January 25, 2021- “Cable Cowboy” John Malone Debuts Liberty’s $500 Million SPAC. Does this Legitimize the Asset Class?
Battleground Stock: Retail Speculators Create Massive Short Squeeze in Gamestop Shares. Who is on the Other Side?
EV Charging Company EVgo Unveils Going-Public Transaction Through Blank Check Company. Did the Market Like this EV Deal?
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 ladies and gents to episode 112 of The Absolute Return Podcast. I am Julian Klymochko.
Michael Kesslering: And I’m Mike Kesslering.
Julian Klymochko: Today is Sunday, January 24th, 2021. Market continues to go up each and every week. A ton of corporate actions, interesting M&A, SPACs. And this week perhaps record short squeeze, certainly a very unique one that we’re going to chat about on the podcast today.
- And with respect to that short squeeze, I’m talking about GameStop, that is the retailer. Formerly left for dead, it has a huge resurgence, and it has really turned into a battleground stock. So super topical conversation.
- In SPAC news, the Cable Cowboy, John Malone debuted Liberty’s $500 million-dollar special purpose acquisition company. We’re going to chat about how this legitimizes the SPAC asset class?
- And lastly, you’re going to touch on a recent business combination in the blank check space, EV charging company, EVGO. They unveiled their going public transaction through a SPAC of course. Did the market like this EV deal? I think you know the answer to that, but we want to chat about some interesting dynamics with respect to that business combination.
“CABLE COWBOY” JOHN MALONE DEBUTS LIBERTY’S $500 MILLION SPAC
Julian Klymochko: Let’s start off on a deal we were waiting for a while. Certainly, on our list as legendary operator and investor John Malone, along with his right-hand man Greg Maffei raised half a billion dollars through a special purpose acquisition company IPO. That SPAC is called Liberty Media Acquisition Corporation. The units are currently trading as LMACU. It’s looking for a target in the media, music, entertainment, communications and technology industries. Wanted to give a broad background on Liberty and why we like this management team so much. Liberty operates and owns interests in a broad range of media, communications and entertainment businesses, and this whole conglomerate, the puppet master is John Malone whose billionaire American businessman worth over 8 billion. He is a huge land owner, fairly large philanthropist, and his reputation was created as CEO of TCI, a cable and media giant for 24 years from 1973 to 1996. He’s still active in business now as chairman. Largest voting shareholder of Liberty Media, Liberty Global, Qurate Retail, which was formerly Liberty Interactive. He also owned 7% of Lion’s Gate and Starz. I encourage you to check out the book “Cable Cowboy” about John Malone. It’s a must read for business junkies and this SPAC specifically Liberty Media Acquisition Corporation, the sponsor ownership is being held or attributed to the formula one group tracking stock, which is a Liberty Entity. And if you do your due diligence into this whole Liberty complex, you’ll find out that it’s a very convoluted with spinoffs, tracking stocks and things of that nature. And one thing to note regarding John Malone and his business partner, Greg Maffei, and Greg is actually the CEO of this SPAC.
John Malone, isn’t directly involved, but certainly is involved from a, you know, ownership level from the Liberty complexes. They’re pretty or very long-term shareholders. Not really concerned about, you know, short term machinations in the market and volatility and things of that nature, which is interesting because this SPAC specifically, and a lot of people criticized SPACs of, oh these guys just looking to get rich through the sponsor, promote things of that nature. Well, Liberty entered into a ford purchase agreement to acquire $250 million dollars of shares upon a business combination, which means they are dramatically increasing their proforma interest in the proforma entity once this deal closes. So super interesting, a SPAC transaction from legends in the business. And if you had criticisms or, you know, a bad outlook on the SPAC asset class previously, then you know, this really resolves that. John Malone is a big hero of this contingent of investors called compounder bros. Certainly I’m a big fan of John Malone and the whole Liberty complex and Greg Maffei. So that’s something to keep in mind is I truly believe that they’re really legitimizing the asset class with this deal and getting rid of a bunch of the criticism that people perhaps had. The other dynamic that I wanted to have is there’s no bad assets, just bad prices. As I indicated, we were watching this one for a while, we knew it’d be a hot deal, but perhaps a little too hot. This SPAC, the Liberty SPAC rallied as much as 33.8% on his first day of trading. Signaling, you know, some of the froth that we’ve seen recently in the blank check market and perhaps at that price. Too rich to own, at least in our opinion, but ultimately who knows, it’ll be super interesting to see what deal in fact that they do. Mike, what are your thoughts on how this SPAC IPO from Liberty perhaps really kind of cloaks the asset class in their aura?
