June 29,2020—Gap Strikes Deal with Rapper Kanye West for Yeezy Brand. Why Did its Value Increase by $1 Billion?

Supermarket Operator Albertsons Finally Goes Public After Two Failed Attempts. Is Third Try the Charm?

Gym Franchise F45 Training Announces Go-Public Transaction with SPAC Crescent Acquisition. Should Investors be Buying?

Heads I Win, Tails I Still Win:  A Discussion on Low-Risk Investing with SPAC Arbitrage

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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 74 of The Absolute Return Podcast. I am your host Julian Klymochko.

Michael Kesslering: And I am Mike Kesslering.

Julian Klymochko: Today is Friday, June 26, 2020, a bit of a volatile week in the stock markets with COVID-19 cases, picking up a bit in the U.S., things are sadly reversing of course. A little bit investors getting spooked, but some interesting activity is still in the market. The IPO window is still open.

    • We saw that Albertsons finally completed their going public transaction after seemingly how many years, nearly a half dozen years of trying to go public.
    • Kanye West the popular rapper celebrity designer did a big deal with the Gap. In which the Gaps market capitalization increased by about $1 billion. So I think Kanye West definitely undervalued here.
    • And there was a SPAC deal this week, that is right. The special purpose acquisition company, Crescent Acquisition. They announced a deal with Mark Walberg, back the gym franchise F45 Training, and it was well received by the market. We are going to talk about some of the price action there, and if investors should be buying.
    • Lastly, we are going to talk about a blog post that I put out this week titled, Heads I win. Tails, I still Win: a discussion on low risk investing with SPAC Arbitrage. And these days with volatility picking up. Stock market valuations near record highs. Bond yields at all time, lows, I think low risk investing is a good place to allocate some of investors’ portfolios but before we get into that, let’s talk about this Yeezy deal.

 

GAP STRIKES DEAL WITH RAPPER KANYE WEST FOR YEEZY BRAND

Julian Klymochko: Big deal, featuring rapper Kanye West and retailer, the Gap and The Gap has really been struggling over the past. How many years? I mean, if you look at the Gap, they operate nearly 3000 stores in North America and going through COVID-19 with a ton of their stores closed, been super challenging. They recently withdrew their full year guidance. They suspended their dividend. They furloughed employees. Their stock has tanked 40%, so this Yeezy deal with Kanye West is really a new lease on life for the retailer. What it did? It signed a 10-year agreement with Kanye West for a proprietary line of Yeezy clothing. Now Kanye will design affordable adult and kids clothing for the Gap. It will be exclusive to the retailer and in exchange for that, Kanye will receive royalties in addition to potential equity based on a sales targets. Now, if you remember Yeezy brand, very popular shoes with Adidas, and recently it has apparently been valued at nearly $3 billion, Kanye’s Yeezy brand, so it is certainly super popular and doing tremendously well on the shoe side. I mean, who knows? Do you think that you can replicate the success as he has had with sneakers with retail here at the Gap? I don’t know. That seems like a bit of a stretch. What are your thoughts on this one?

Michael Kesslering: Yeah, this is very interesting deal and like you had mentioned with the big bump that you saw in the Gap share price, I just wanted to first quickly go back to the example we had spoken before about the Joe Rogan deal with Spotify. And then after that Spotify did make an announcement with regards to a Kim Kardashians podcasts and Spotify has just been on a run since then. It is up over 50% since the Rogan announcement and that is added almost $17 billion to their market cap. So you’re seeing big numbers for the sort of celebrity licensing deals. And with the Kanye deal, just to get into the granular details on the equity issuing side. They have not publicly disclosed what sort of royalty percentage Kanye will be getting. But on the equity side, they did issue warrants for up to 8.5 million shares.

That would best if the line achieved 700 million in net sales during the fiscal year. And so that works out to about a hundred million dollars of equity value or about 2% ish of Gap. So, you know, a big payday for Kanye, if he is able to bring in those types of numbers that would put that 700 million target into context with the Gap. They had sixteen point four billion dollars of revenue last year, and that is across all of their lines. They also have Old Navy, Banana Republic, I believe a few other brands under The Gap parent company. So that would work out to, you know, a 4.2% increase in revenue and so these are quite lofty goals for him and the Gap, but it is something to try to rejuvenate the brand. And I guess, you know, for me looking at this, what I’m interested to kind of take away and see how this will evolve. Is they have mentioned that they will allow Kanye to have input into the presentation in stores and on their website.

