January 18, 2021 – Online Lender Affirm Stock Nearly Doubles in Initial Public Offering. Is There a Bubble in IPOs?

SPAC ArcLight Shares Skyrocket on Merger with Electric Vehicle Company Proterra. Is the Market Still Hot for EV Deals? 

Arbitrageurs Win Big as Cisco Ups Bid for Acacia by 64.3% to $115.00. Is this the End of the M&A Drama?

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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 111 of The Absolute Return Podcast. I’m Julian Klymochko. 

Michael Kesslering: And I’m Mike Kesslering. 

Julian Klymochko: Today is January 15th, 2021. Have a number of pretty interesting events to talk about this week. We’re talking IPO pops, SPAC pops, M&A bumps, all the good stuff, we know you love. So, let’s get into it. 



Julian Klymochko: First, I wanted to talk about one of the biggest IPO pops we’ve seen in a while. At least since Airbnb. San Francisco based Online Lender, Affirm Holdings, saw their shares soar nearly a hundred percent, that’s right. Basically, doubling in its stock market debut. And no, this is not the year 2000, this is 2021. We’re seeing these massive IPO’s double despite and get this on this deal. They initially priced it at a range of $33 to $38 per share. Then they increased it to a range of $33 to $38. That’s where they started. Then they increase the range from 41 to 44, and then they priced it at $49. And so, IPO buyers, the company sold $1.2 billion dollars’ worth of shares at $49 dollars. And then on the first day of trading, it closed at $97.24, despite boosting the range and then pricing above the top of the range, just goes to show you how crazy this IPO market is. 

A bit of info about a firm founded in 2017 by PayPal’s co-founder Max Levchin. Affirm counts a number of investors, including Singapore GIC, Khosla Ventures, Founders Fund, Lightspeed Venture Partners, and Shopify amongst its investors. Levchin remains the biggest shareholder after the IPO and fun fact, I believe Shopify earned about $2 billion dollars, a massive windfall for them off the IPO, their holdings in the company. Affirm is a pretty interesting business model. You know, online lending, profits remain elusive, net loss of $15 million on revenue of $174 million in their latest quarter, their Q3. But the other thing that I wanted to flag Mike, perhaps you want to talk more about this is Peloton of all companies accounts for almost a third of their revenue, doesn’t it?

Michael Kesslering: Yeah, yeah. 30% of their revenue comes from Peloton. And I mean, that’s kind of the entire business model is partnerships with Affirm. One partnership, like, I mean, they have partners with Casper, Peloton, Expedia, Shopify, and I want to talk a little bit about that Shopify partnership because in July they announced a partnership with them where Affirm wouldn’t become the exclusive provider of point-of-sale financing for Shopify. And as part of the deal, Shopify was then granted warrants to buy 20.3 million shares at a penny a share. 

Julian Klymochko: Oh, wow. 

Michael Kesslering: And so that stake is now worth well over $2 billion dollars. And really why I mentioned the partnership angle is because there’s this kind of symbiotic relationship with merchant partners where Affirm piggybacks off of merchant growth, while merchants also theoretically grow more because of the buy now pay later option, which is kind of their core product offering. And really this is when you look at Peloton growth numbers, a lot of analysts are really attributing that growth to this option that’s offered through Affirm where there’s also a little bit of appeal. Like when you look at that core product line of the buy now pay later, really it has some appeal really to a lot of low-income earners. That’s traditionally been the core part of that business, but it also, according to Affirm, the kind of appeal to buyers that can afford the product as it smooths the purchase impact. However, the one negative is you don’t get reward points from your credit card but also can be very appealing for merchants and it just reduces frictions for the buyer to purchase their products which would ultimately lead to, as I mentioned, that feedback loop of increased sales where the merchant really, what they’re paying in this scenario is instead of paying their payment processor, what be it Stripe or another payment processor that fee then goes to a firm. But really when you’re looking at the value of the company, it depends what model you want to believe in. Do you think that they’re an online lender where they have very thin margins because they’re offering 0% financing or are they a payment processor? Which can then be a valuation multiple you know, over 10x revenue. So, it really depends which lens you want to look at the company in terms of the valuation right now.

Julian Klymochko: Yeah, yeah. You make a good point there. I don’t think investors really care all that much if judging by the price action of the shares up nearly a hundred percent on the first day and finished the week up about 136%, it has what markets and investors or speculators like to see. Name, brand founder, named brand backers, good top-line growth, and increasingly large losses on the bottom line and investors. I mean, that’s really what they’re gravitating towards, and Affirm really showing the current market environment, this IPO pop that we see over and over again with these name brand companies like Affirm and Airbnb and others. So that trend continues. 



Julian Klymochko: Now onto some SPAC news. Electric vehicle companies and SPACs continue to fit like hand to glove as special purpose acquisition company, ArcLight Clean Transition Corp. They announce a business combination with electric bus and battery manufacturing, Proterra. Obviously this one was well-received by the market. 