Michael Kesslering: Yeah, we’re certainly huge fans of John Malone and Greg Maffei and Liberty in general. And I think an interesting takeaway here is when you mentioned the premium that it’s trading at and all of that is, John Malone is a huge fan of getting kind of optionality for free or getting it at a discounted rate. And that’s really how he’s made himself a billionaire. And so, I think even he himself and their team would agree with the comments around that you’re paying for this optionality that I think they will come with a good deal, but you’re paying for that right now.
Julian Klymochko: 30% as much as.
Michael Kesslering: Yeah, and that’s a pretty high premium to pay. You’re certainly paying for an option in that scenario. So, I thought that was interesting and I think the management team would agree with the SPAC at its current levels. I mean, we knew this was going to be a very hot deal. It came out, you know, with only a fifth of a warrant you know, which really isn’t much for warranty coverage,
Julian Klymochko: Which was also downsized over the deal cycle. They had on their prelim S-1, the first prospectus filing, it was noted. They’d be one quarter of a warrant. And when they amended it, they downgraded investors to one fifth of a warrant, perhaps signaling the tremendous demand and the better and better terms that SPAC sponsors are getting from investors.
Michael Kesslering: Exactly.
Julian Klymochko: More evidence of froth.
Michael Kesslering: You’re seeing some come out with no warrant coverage. I mean, specifically within biotech, that’s fairly common. But yeah, it’s an interesting dynamic where it’s just getting more, the leverage is swaying more towards sponsors at this point in time. Now that’s not to say that will continue far into the future. But that’s the current market environment right now. One other thing that you had mentioned was that it has been placed within the formula on tracking stock. And I think that’s an interesting dynamic where it gives public shareholders the opportunity to get a piece, not of just SPAC exposure but of the sponsor economics from that SPAC. And I believe the only other way that you can get exposure that I’m aware of to sponsor level economics is with Pershing Square SPAC through their closed end fund.
But I will note that Formula 1, the tracking stock. It has a $9 billion dollar market cap and $11.5 billion EV enterprise value. And so, this isn’t just a pure play on the economics from the SPAC sponsor.
Julian Klymochko: Right.
Michael Kesslering: You still do get exposure, but not just in pure play form. The large pipe forward purchase agreement. I mean, that’s just a very interesting dynamic for a potential target company. That certainly makes them a very highly sought-after target or a partner for a company that’s looking to go public via SPAC. And not to mention just the background and hype that would come with the Malone and Maffei management team. That $250 million does talk, and lastly, yeah, this really puts a lot of the compounder bros. It puts them in an interesting position because on Twitter, you see a lot of negativity around SPACs from the compounder and value community, but a lot of positivity towards John Malone, myself included. So, it forces some of these compounder bros to kind of align in the sand in where their allegiance stand. Are they negative against SPACs? Are they positive for John Malone?
Julian Klymochko: Yeah, resulting in a brain reffing out.
Michael Kesslering: Yeah, a little bit of mental gymnastics [Inaudible 00:09:36], I’m sure. But that’s certainly a very interesting deal from us. Unfortunately, we’re on the sidelines for this one.
Julian Klymochko: Yeah. So, you noted that Pershing Square has exposure within the closed end fund, but I wouldn’t know was that Pershing Square was the first and only management team that waived the sponsors. So that exposure I believe, would be through the warrants that they do own. So, Formula 1 does have you know, that full sponsor promote exposure. And on this deal specifically, I thought it was notable that Liberty reserved about 5% of the IPO for insiders and employees. The other thing that’s notable in terms of just the sheer speculation in this market is that over 13 million shares traded on its first day, which is about 26% of the shares offered in the IPO. And, you know, I think that’s unfortunate because a lot of fast money hedge funds have recently come into the SPAC space. Only to look to flip these issues on the next day.