It will be interesting to see if he’ll make significant changes to their overall store aesthetic is that is something that folks in the investor community have kind of been complaining about is that they really haven’t changed their aesthetic or their brand. And it has been struggling over the years and as well for Kanye and for his Yeezy brand which he is the sole owner of, is will this kind of be a little bit dilutive to his luxury shoe brand because they are you know, they are a little bit more luxury brand as opposed to this, which is affordable. And I guess, you know, will this be a little bit dilutive? I really don’t know. Other brands that have tried this out you look at things like Hugo Boss. A brand like Hugo Boss, when they went to the little bit more affordable price point with an area of their brand that really did not work out very well. And now they’re trying to recoup their brand placement but for him, I mean, this could just be his way of kind of giving back to the community and giving them a fordable options, affordable style and fashion options. And he’s the sole owner of the easy brand. There is no external shareholders, so that is his prerogative if he wants to do so.

Julian Klymochko: Yeah, It is an interesting pivot for the Yeezy brand. Obviously super successful in shoes, $500 shoes, mine you. So huge margins there. I would not be surprised if that is worth close to 3 billion, given the volumes that they are doing, but you make a good point. Can they transition to low cost clothing for everyone? Certainly not everyone can afford $500 pair of shoes. In addition, as you highlighted that deal with Joe Rogan, Spotify, Kim Kardashian West, it just highlights the sort of state or perhaps declining brands, well not Spotify. But something like the Gap, their use of celebrities to sort of boost their fortunes. We saw something similar a number of years ago with Weight Watchers and Oprah. They did a deal with Oprah and I believe at the time the stock was sub ten dollars and since then the stocks have done extremely well. I believe it is around $25. So big gains off that Weight Watchers deal for shareholders and that one is probably the closest analog to this Kanye-Gap deal. As you indicated, my positive share price performance, it was kind of on a downhill slope for a while, but stock up as much as 42% today on the news, did close up about 19%, who knows how much of that is short covering? But nonetheless at the peak, it increased in market capitalization for the Gap of North of $1 billion. So certainly, Kanye West and other celebrities can boost stocks, and I would not be surprised to see more and more of these deals happening. I saw some news this week about LeBron James going big into media and you see more and more celebrities trying to monetize their likeness, their image. It certainly make sense. It definitely is an undervalued asset and as we saw off the Joe Rogan deal, Spotify as market cap increased in the billions. The Gap deal with Kanye, their market cap went up over a billion dollars, so true massive marketing power of celebrities.

GYM FRANCHISE F45 TRAINING ANNOUNCES GO-PUBLIC SPAC CRESCENT ACQUISTION 

Julian Klymochko: So we also had an interesting SPAC deal. What happened here was special purpose acquisition company, Crescent Acquisition Corp. They announced an $845 million merger with a gym franchise, F45 training, which is actually backed. One of their shareholders is Mark Wahlberg. This gym chain has nearly 2000 franchises in 50 countries. So growing like weed, super aggressive growth there. That is probably what shareholders like. It was founded in 2013, what F45 does? It is similar to many other gym concepts. They basically have merged high intensity interval training, circuit training, and functional training into one group workout. So it’s really interesting that they chose F45 as their acquisition target given say like the opposite of what happened in supermarkets where supermarkets have seen, this bump in business. You look at gyms similar to say retailers like The Gap. They have just been punished because many of them have been closed and social distancing. In the age of that, it is kind of tough to run a gym successfully these days. It was really surprising, the price action that SPAC shareholders like this deal, it was up as much as 29% on the news, but settled the week plus 6%. And I think that’s more of a keenness of investors to get involved in SPAC deals, not necessarily bullishness on F45 training specifically, but super, super interesting dynamic there, and really lends credence to our bullishness on pre deal SPACs and the tremendous upward price action that can occur when pretty much any deal is announced. We looked over the past month, any SPAC that has announced a deal. The market has been very, very receptive. Meanwhile on Tortoise Acquisition, which we talked about on last week’s podcast, what that stocks up 65% or so, it is just madness.

Michael Kesslering: Yeah, it sure is and I mean, not only does it lend credence to your view of really the market reacting favourably to any deal but as well as anything that’s being done that has any sort of celebrity backing. So the Mark Wahlberg connection in this deal. I think we were talking about this offline, where every single article you read about this, his name is brought up. That sort of brand alignment does seem to be quite favourable, you know, outside of SPAC as well. A couple of interesting notes and I do have a friend, one of our listeners had reached out on this deal as they are a F45 member. What is being offered to me just seem very much like CrossFit.

Julian Klymochko: Yeah.

