September 28, 2020—SPAC Switchback Energy to Acquire EV Charging Network ChargePoint in $2.4 Billion Transaction. Have We Reached Peak of the Market for EV SPACs?
Berkshire Bites on $600 Million Preferred Financing for E.W. Scripps Acquisition of ION Media. How was this Investment Structured?
Blank Check Gores Holdings IV to Combine with United Wholesale Mortgage in Largest SPAC Deal of All Time. What Does the Market Think?
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 89 of The Absolute Return Podcast. I am Julian Klymochko.
Michael Kesslering: And I might Mike Kesslering.
Julian Klymochko: Today is Friday, September 25th. I believe the S&P 500 down for its fifth week in a row. Not dropping a lot, just a bit of volatility this week. Nonetheless got a few deals to talk about in this deal-focused episode of the podcast.
- Going to start off talking about SPAC Switchback Energy, struck a deal to acquire EV Charging network ChargePoint in a $2.4 billion dollar transaction. We’re going to chat about like, do you think we’ve reached peak of the market for EV SPAC? There’s been a ton of these, investors still seem to like them though.
- Next up, Berkshire Hathaway. They got into a deal here. I mean, we haven’t seen a ton out of Berkshire this year, but they did strike a $600 million preferred financing for E.W SCRIPPS, acquisition of Ion Media. We’re going to get into the details on how this investment was structured. Hinted is a Buffet classic, even though one of his lieutenants did this deal.
- And lastly, another SPAC transaction as blank check Gores Holdings, the IV combine with United Wholesale Mortgage in largest SPAC merger of all time. What does the market think of the $16.1 billion dollar deal? Just absolutely massive.
SPAC SWITCHBACK ENERGY TO ACQUIRE EV CHARGING NETWORK CHARGEPOINT IN $2.4 BILLION TRANSACTION
Julian Klymochko: Before getting to that, Mike, let’s talk about this Switchback Energy Acquisition/ ChargePoint deal. This is a funny one. This one made me laugh and here’s why, because Switchback Energy Acquisition, it was always trading at a discount to its net asset value. It was a fairly large deal, $300 million been around for a while. So, it’s vintage, I believe it came out late 2018, early 2019, getting to the end of its life. And its initial mandate was to be focused on the upstream and midstream energy sectors.
And we all know how those sectors have traded over the past number of years, you know, an absolute dumpster fire. Investor sentiment could not be any lower in any deals that we’ve seen been announced, in oil and gas. Investors can’t get excited. They all redeem in the SPAC fits. So, it’s somewhat funny that they pivoted from what they know, which is ENP oil and gas upstream/ midstream, because Switchback is sponsored by NGP, which is a resource focused private equity shop. However, what Switchback Energy did was they jumped on the bandwagon for all things, electrical vehicle, electric vehicle related because we’ve seen those deals just skyrocket. Investors, super enthusiastic about them. Surgeon share prices and massive financings coming along with those and record valuations. So, what Switchback did? They change their mandate, struck a deal with an electric vehicle charging network company called ChargePoint.
It’s founded in 2007. They have more than a hundred thousand charging points worldwide and they do have revenues. So, it’s not one of these pre-revenue companies. Been around for 13 years in 2019 had $147 million dollars of revenue. Still not profitable though that book them, but $133 million dollars of red ink in 2019, a number of really high quality and strategic investors already in ChargePoint, including Daimler, BMW and Siemens. Then you got Bailey Gifford, that investment firm big into Tesla. As many listeners know, they all have a large holding in ChargePoint as it prepares. They’re going public transaction through a blank check, Switchback.
What’s interesting is this one, as we have seen to be the trend in recent SPACs comes with a pipe, a private investment in public equity struck at 10 bucks per share roughly $225 million dollars on that. Plus, the blank check has I think around $300 million dollars. So net cash available to ChargePoint when they complete this deal will about be $500 million dollars and unsurprisingly investors loving this deal. The SPAC was up about 30% this week on the news. As I previously discussed, we need electric vehicle deals. We need more of them and we need more of them now. So, what are your thoughts on yet another one? Will they ever stopped?
Michael Kesslering: Yeah, they won’t stop until you don’t see a 30% pop on announcement.