So, a lot of these are trading 1/3 of the IPO shares offered on the first day and on this one, 26%, 13 million shares trading. And it’s just, you know, unfortunate to see so much short-termism in the SPAC market, just because that leads to unnecessary volatility. And my warning to investors is just be careful out there. Don’t pay too high of a premium and be you know, pretty disciplined on price when getting into these things, because we are noticing a lot of froth, a lot of extreme speculation and things of that nature. So certainly, looking to calm the market down a little bit, because I just believe it’s unsustainable at this point.
BATTLEGROUND STOCK: RETAIL SPECULATORS CREATE MASSIVE SHORT SQUEEZE IN GAMESTOP SHARES
Julian Klymochko: Moving on to another situation that’s unsustainable is where short sellers absolutely got their faces ripped off this week. As retail investors piled into GameStop shares causing the stock to rally as much as 78% on Friday. Now GameStop the video game retailers’ stock, which was previously left for dead. I believe it was a Net-net just recently, like in the past a year or two, and by Net-net, I mean, it’s market capitalization trading below its net cash, meaning that investors wouldn’t give it the benefit of the doubt of even liquidating, but it seemingly has come back from the dead and has rallied over 1000% over the past year. Believe it or not speculators in internet chat rooms seem to be colluding on heavily shorted companies in order to try to manufacture a short squeeze. And GameStop is really the number one stock for that. This company, they have attracted a hoard of speculators specifically in internet chat rooms, such as Reddit and Wall Street, bets it’s called, is the specific chatroom. These speculators are attempting to manipulate the stock higher, which is interesting because it reminds me of what used to happen 140 years ago.
That’s right, back in the late 1800, there was a stock market speculator known as Jay Gould and a number of others who would conduct these things called corners. And the opposite being a bear raid they’d call them. A corner is where they tried to corner the market on a specific stock or commodity and push the price up just due to overwhelming demand, manipulate it higher and sell out prior to it crashing. The opposite would be a bear raid where they’d heavily short a stock and look to cover at the lows. So, GameStop here has certainly turned into what we call a battleground stock, which is back and forth between longs and shorts. Now that short seller, such as Citron research Andrew Left coming and calling for these shares to crash back down to $20 dollars, a quote here from Andrew Left, he stated. “This is a failing mall-based retailer,
so, the amount of people who are so passionate about putting GameStop higher, not based on any fundamentals, it just shows the natural state of the market right now,” end quote. Nonetheless, I mean, this has just traded into an absolute or it’s turned into an absolute trading frenzy. If you look at the volumes of GameStop shares, nearly 12 billion traded just on Friday, and that’s nearly triple the entire float of the company, one of the most popular issues trading in the market right now, despite its small size around $4 to $5 billion dollar market cap, but you know, an absolute speculative mania and contingent on either side and it’s there right. And turning it into a battleground stock with a lot of interesting trading dynamics. Mike, what’s your call on this one? long or short? Or do you just stay out of the battleground stocks?
Michael Kesslering: Yeah, I would prefer to stay out of the battleground stocks. I think there just becomes way too much emotion once you allow yourself to be in kind of a high charged situation like this. I guess what you had mentioned was that there’s a lot of chatter between the retail community and that’s all through the WallStreet Bets subReddit. And so, this is a crazy situation, you know, just January 12th. I mean, the stock closed at under 20 bucks. And now it closed Friday at $65. Like, I mean, I believe the high in today was around $76 as well.
Julian Klymochko: Right.
Michael Kesslering: So, it’s just a wild situation. As you had mentioned, Michael Burry being involved since 2019.
Julian Klymochko: Right, Michael Burry.
Michael Kesslering: He’s a very, I guess, unlikely beneficiary of this battle.
Julian Klymochko: Well, assuming that he still holds it, because I think he sold about half his position in Q3 and his disclosure for Q4 has not come out yet. So hopefully he’s still hanging on to those, but who knows?
Michael Kesslering: Yeah, that would be one where he would just be kicking himself, if not, I mean, and what Andrew Left said, all of that is true that the fundamentals of this company have not changed, but as a fund manager, you do really have to prepare yourself for certain issues such as, this is a low float stock and it’s also a stock that has the short interest is 141% according to Bloomberg, a percent of float.