Michael Kesslering: It seems a little bit culty. Very high user engagement though but when I say it sounds a little culty, all that means is that they have a very engaged user base. So I won’t take that away from them, but I really don’t have much to comment on the actual evaluation or anything or their prospects moving forward as any of the financial numbers that were quoted in the press release and the presentation were all pre COVID, so I really have no insight into how this has done through COVID or how it will emerge on the other side. Would like to note that I believe about 20% of the deal there is an exiting shareholder. So that is always interesting to follow in these deals. That is somewhat unusual, little bit unusual in these SPAC deals. Maybe on a typical IPO, that is a bit more of the normal, but less the normal with a SPAC deal. I did also want to bring up just in the area of the SPAC is. A gentlemen that we have spoken about many of times on the podcast, Bill Ackman. He got into the ring and Julian you had mentioned, I believe this was about a month, maybe a month and a half ago. That pretty much every hedge fund manager, VC and private equity firm will be launching SPAC in the next year or so. That is somewhat coming to fruition here. With Bill Ackman, one of the biggest names in the business. Very polarizing, they just filed their preliminary prospectus, but they are looking to raise a record $3 billion for their SPAC and go looking for a mature unicorn.

In addition with that $3 billion, which you never know how much of that’s going to be left after a deal for the company to have in their culvers, but Pershing Square, Bill Ackman. They are also have a Ford agreement to invest another billion dollars. So the company will at least have a billion dollars if no investors are deemed as well as an additional $2 billion that is not guaranteed but still has the potential. And I guess they would look at based on the deal, but why I wanted to bring it up is. Number one, the scale, but as well as the unique taunting structure.

Julian Klymochko: Yeah.

Michael Kesslering: They have structured for their warrants, where initially as an investor, you will be given one ninth of a warrant. And just for context, typically in a SPAC, or typically given between a quarter of a warrant to a full warrant. Is kind of the range that you see for per share in this situation, you are giving a nine and then if you do not redeem, then you are given an additional two nines and that would bring you up to a third of a warrant, and so that’s where it becomes very interesting. And a taunting structure is something that has existed, well I believe over a hundred years where it’s an insurance structure where people that pay into a pool as they die, that pool stays the same and accrues interest. But as you die, it’s basically, there’s more left for the remaining survivors. It is a unique structure that they are using for their warrants. And its right in the name of the SPAC. I just thought that was an interesting thing to bring up, as there is plenty of new news in the SPAC markets these days.

Julian Klymochko: Yeah, definitely interesting and creative taunting structure in Bill Ackman record breaking blank check company, but to conclude on the Crescent Acquisition, F45 deal. Executives at Crescent, obviously bullish on a quote from them. “They indicated their thesis behind the deal, F45 high profit margins, exceptional franchisee, economics, and repeatable business model, position it for a continued rapid expansion”. So it’s really a retail expansion play surprising timing given what’s going on with, COVID. Not to mention both 24 Hour fitness and Gold’s gym recently filing for bankruptcy. We will monitor this one; see how it does, but thus far, the market liking it.

SUPERMARKET OPERATOR ALBERTSONS FINALLY GOES AFTER TWO FAIL ATTEMPTS

Julian Klymochko: I will tell you one stock that the market isn’t liking and that’s Albertsons who finally got their IPO done after two failed attempts. So Albertsons, there U.S. supermarket operator. They finally went public this week and a downsize that’s right, a downsized deal for $800 million in an initial public offering, the first time coming to market for the grocery store operator. So the century old grocer tried to go public and failed twice already. So this was their third time, which ended up being the charm because they’re successful. So the first time they tried to IPO in 2015, that flopped, then they tried to go public by merging with publicly traded Rite Aid a couple of years ago that also failed. And one of the things that we don’t like to see is secondary offerings and private equity exits. You know, this one has all that and more, right. Like, because the reason that it is going public is to provide private equity firms, Cerberus the opportunity to exit their investing, so of the $800 million raise. Albertsons is actually getting none of that. That is all going into the genes of Cerberus, as they partially exit this investment. It has been a long-term hold for them much longer than your typical seven-year holding period for private equity investment. I believe they bought it in 2006, so a super long hold. Nearly 15 years, following this IPO. They will continue to own about 32% of Albertsons and the way I view this deal is they really waited for the opportune time to take this thing public, right. As we have discussed over the past month or so this IPO window is wide open. You have seen a lot of IPO pops that gets speculators interested in buying initial public offering. So a wide open IPO window in addition to pretty exceptional financial performance of grocery stores, because while everything has been closed, grocery stores have been open not to mention you’ve had consumers, stockpiling foods and other essential items. Boosting temporarily the bottom line of grocery stores such as Albertson.