Julian Klymochko: Reminds me of that Chuck Prince quote, “when the music is playing, you got to get up and dance”.
Michael Kesslering: Yeah, exactly.
Julian Klymochko: And they’re dancing in the SPAC world.
Michael Kesslering: Yeah, certainly. If investors keep pushing up prices on announcement. There’s no reason for sponsors to shy away from the EV deals. Just in terms of going through their investor presentation upon deal announcement, a couple of highlights that I had. The company, they see themselves as an index for the entire EV industry, not just a bet on a specific player as they are quite strategic with a number of different players. So, I guess, when you look at an investment such as Tesla, it’s really all about upending, like the adoption of EVs, but also that specific player.
Julian Klymochko: Plus, they have some of their customers or future customers as strategic investors.
Michael Kesslering: Exactly. but yeah, as well, the company expects about $190 billion dollars to be spent on the EV charging industry infrastructure by 2030, they hope to be a large piece of that. Looking at their financials, they have pretty low gross margins. I believe they had 13% last year and expect 24% this year.
Julian Klymochko: Aren’t they going to try to have some sort of subscription play?
Michael Kesslering: Yeah, so that’s where they view themselves as capital-light. Not in my definition of capital light. They view themselves as capital light. But it’s that hardware+plus a subscription similar to Peloton, which we’ve talked about their business model and how really, it’s all geared towards like if they can basically break even on the hardware, it’s all about having a sticky customer for a recurring revenue and getting that multiple. Even in their projections, they’re really only rising to 42% gross margins. So, can’t really technically take the software comps, which they try to, I’ll discuss that in a moment, but they try to comp themselves to a little bit more software heavy companies as well.
Julian Klymochko: Were they the company that I saw comped against both Tesla and Peloton.
Michael Kesslering: Yeah, that is exactly them. So, they, they comped themselves against Tesla and Peloton, and that was for operational and valuation benchmarking…
Julian Klymochko: Story stocks.
Michael Kesslering: Yeah and then they also had a little bit more relevant energy tech players, such as Enphase and SolarEdge. But all their valuation benchmarks are showing based on their 2025 and 2026 estimates. We’ve talked about how that’s not best practice in terms of any sort of valuation comps. And really isn’t based on anything that can actually be projected. But then in their appendix in their presentation, they did have that themselves comp to gain stock companies like Nikola, Luminar, Helion and Lordstown.
Julian Klymochko: Right.
Michael Kesslering: I really hope that their pitch isn’t just, hey, our valuation is slightly less crazy than these companies. Because that’s kind of what it seemed.
Julian Klymochko: And then Nikola valuations seem to be dropping dramatically day by day.
Michael Kesslering: Yeah, yeah, exactly. Now that their founder is no longer with the company. Had given up a large portion of his options, but it’s still a multibillionaire.
Julian Klymochko: A mixed accusation of fraud as well.
Michael Kesslering: Yes, and still a multibillionaire though. He’s given up a couple of hundred million dollars in comp, but is still worth $3 billion dollars.
Julian Klymochko: Now he can sell without catching any attention because he doesn’t have to file, he is not an insider.
Michael Kesslering: Yeah, so that really doesn’t seem like that bad of a deal for Trevor Milton, to be honest. But yeah, anyway, in terms of ChargePoint. Basically, the story seems to be, hey, we have a little bit better valuation on these wild estimates than some other companies that also have wild valuations.
Julian Klymochko: The difference between ChargePoint and some of these others is it appears that ChargePoint is quite a bit more established, been in business 13 years has a nine-figure revenue stream thus far.
Michael Kesslering: Yeah, they do have an actual business. If you’re going to compare them to companies like Nikola, absolutely like they do have a legitimate business right now. It’s not just a bunch of renderings. So, you have to give credit where it is due. It is still a large valuation, but it’s not out of this world valuation.
Julian Klymochko: Right, but thus far, no indication that we have reached the peak of the market for EV SPACs. We certainly continue to see more of these deals coming. We monitor the SPAC IPO market, very closely. Read every S-1, and a lot of the new ones are targeting what they call energy transition, clean tech, all of that implies more EV related deals, whether they are battery related like that Quantumscape deal or EV related charging, things of that nature. Any other sort of, kind of future technology as the world kind of transitions into electric vehicles. So certainly, we will have more than those willing to bet on it. And as for now, the market is loving these deals. As I indicated, have nearly 30% on the news, on a SPAC that was supposed to do in the oil and gas deal, but now it’s in the hot EV space.