Julian Klymochko: Heavily shorted.
Michael Kesslering: Yeah, that’s a crazy scenario where it’s kind of becomes a game of musical chairs when you have such a group dynamic like that. And you’re just in a position where you can be really squeezed and lose well over 100% in terms of a short squeeze, it becomes pretty dangerous from a risk perspective. A few other crazy stats. I mean, I think it was Eric Balchunas from Bloomberg. He pointed out that tricking volume on Friday was about what the stock had traded on an annual basis historically.
Julian Klymochko: Right.
Michael Kesslering: And then in the option market as well, I mean the $60 dollar strike call options just expiring on Friday, those were the most traded and they traded over 200,000 options.
Julian Klymochko: Insane.
Michael Kesslering: And with an implied vol of over 1300, that’s absolutely wild. Really what’s happening in this scenario. What it seems like is that the option market volume is really what’s driving and moving the stock price movements because you do have the market making community, that’s making a market on the options. They’re having to hedge their exposure in the stock market. And so, you have these secondary effects that becomes kind of, create these wild feedback loops in stock. So, it does lend credence to, you know, if you are invested in the equities, you do still have to be focused at least a little bit for some of these anomalies that can happen in the option market, because that will have an effect on your whole day. But yeah, it’s just a scenario where, you know, risk management. That’s all I think about is how imperative risk management is in these shares and screening out four names that are so heavily shorted in your portfolio if you’re a shorter of stocks you know, it’s just imperative for risk management purposes.
Julian Klymochko: Yeah, I think it’s a really interesting dynamic that you noted the effectively tail wagging the dog with respect to the options market on some of these names, like a GameStop, where you have the underlying stock being driven by the tremendous activity in the options market where, you know, the options market on the other side of speculators are the market makers and the market makers need to Delta hedge that is put on a counteracting position in the underlying common shares to offset their option position. And it creates a dynamic referred to as a gamma squeeze where it can lead to wild moves in the underlying stock price. So interesting dynamics there. And my advice with respect to battleground stocks, I hear a commentary from just people randomly getting involved because it’s so topical, there’ll be like, oh, you know, I went along GameStop, or I shorted some GameStop, the price is crazy. My advice, don’t get involved in battleground stocks. You don’t need to be involved in everything. And these will just give you, you know, more stress than what it’s worth. I remember you know, quite a number of years ago when Herbalife was a battleground stock and, you know, there’s easier things in life than getting involved in securities, such as these. And the other thing to note is, and Mike, you really hit the nail on the head is never short heavily-shorted shares. That’s number one. I mean, it’s not good from a risk perspective, right? Because you are prone to a massive short squeeze. It’s like this and the stock has gone up 2X. The other thing is never short a dirt-cheap stock, like GameStop was super cheap and historically, value stocks have outperformed, so keep that in mind. So, don’t get involved in this one, is my opinion, but definitely learned a number of very fruitful lessons from what’s happening in GameStop shares.
EV CHARGING COMPANY EVGO UNVEILS GOING-PUNLIC TRANSACTION THROUGH BLANK CHECK COMPANY
Julian Klymochko: Lastly, I wanted to chat about a recently announced business combination in the blank check space. So, you had SPAC and this one has quite the name. The SPAC is called Climate Change Crisis Real Impact 1, that’s right, that’s the name. This SPAC had a mandate to conduct a business combination in a climate related sector. So, they certainly seem to nail it on this one. They announced a deal this week with EVGO, which is an owner operator of fast charging stations for electric vehicles in the US. EVGO is relatively developed. They have more than 800 locations and 67 major metropolitan markets across 34 States in the US. It’s network services more than 220,000 customers. They do have commercial relationships with GM, Tesla, Nissan. They also have partnerships with Lyft and Uber and also host sites at Albertsons and Kroger, just running through the investor presentation. One thing that I did want to note is some of the underlying economics on a building these charging stations, and they do claim unlevered IRR. So internal rate of return of 30 to 35% on some of their EV charging stations. So, from that perspective, they do seem quite a profitable. The other thing that I wanted to note on this transaction is that it does imply an equity value of EVGO, 2.6 billion. It’s bringing in $575 million dollars of cash, in addition to the SPAC cash, there’s going to be a $400 million dollar pipe financing anchored by PIMCO, BlackRock, Wellington, Neuberger, and Van Eck. I did want to touch on valuation because if you look through the investor presentation, which every investor should do, if they’re considering getting involved in this situation or even monitoring, definitely check out the deal deck is that they claim this deal is being done at 6.2 times EBITDA.
