Porn, pot, space and gambling: Can SPACs shake a checkered past?

Jeff Lagerquist
·8 mins read
Playboy, DraftKings, Nikola, and a number of cannabis companies are listing on the stock market through SPAC deals. (GETTY)
Playboy, DraftKings, Nikola, and a number of cannabis companies are listing on the stock market through SPAC deals. (GETTY)

Playboy, pot, gambling, space tourism, and a controversial zero-emissions truck maker. What do they have in common? They’re all feeding into the buzz around SPACs, or special purpose acquisition companies.

Also called “blank cheque companies,” SPACs are having a moment as COVID-19 skews the pace of traditional IPOs and retail investors pile into the stock market with an appetite for glitzy new listings.

Examples this year include sports betting website DraftKings (DKNG) and electric and hydrogen-powered automaker Nikola (NKLA). Each saw their shares pop after SPAC-led public market debuts, although Nikola has lost value recently. Playboy Enterprises is set to return to the stock market through a deal with a SPAC announced on Thursday. Legal cannabis, a sector known for erratic stocks and scarce capital, is seeing a growing number of SPAC managers shopping for private companies looking for cash and a path to the stock market.

How SPACs work

The four-letter acronym refers to shell businesses with money to spend and no actual operations. Rather, the SPAC’s purpose is to invest in other assets. They can specialize in sectors like tech or cannabis, or have a more general focus. After initial investments by founders and sponsors, the SPAC raises money in an IPO. Investors typically receive a combination of equity and warrants to purchase shares in the future.

Management rosters are often stacked with high profile names to win investor trust. Think Bill Ackman and Richard Branson, or in Canada, Belinda Stronach and the late Hunter Harrison.

Ackman recently raised US$4 billion in the IPO of Pershing Square Tontine Holdings (PSTH), the largest SPAC IPO to date. Chamath Palihapitiya, the venture capitalist behind Virgin Galactic’s public debut, recently launched a trio of SPACs seeking a total of more than US$2 billion. Former Canopy Growth (WEED.TO)(CGC) CEO Bruce Linton is leading a US$150 million NASDAQ-listed SPAC called Collective Growth (CGRO) focused on buying U.S. hemp assets.

SPAC managers may have acquisition targets in mind, but don’t disclose them prior to the IPO. The publicly-raised funds are held in an interest-bearing account until management is ready to snap up assets. They typically have a two-year window to deploy a minimum of 80 per cent of their enterprise value in a “qualifying transaction.” Otherwise, the money goes back to the investors.

Shareholders vote on the acquisitions before the “de-SPACing,” and have the option of selling their stake before the new company is launched. Many opt to hold onto the warrants if they sell their equity shares, allowing them to jump back in at an advantageous price if the new company becomes a stock market darling.

Return of the SPAC

2020 has been a record year, according to data from SPAC Insider, with 120 U.S. SPAC IPOs raising more than US$45 billion. That’s up from 59 SPAC IPOs in 2019 raising about US$13 billion.

Proponents see a rejection of costly and cumbersome IPO requirements separating private companies from a broader investor base. Critics see the final phase of a bull market driven by speculative retail investors.

Joe Crouthers, a former Goldman Sachs banker, is leading the US$120 million cannabis-focused Ceres Acquisition SPAC (CERE-UN.NE) listed on the Toronto-based NEO Exchange. The Los Angeles-headquartered company aims to invest in “cannabis and related health and wellness industries.” A Canadian listing allows it to buy pot assets that are illegal under U.S. federal law. Ceres’ two-year deal-hunting clock started ticking when it went public on March 3, days before the pandemic tightened its grip on North America.

“It was actually the same day the Fed did their 50 basis point surprise cut. It’s sort of been the COVID world ever since,” Crouthers said.

Cannabis-related companies completed or announced 124 deals in the U.S. and Canada during the first seven months of 2020, less than half of the prior year's total for the same period, according to analysis by S&P Global Market Intelligence.

“Coming into COVID, really the eight to 12 months prior, it’s been really rough for a lot of cannabis names. Cannabis in general was already capital constrained,” Crouthers said. “If you need a cheque above five or 10 million dollars U.S., it’s very difficult to find.”