BERSHIRE BITES ON $600 MILLION PREFERRED FIANANCING FOR E.W SCRIPPS ACQUISITION OF ION MEDIA
Julian Klymochko: Let’s move on with Berkshire in the news this week, putting up $600 million dollars, which to most would be seen as a large deal, but just a drop in the bucket for Berkshire Hathaway, given it’s 150 billion cash pile, putting a little bit of it to work by helping to finance E.W Scripps, $2.65 billion dollar acquisition of true crime cable network Ion Media. Now, the target was launched in 2007. It’s owned by credit investment from Black Diamond Capital & Management. They operate a national Tv network. They have shows such as law and order a fan favourite, been around forever. Can’t go wrong with some law and order and NCIS a Los Angeles. Ion Media owns television stations in 62 markets, including many of the top ones in the country. So, this deal in terms of why E.W Scripps is buying Ion Media, a lot of consolidation in the media space, they expect to generate $500 million dollars in synergies over six years. So, a lot of overlap cost cutting opportunities available once this transaction closes.
Now this deal was structured in an interesting way and it gives you know, the aura of a Buffet deal. However, this deal was driven by its Buffet Lieutenant, Ted Weschler. And the reason that I say it gives an aura of a Buffet deal is the structure. If we go back to the deals that Warren struck over the past dozen years, he’s done a few of them, whether it’s Occidental Petroleum, Bank of America or Goldman Sachs, in each one of those deals, he invested not by a common equity. He invested via preferred shares plus warrant kickers. And this deal was structured in the same way, such that the $600 million dollars they get preferred equity. And then they got a good chunk of warrants on top of that for additional upside kickers. Now those warrants don’t always pay off. I believe they did in the Goldman Sachs and BFA deals, but obviously Accidental way out of the money and likely highly likely to expire worthless on the warrant side. And who knows if those, perhaps they’re going to get impaired. Bit of a sketchy situation, but you know, trademark Berkshire deal where they’re looking at sort of a beaten down or uncared about industry and putting their money to work through interesting structure, specifically preferred plus warrants.
We hear from Buffet talking about his desire for an elephant size deal. And seemingly had a great opportunity in 2020 with a massive market volatility, lots of firms in need of capital. However, we’ve seen very limited out of a Buffet over the past year, the $600 million dollar deal for E.W Scripps, obviously a Wechsler deal, tiny portion of their cash balance. Previously, we talked about the Snowflake IPO subscription, which was a head scratcher, but that was a Todd Combs deal again, very small transaction. And basically, Buffett’s only done two things this year: the $4 billion dollar transaction for Dominion Energy Natural Gas Storage and Transmission Network. And lately I think in the last month or so, he did disclose significant stakes in five of Japan most venerable corporate trading houses and that was just a cheap stock play. I believe they’re trading at single digit earnings multiples discount to book values. So that’s all we’ve seen out of Buffet. He still has a ton of cash to put to work, but thus far haven’t seen a lot out of him. Certainly, his lieutenants are staying active. Mike, what do you think on this sort of classic Berkshire deal structured by Ted Weschler?
Michael Kesslering: Yeah, Ted obviously learning from Buffet with these preps’ deals.
Julian Klymochko: The heir apparent?
Michael Kesslering: Yeah, perhaps but with the actual structure of the prefs as you had mentioned, 8% coupon paid in cash 9% if deferred no maturity date on them, which is interesting. But redeemable starting five years after it, the issuance with the warrants Berkshire can exercise them at any time, but no later than one year after all the preps have been are deemed. The expectation is that this would add another a hundred million dollars of value to Berkshire on a $600 million investment with an 8% base rate return makes that investment quiet, favourable for them.
Julian Klymochko: Certainly, better than earning basically 0% in treasuries.
Michael Kesslering: Exactly and what I found interesting as well was the one clause within the pref is that while the prefs are outstanding that Scripps actually can’t issue a dividend or repurchase shares. So, it does constrain them in terms of their capital allocation or returning capital back to other investors that are below them in the stack.
Julian Klymochko: Right, providing some safety and comfort for Berkshire.