However, this is 2026 multiples. So, five years out, and I should warn investors that they are comparing that multiple against others on a, say like a 2021 or more recent basis. And if you look at EVGO on a current year basis, the valuation is more like a hundred times revenue, which is certainly quite steep. However, this company is estimating a revenue kegger. Compound annual growth rate of 151.8%. So that’s something to keep in mind on this one. And Mike, obviously this one is an EV charging deal, you know, the market loved it. The SPAC stock, which was already elevated. I mean, it was already trading North of $13. So, baking in a substantial premium, rallied another 64.5% on the news and now trading into the twenties. That’s right, a premium of over a hundred percent on this one. Mike, what are your thoughts on this EVGO climate change deal?
Michael Kesslering: Yeah, I mean, at first, when we started seeing some of these specifically within the ESG space, ESG SPACS for which we do hold a number of these. We kind of would giggle a little bit at some of the buzzwords that were used in the naming of these and this SPAC must set a record for the amount of buzzwords in just the name
Julian Klymochko: Yeah, they should have gone with the symbol WOKE instead of CLII in my opinion.
Michael Kesslering: Yeah, I mean, and so like, we can giggle all we want about that, but I mean, prior to this deal announcement, it was trading at a premium to its trust value. So, you know, statistically maybe there is some value in doing that. But you know, I will give some credit where it’s due here. You know, we are talking about some of the multiples and the crazy, you know, with any of these electric vehicle companies. You’re looking at, you know, multiples that are older than 2025 or 2026, typically is what they’re quoting. But I will give credit because they do actually do have revenue right now. They do have $14 million dollars expected for their fiscal 2020. So, I mean credit where it’s due there, it’s not a pre-revenue company. And so, I mean that doesn’t make it not risky, but it is a little bit different where they do have a business model here.
And I mean, another interesting aspect, you know, a very large pipe financing, interesting that no Chamath participation in this one, that’s pretty rare. Lately he’s been involved in pretty much all of the electric vehicle pipe financing. So that’s a notable, I guess, partner that’s not involved as well I would give a little bit of caution just around their projected IRR and unit economics as Julian, both you and I come from a background before moving to the buy-side. Background in the energy investment banking. And I don’t think a management team from an energy company specifically on the exploration and production side has ever drilled a well that didn’t have a 40%, at least a 40% expected IRR. So, you know, a little bit of caution in these expected unit economics, I can’t comment on the you know, whether they’ll actually realize this. Just a note of caution for anybody looking through the investor deck. Every investor deck does show, you know, just basically a hockey stick graph of their unit economics.
So, you know, not to get too caught up in the hype. And one last thing is, I mean, just with all these electric vehicle companies, I mean, I honestly have a little bit of difficulty even keeping track of some of these, especially with the target codes. Where you have EVGO here today, and just last month we were talking about EVBox, which is a competitor of EVGO. So, it’s pretty easy to get these a little bit mixed up but you know, interesting situation to follow. And it will not be the last of electronic or electric vehicle companies or adjacent companies. So, within the infrastructure layer of the EV revolution. It won’t be the last with the SPACs, that’s for sure.
Julian Klymochko: Yeah, I think you’re right about that one. Now this transaction is expected to close on the second quarter of this year, after which EVGO stocks will trade under the symbol EVGO, easy one to remember. That’s about it for this week folks. Hope you enjoyed the podcast. If you did, definitely check out more at absolutereturnpodcasts.com, leave us a review on Apple iTunes and some of the other platforms, Spotify, et cetera. Definitely follow us on the Twitter machine. Mike, what’s your tweet handle?
Michael Kesslering: It is @M_Kesslering.
Julian Klymochko: And mine is @JulianKlymochko, so definitely give us a follow, wish you all the best of luck in your investing this week and we’ll chat with you soon. Cheers.
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