A being announced. And SPAC,
S-1 are just nonstop, but that about summarizes everything for us this week. Hope you enjoyed episode 109 of The Absolute Return Podcast. Wish you all the best in your investing over the next week. Definitely follow Mike on social media. What’s your handle on the old Twitter?
Michael Kesslering: @M_Kesslering
Julian Klymochko: And mine is @JulianKlymochko, K-L-Y-M-O-C-H-K-O, until next week, we wish you all the best, 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.