Proterra, a bit of background on the company. They deliver battery systems to commercial vehicle manufacturers. They also manufacture bus equipment and they offer energy management solutions to their customers. And this differs from other EV companies that recently announced go public transactions through SPACs in that Proterra has a sizable current business. That’s right, they generate a lot of profit and do, sorry, not profit, sorry, revenue. And they have been generating sizable revenue for a while. For example, they have produced and delivered more than 300 megawatt hours of battery systems, more than 550 transit buses and installed more than 50 megawatts of charging systems. And in 2020, they generated revenue of nearly $200 million dollars. 

Obviously unprofitable these days as is basically every electric vehicle manufacturer. But nonetheless, you look at the transaction metrics of this $1.6 billion transaction. The valuation is 3.6 times next year’s revenue. And this company plans to grow its revenue by 68% over the next number of years. So, in a Tesla like relative valuation, it seems modest in my opinion, plus this deal includes a $400 million dollar pipe private investment in public equity concurrently with the going public transaction, including a strategic investor, Daimler Trucks and financial investors, Franklin Templeton, Fidelity, and BlackRock. Got a quote here from the chairman and CEO, Jack Allen. He said, “This is really an inflection point of the industry. Doing a SPAC allows us to go faster and to be able to really accelerate the investments that are ahead of us in all three of our business segments that are driving revenue today.” And I think he really nailed it there because he’s been seeing a number of his competitors go public in the EVs space. And as those competitors go public, they get granted a cost of capital advantage and they raise hundreds of millions of dollars to grow rapidly and compete in the market. So, if you’re a Proterra, I’m not at all surprised to see them wanting to do a quick going public transaction and raise hundreds of millions of dollars, really to maintain their competitive position and fund their growth plans prior to their competitors, really gaining on them. So, the transaction makes sense. Market loved it, ArcLight stock was up more than 120% this week on the news, a huge winner if you own the units and an even bigger unit winner. Luckily for us, The Accelerate Arbitrage Fund owned the ArcLight units, meaning the shares and the warrants. So obviously we’re liking this deal and in terms of timing, they expect to close the transaction in the first half. I’m expecting late April early may. And when they do, Proterra will trade under the symbol PTRA, but certainly EV companies to SPACs, hand to glove. Mike, what do you think?

Michael Kesslering: Yeah, you brought up a couple of really good points and the first being your view on, I guess a favourable valuation when you’re looking at it relative to some of its peers. There’s someone else that agrees with you at that. And that would be a Chamath Palihapitiya. 

Julian Klymochko: All right. 

Michael Kesslering: As we had mentioned last week, he has his one pager online on Twitter where anyone can read these, just a couple of highlights

Julian Klymochko: And he’s involved in the pipe, right?

Michael Kesslering: Yes, he’s in the pipe. And yeah, so he’s looking at the valuation on the basis of 2022 and 2025 revenue multiples, and actually describes them as a margin of safety for new investors.

Julian Klymochko: I wouldn’t go that far. 

Michael Kesslering: Seth Garvin may have a problem with the use of that term.

Julian Klymochko: Yeah, Ben Graham rolling in his grave.

Michael Kesslering: Yeah, exactly. But another thing that he mentioned in that, in his note was he highlighted the company’s vertical integration and highlighted some of their partnerships, as you had mentioned as well, on the partnership side Julian, but from a VC perspective, I get what Chamath sees as favourable from the vertical integration and how that’s appealing as really when you’re looking to make that type of investment, having that vertical integration ensures a lot more value, really ensures that they’re able to maximize their value capture. But it does take significant capital. So, you do have to deal with a lot of dilution as an early investor. 

Julian Klymochko: And that’s never price in. 

Michael Kesslering: Yeah, and that’s where your second point comes in is unless you have a significant run-up in share price early, then perhaps it just low the cost of capital. And as you had mentioned with regards to their president comments also what you had mentioned last week with regards to Elon Musk and how he brings down a company’s cost of capital. Chamath himself, his involvement brings down a company’s cost of capital just by sheer promotion.

Julian Klymochko: Right.

Michael Kesslering: So, I think those are all interesting aspects in this transaction. They’ll have a ton of capital left after a post-close from the trust presuming it continues to trade at a large premium to nav. So yeah, like at the end of the day, the market is pretty obsessed with finding the next Tesla. And this does seem like relative to many of the other companies that have come up in the space, this is a pretty strong company and it does have good prospects, as you’ve mentioned at the very least, they do have revenue already. So, it’s not just a complete pie in the sky numbers.

Julian Klymochko: Yeah, no kidding. And you’re definitely right with respect to SPAC investors and their infatuation with EV deals. We also saw rumours swirling around Churchill Capital Corp, for which we also own in Arb. Rumours of a deal with Lucid Motors, which is kind of one of the big EV private companies that is yet to announce a deal, but we could see that soon, just a rumour for now. So, I encourage you not to trade on it, wait for a definitive agreement to be able to judge the merits of their transaction. But we are long Churchill, which we have owned since the IPO. I mean, same with ArcLight. I wanted to kind of follow a rewind back to how our position really came about in ArcLight.