Michael Kesslering: Yeah, absolutely. And in terms of the deal itself, no major comments. I think you covered it quite well, Julian with you know, they’re expecting some synergies over the next number of years. Berkshire does have experience in the media industry. And so, this seems like a fairly cookie cutter deal for Berkshire, from their perspective of, you know, you get the prefs, it’s an industry that they know, get the warrants on top,
Julian Klymochko: Right, that’s a good summary.
BLANK CHECK GORES HOLDING IV COMBINE WITH UNITED WHOLSALE MORTAGE IN LARGEST SPAC DEAL OF ALL TIME
Julian Klymochko: I wanted to chat about this United Wholesale Mortgage SPAC deal with Gores Holdings because this year we’ve had a lot of firsts and records within the blank check sector. Few months ago, we saw Bill Ackman come out with the largest SPAC IPO of all time at 4 billion. Of course, the SPAC market has been absolutely on fire. A ton of IPOs this year. I believe we’ve done a North of $40 billion dollars raised a year to date, which just is a significantly higher than any other deal by multiples. And this week, it was announced the largest SPAC transaction, the largest business combination on record with Gores Holdings for a blank check company merging with United Wholesale Mortgage, the number one wholesale mortgage lender in the US at a value of $16.1 billion dollars, that makes it the most highly valued, a blank check merger on record.
But I thought it was very interesting is typically the average SPAC raises, 200 to 300 million. In this case, Gores Group raised 400 million for their fourth SPAC that did this United Wholesale mortgage deal. And the typical business combination is generally 3-5 times larger than the SPAC IPO proceeds or what they have in the trust account. Now, this one was many multiples of that. I mean, I think it was around 38-fold, what they had in the trust account. So, it really presents a new option for SPACs is perhaps they’d consider it punching above your weight in terms getting a significantly larger deal than was previously expected or even thought possible within the space. So, it really opens up more areas for deal making in larger and larger companies. How this transaction is going to work? So United Wholesale will receive $425 million dollars in cash from Gores Holdings. That’s what they have in the bank. And this is an all-share deal. They’re also getting, as we’ve seen in other deals of $500 million dollar pipe financing, they’re going to use these proceeds to invest in their technology platform and marketing and talk about Gores Group. And we always have this debate like who is really the SPAC master, is it Chamath who we have crowned the current SPAC master, but man, look at Gores Group. This is their fifth SPAC; I believe to announce a deal. And they just raised $400 million dollars, for their six SPAC. And one of the SPAC, they all have the numbering methodology except Gores Metropoulos, which merged with autonomous vehicles sensor from Luminar earlier this year. So, Mike, do you think that it’s a changing of the guard here, perhaps time to crown a new SPAC master with Gores Group doing not only the largest merger of all time at 16.1 billion with United Wholesale Mortgage, but also the amount of SPACs that they have. I mean, they’re already on their sixth one, raising 400 million, I think Chamath have some catching up to do here.
Michael Kesslering: Yeah, absolutely, in terms of volume and then as well as actual success within this SPAC industry. Alec Gore is definitely up there in terms of these industry participants that we’ve highlighted over the last number of months on the podcast.
Julian Klymochko: They have been in the space for a long time.
Michael Kesslering: Yeah, yeah, absolutely. Specific to the deal, I guess. I do have another couple of comments on the deal as well, but you know, the market really didn’t like this deal. Trading around $11 dollars pre-announcement.
Julian Klymochko: I hopes.
Michael Kesslering: Yeah. Yeah.
Julian Klymochko: Especially after that Luminar deal. I mean, that seemed like a winner, but Luminar was kind this classic early stage tech that was highly speculative, but you know, that early stage opportunity that SPAC investors seem to be attracted to.
Michael Kesslering: Yeah, exactly. What you typically see is, as we’ve highlighted before, is that sponsors that have had success before, like Alec Gores, their SPACs typically trade at a fairly sizable premium to their trust value. And this one was trading at $11 dollars. So, a premium to the trust value close today at 10.35. The market does not like this. And some of the reasons for the sentiment would be last month, one of their competitors, Rocket Companies they actually went public.
Julian Klymochko: In a traditional IPO.