So they’re being very opportunistic here and I don’t want to use the term lipstick on a pig, but it’s somewhat similar to that. In terms of price action, they went out with an initial range on the share price of the IPO of 18 to 20 bucks per share. They actually took that down to 16 on the IPO. Another thing you don’t like to see, so what you don’t like to see is temporarily good financial performance of the company. You don’t like to see a downsize deal. This one was downsized, so they are raising less at the $800 million range and then you don’t like to see the price range to be reduced. It is kind of a triple whammy of bad news, not surprising the stock fell on its first week of trading. Negative 3.4%, so certainly no IPO pop for Albertsons. And if we compare that to the average IPO, since the start of April, they popped about 25% to the positive on the first day of trading, so it looks like that streak has broken. Who knows if it says the uniqueness of that deal, that would be my best guess is don’t take that as all IPOs are going to start to do poor here. I don’t think this has any sort of bearing on any future IPOs. I think we will continue to see a lot of SPAC in the pipeline to go public over the next couple of weeks. And we’ve seen a ton of biotech IPOs. Those will certainly continue. What are your thoughts on this? A very opportunistic exit by Cerberus in terms of their Albertsons IPO. Finally getting done, third tries to charm.

Michael Kesslering: I think you do bring up a good point that not all IPO are alike. When you look at the hot IPOs. They are something that they are raising growth capital and it could even be you don’t necessarily have to agree with whatever growth vertical they’re looking at, but it is for growth capital. It is not just an LBO exit. It is not just an exit by a private equity company, so with the read through for this is for private equity firms that are looking at IPO exits likely not the best of ideas in that vein. Perhaps looking at a SPAC as an exit is a smart idea for these private equity companies just given the dynamics in this situation. But like you said, this had the triple whammy pricing below its range, then trading down on the first day.

So in no way, was this a hot deal. So really that is just damaging to the investment bankers for the company, they were actually able to raise at $16, so they were able to get, I guess, a more efficient price, as opposed to just having that initial one day pop accrue to those investors that have come into the IPO. But looking at Cerberus and the overall deal, like you had mentioned, they held it for 14 years. They had initially acquired it for an enterprise value of around $17 billion. Now they are exiting at around $21.6 billion dollars enterprise value. Just looking at that on its face, 14 years and not a huge return from $17 million to $21.6. But keep in mind that throughout that time, it is highly likely as the company is cash flow positive, that they would have been paying themselves quite large dividends and would have been able to find different ways to extract value from the company, but really what this comes down to. I’d read some of the quotes of Albertson CEO discussing some of their growth initiatives, which, you know, very rosy picture on their growth initiatives. Talking about the percentage growth of their E segments. So their e-commerce version of groceries. I mean it is the law of small numbers where you are growing at a very high rate of a very well base that is in no way really material to the company at this point, as well as things that every other grocer is doing. They are growing their private label brands, but really, every grocery is doing that, so it is nothing unique to the name. In reading, some of the comments was a little uninspired by the CEO’s comments. But overall, I mean, what can you do? At the end of the day if they are talking about these growth initiatives, but they are not raising capital for those growth initiatives. They are strictly doing an exit for the private equity firm. You have a very smart buyer that has been looking to exit this deal for a long period of time. Typically, you know, don’t want to be on the other side of a private equity exit.

Julian Klymochko: Yeah, I agree with that sentiment. Certainly, the odds are stacked against you. Not saying that it will be a loser of a stock, but certainly, if Cerberus is selling, I wouldn’t be buying.

BLOG POST

Julian Klymochko: So the last thing I wanted to touch on this week was the blog post I put out a couple of days ago; it was titled  Heads I win, Tails I Still Win: Low-Risk Investing With SPAC Arbitrage, which is one of my favourite trades these days, especially in this environment. As we have discussed super high equity valuations, a lot of volatility, record low bond yields. So investors are really struggling and not to mention that wicked bear market that we went through in the first quarter, lots of people are looking at their portfolios these days and be like, “hmm, I don’t want to go through that again. What can I do besides selling everything and sitting in cash?”

Well, one interesting trade is SPAC Arbitrage, and why we like it is that the special purpose acquisition company just holds treasuries like short-term treasuries, which are admittedly yielding very, very low, like 0.15%. So that’s not really why we’re keen on the trade. SPAC Arbitrage, you don’t just get that short-term T-Bill yield. There is basically two scenarios that can generate returns for a special purpose acquisition company investments. So the baseline scenario is that the SPAC does not complete a merger within its lifetime and either liquidates or presents an unattractive deal. The stock does not pop contrary to this at F45 deal and that Tortoise deal that we chatted about last week. If it is a bad deal, you can redeem your shares at the IPO price plus accrued interest. So you do get that baseline yield of treasuries. If you can buy it at a discount, which is what we like to do, you get treasury yield plus that discount, which is a nice low risk opportunity.