One consequence of the pandemic, he said, has been companies looking to sell off individual assets that could fit into his SPAC’s strategy, naming struggling U.S. pot retailer MedMen (MMEN.CN) and troubled multi-state operator iAnthus Capital Holdings (IAN.CN).

“There are opportunities coming from a lot of the more public names,” he said. “Even though COVID has overall probably been a positive for cannabis, I think it’s made the capital even more challenging for that period of time. It’s made the last few months especially painful for some folks who weren’t out in front of that.”

Crouthers sees the SPAC structure as a more collaborative path to the stock market for investors, and the owners of the target company, compared to an IPO or reverse takeover (RTO) listing. He said it allows both sides to get to know each other prior to a final deal to take the acquired company public.

“Business owners get a lot better picture as they go through the deal, versus prepping for a road show in a traditional IPO,” Crouthers said. “It adds up, I think, to deal certainty, which is worth even more when there is so much uncertainty in the world. Having more clarity and a little bit more control over that process is comforting to folks.”

He said retail investors earn “a treasury-like return” post-IPO, plus they get a “free look” at owning a private company that may otherwise have been targeted by a hedge fund or private equity firm with much deeper pockets.

In the U.S., SPACs surged in popularity in the wake of the global financial crisis. In 2008, the New York Stock Exchange and the NASDAQ announced they would begin accepting listings. The Toronto Stock Exchange finalized its rules permitting SPACs in December of that year.

Greg Taylor, chief investment officer at Toronto-based Purpose Investments, said the resurgence is surprising and advises investors to study past performance in Canada.

“It’s really been an awful experience on average for the SPACs when you look at Acasta and some of the other ones that had been around for a while, and all basically blew up,” he said. “I think people are forgetting the longer-term history.”

Acasta Enterprises went public on the Toronto Stock Exchange in 2015, backed by Tony Melman of Onex (ONEX.TO), Air Canada (AC.TO) CEO Calin Rovinescu, Royal Bank's (RY.TO) Gord Nixon, the late CP Rail (CP.TO) CEO Hunter Harrison , and Belinda Stronach of Magna International (MG.TO).

With the clock ticking and pressure mounting from investors to deliver deals on par with the resumes of those involved, Acasta bought a trio of businesses in 2016; a shampoo and soap maker, a detergent manufacturer, and an Ireland-based aircraft leasing company.

The investments proved disastrous and the famous founders began to distance themselves from the faltering company. TSX-listed shares fell from their $10 IPO price to penny stock territory in 2018. Acasta changed its name to Apollo Healthcare (ACH.TO) last month, reflecting its focus on hair and body products.

“People seem to forget that this can happen. They’re not all going to be home runs,” Taylor said. “People are thinking there’s free money out there, and they’re buying SPACs. It’s definitely a sign of mania more than anything else.”

Are SPACS the best way to invest in pot?

Taylor, who heads Canada’s first actively managed cannabis fund at Purpose, said cannabis SPACs have an unproven track record. He points to Canaccord Genuity’s first pot SPAC, Canaccord Genuity Growth Corp. It acquired American cannabis company Columbia Care (CCHW.CN)(CCHW.NE) in April 2019. Shares have fallen considerably since from $11.60, when the company de-SPACed, and have even traded below the $3 per share SPAC IPO price. Meanwhile, Ayr Strategies (AYR-A.CN), a SPAC-born company focused on U.S. cannabis operations, has seen its shares climb as the company expands its vertically integrated business.

Speaking at a recent virtual conference, Ruth Epstein, the chief financial officer of U.S. cannabis SPAC operator Tuscan Holdings called blank cheque companies such as hers “the only game in town” for pot companies when it comes to raising capital and entering the public market.

The challenge for the new crop of SPACs in the pot sector, according to Taylor, will be bringing unique offerings to the market that drum up investor interest in that same way Virgin Galactic and DraftKings have.

“You have to wonder what they’re going to buy that isn’t really already in the market,” he said. “This is something that could potentially come back to haunt them at some point.”

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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