So, they did their IPO is September 23rd. So, this deal was announced relatively quickly, hundred and eleven days post their IPO. And this was just a $250 million dollar transaction, actually $277.5 million, after the Greenshoe, they offered a half warrant. The deal was under it by City & Barclays. And I still remember, I believe I tweeted about it on the week it came out, the units were actually trading at a discount to the $10-dollar nav net asset value. They’re trading around $9.96. We’re able to load up on ArcLight at a favourable price, that’s what I call it, margin of safety. In the worst-case scenario, we get back $10 dollars plus accrued interest if we could buy at $9.96, we liked that. I mean, that’s a great trade, phenomenal risk ward. And we’re really seeing the benefits of it because the units that we bought at $9.96 are now North of $30. So that’s basically how a SPAC arbitrage trade is conducted.



Julian Klymochko: Lastly, I wanted to follow up on a story that we chatted about on last week’s podcast, the Acacia-Cisco drama, that listeners will be aware of  just to give a bit of a recap last week, we talked about how this deal had been dragging on for a while, delayed by Chinese SAMR approval, S-A-M-R and after a while, like they extended the so-called outside date a number of times. And after the latest one, which I believe expired January 8th, Acacia walked because they thought they were worth more given their business was performing remarkably well and its comps and valuations in the sector had risen. So, they walked, Cisco sued and now jilted by Cisco convinced would be merger target Acacia to come back to the bargaining table and sign a new merger agreement at an increased price and the parties dropped their litigation.

Now, Mike, we were speculating what we thought would happen. And we did talk about, you know, the most likely result being an increase in price and recut deal, which would have been good for us because we hold this in the arbitrage fund. However, the deal that they cut was way ahead of expectations. You know, if you asked me a price, I would have said $90 to 100 dollars up from $70 bucks at the time. And I thought $90 to a 100 was bullish, but Acacia shareholders really hit the jackpot here as Cisco increased its bid from $70 to 115 per share, this represents a 64.3% increase in the value of the optical interconnect technologies manufacturer to a transaction value of $4.5 billion. So back when they struck the deal in 2019, the valuation was at 4.9 times sales, 25.5 times EBITDA and 28.9 times forward looking EPS. These are all 2020 forecast numbers. 

Now the new valuation is that 6.1-time sales, 29.8 times EBITDA and 32 times EPS on 2022 forecasts. So, an increase in valuation and obviously further buffering that increase in price is the increase in fundamental performance. As for this one, they don’t expect it to be delayed. The parties expect the deal to be completed by the end of the first quarter. Acacia shareholders do get to vote on this one and the stock up 43.7% this week. On the news, which we’re enjoying because Acacia is the largest position in our arb. And from a merger arbitrage perspective. I know we’re only two weeks into the year, but I may call this one as the biggest win in merger arbitrage for 2021. Mike, what are your thoughts? Premature or could it be?

Michael Kesslering: Yeah, I mean, it seems like a fair guess. So, in terms of just the sheer premium that was announced in this rewritten deal. And I mean, as you had mentioned, your estimates were in the $90 to a 100 dollars range. I think my estimates were kind of topping out at $90 dollars and you know, myself, I thought that was fairly aggressive as well. So, in the same boat as you even more so with I mean being very overwhelmed by just the recut deal that was absolute music to our ears. And one comment that I did want to make was just with regards to Cisco and the strategic element of this deal, where Cisco has done a lot of messaging over the last couple of years. Really messaging around their software angle because they’ve historically been a hardware focused company and this is a hardware deal. And so really why are they messaging around their software line of their business? It’s surely because you’re rated a lot higher evaluation, multiple if you’re a software-based company, so it is interesting. They really must believe in the strategic benefits of this to kind of deviate from that story that they’re telling investors to go into a little bit further into the hardware business. So, I did want to point that out. It’s an interesting move from that standpoint. And I mean, they’re obviously a lot more confident in their ability to get Chinese approval this time around as it did seem like they hadn’t technically gotten complete approval by the time the merger agreement expired last time. 

Julian Klymochko: Right. 

Michael Kesslering: But they seem to be quite competent that they’ll be able to get it this time around. 

Julian Klymochko: Yeah, I believe that too. I think this M&A drama is over and we’re pretty confident that deal’s going to close. We remain long and I’d be remiss if I didn’t give a tip of the hat to the Acacia board of directors. I mean, they really played this situation like pros, huge win for shareholders. So, you know, shout out to the Acacia board of directors, phenomenal job here. So, I hope they’re celebrating this weekend, but that’s about all we got for you folks on episode 111 of The Absolute Return Podcast. Hope you enjoyed it, if you did. Check out more at absolutereturnpodcast.com, definitely follow us on the tweet machine. Mike, what’s your Twitter handle?

Michael Kesslering: It is @M_Kesslering.

Julian Klymochko: And mine’s @JulianKlymochko, K-L-Y-M-O-C-H-K-O. And 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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