However, there is this upside scenario where you have this optionality of them announcing a good deal. F45 that one rallied much as 29% on deal announcement now up single digits, but it was previously trading at a discount. So in the upside scenario, the SPAC announces a business combination that the market is keen on and its price rises way above net asset value. And the share price increase represents this equity upside scenario. I highlighted two examples specifically. One was a SPAC called Insurance Acquisition. They did not even announce a deal. All that came out was they were in talks to do a deal with private company, Shift Technologies, which is an online retailer for used cars, which is somewhat funny because insurance acquisition was, they indicated their deal was going to be in insurance. So, a bit of a pivot on their part, but nonetheless, the market was super keen on this deal. It went from a roughly half a percent discount to net asset value in terms of where the SPAC was trading. The next day after deal announcement, it was nearly 16% premium, so a wicked short-term gain of 16% above and beyond any sort of arbitrage yield that a shareholder was expecting. So we like these trades just because of the very low downside and in certain cases, high, high upside. For example, if we look at another one— and all these deals have taken place this month in June— so June 19th SPAC Tortoise Acquisition announced a business combination with private co Hyliion, which is a manufacturer of electrified powertrain solutions for semi-trucks. And as everyone knows, if you look at Tesla stock, you look at Nikola stock. Electric vehicles are hot, hot, hot these days in the stock market. This one, no different, I mean, going from a 1% discount prior to deal announcement to a stunning 65.5% premium.

So if you’re in this for the SPAC Arbitrage, you’d be looking to make over a 1% annualized return and you wake up the next day, you’re up 66%, which is an explosive gain for what looks like a very low risk trade. So those risk reward dynamics are what we like and we are looking to capitalize on the market’s excitement about SPAC deals. So we are looking to buy SPACs pre deal and really harvest those gains once these deals are announced. And we have seen it really come to fruition this month, a lot of hot deals being announced, probably close to half a dozen. And I expect to see more of those. We call it a heads-I-win-tails-I-still-win bet and it is hard to argue against that one. Isn’t it Mike? Yeah, it certainly is. And I mean,

Michael Kesslering: Yeah, it is certainly is. Overall, we are quite keen on the SPAC space and it just represents such a good opportunity for risk-adjusted returns. I think you put it very well in your blog posts, just discussing a few case studies on how this actually works. As you look at some of the Reddit forums and things of that nature, where even Matt Levine where he will talk about SPAC. And it is just something that he’s just recently learnt the underlying structure and especially on the Reddit forums. There is a lot of confusion on how these actually work and it, but it can be quite an interesting strategy, but it does take a lot of working understanding the redemption process and things of that nature, because you don’t want to be ending up missing a redemption as Julian. I believe you have tweeted out a few times before on what can happen if you do miss their redemption, but it is a very interesting space to be following at this time.

Julian Klymochko: Yeah. You make a good point there because it may not be actionable for individual investors if they have small portfolio sizes, because some brokerage firms actually do charge a fee for a redemption, whether it is $50 or $80. So if you are looking to earn a 1% spread you know, investments of $10,000 in a single SPAC probably may not be too worthwhile, so I caution individual investors on following this strategy. If you don’t have a, you know, sizeable portfolio does, given the costs can be somewhat cost prohibitive in terms of effecting this type of arbitrage, but always learning in the market. It is great to see investors interested in this really new structure. That has gained a lot of popularity, as you indicated, Mike, very popular on Reddit these days. They are like in some of these hot deals that have come out that subsequently become popular with the Robinhood trading crowd. I believe a Burger 5 deal is really hot and you see a SPAC forum, capital acquisition company, FMCI being bid up by the Robinhood traders, but that’s really all we ought to chat about this week on episode 74 of The Absolute Return podcast. If you enjoyed the show, be sure to check out more @absolutereturnpodcast.com and definitely give us a follow on Twitter. You can find me at the people’s hedge fund managers. So that is @Julian Klymochko, K-L-Y-M-O-C-H-K-O. Mike, what’s your handle? How do they follow you on the Twitter machine?

Michael Kesslering: Mine is M_Kesselering

Julian Klymochko: Okay, great. So be sure to give him a follow as well. We wish you all the best of luck in your trading, investing and speculating this week and we will 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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