Michael Kesslering: Yes, in a traditional IPO. Had a decrease in both the size and pricing of their offering prior to its initial day of trading. So, this could have a factor in some of the negative sentiment towards the company, as you had mentioned though, they are a little bit more established. They have real earnings, but those earnings are declining, are expected by the company’s own projections to be declining over the next couple of years. As well as you did have some insider selling into the SPAC merger which it was basically seen as a little bit of a liquidity event for investors and typically SPAC investors, anybody following the space, you really like to see the target shareholders, especially management rolling their equity forward. But there was a little bit of selling in this deal. But as well, I did want to highlight, there was a few things in the media that I saw this week that really showed a little bit of misunderstanding with regards to the capital put up by founders and how much of a multiple you can make on that as a SPAC sponsor, where there was an article that I saw that came out saying that the Gores SPAC deal turned $25,000 dollars into $80 million in a few months.
Julian Klymochko: $25, 000 they pay for their basically their seed shares. The class B shares also known as the prem out.
Michael Kesslering: Yes and with that prem out typically you will see those renegotiated either a number of those shares being cancelled, or you can see them converted into some sort of earn-out where they will still keep those shares, but there’ll be subject to an earnout based on the share price after a number of months and years after the de SPAC,
Julian Klymochko: Plus, the Gores Group needed to put up significantly more than just $25, 000 dollars.
Michael Kesslering: Which is exactly what I’m getting to. Yes, the $25,000 dollars but also $10-12 million of at-risk capital.
Julian Klymochko: Right.
Michael Kesslering: Which goes to zero if the SPAC does not find a deal.
Julian Klymochko: Or even if the SPAC doesn’t do well, because typically that at-risk capital is warranted at 15% premium to the IPO price of the SPAC shares, don’t do well. Then when those expire at risk capital zero, however, you still have, you know, a good chunk of you pro out likely.
Michael Kesslering: Yes, and so a reasonable amount of that, there is quite a bit of risk in that capital. Don’t get me wrong. This still was a great deal for Gores where they made over six x their initial investment of that $10-12 million dollars. So, they still did very well. It’s not quite the $25,000 dollars into 80 million that the headlines would like you to believe. But still very much highlights how profitable it is to be a SPAC sponsor. And why everybody in finance, in the private equity space, VC space, hedge fund space, or wanting to get into SPAC.
Julian Klymochko: Yeah, and is reason why we’re seeing kind of three to five SPAC S-1 filed per day to get new issues out, but on a comment with respect to the compensation, yes, people should be aware of it, but I think it’s getting too much of a negative, negative attention, because if you looked at the M&A advisory fees that the investment banks get out of this, or the lawyers get specifically the investment bankers would be quite a bit larger. You know, I’m sure they’re making a high single-digit to even low double-digit millions of dollars for putting zero at risk capital up. So, there’s nothing wrong with earning a lot of income for providing your expertise. And that’s what these dealmakers do. They put a deal together, they get a chunk of the value. And you’ve seen that for many decades in the investment banking space, merchant banking space, you look at private equity, they get 20% carry, more performance driven.
However, this has been a business model that’s been around forever. So I did see you know, Chamath specifically talking about all the attention being paid to the SPAC sponsor promote, and the fact that they’re making a lot of money, but his comment was like, you know, there’s nothing wrong with making money, all the other parties in the deal or making money, specifically the investment bankers, the lawyers, all these different parties, making millions of dollars. Why is all the attention being paid on the sponsor, earning their fees.
Michael Kesslering: Especially when they’re actually taking the risk.
Julian Klymochko: Yeah, not just capital at risk, but reputational risk and things of that nature. So, it’s more so to balance out the debate here. Certainly, they’re making a ton of money in these transactions, but not everyone can do it, right? So good summary on that one. Really interesting news in the M&A, and SPACs space, as busy as ever. We’re seeing a ton of more SPAC IPOs, so super exciting sector to follow. Other than that, that’s about it for us on this episode of The Absolute Return Podcast. If you enjoyed it, definitely check out more @absolutereturnpodcast.com and certainly Mike, they should follow you on Twitter. What’s your handle?
Michael Kesslering: M_Kesslering.
Julian Klymochko: And you can find me on Twitter at @JulianKlymochko, until next week ladies and gents, hope you have a great week of investing and trading 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.