"If you in the SPAC game, you know what I'm talking about
We sick of IPOs day 1 lockin' us out"
– Rapper Cassius Cuvee (Spac Dreams)
The public has been awakened to individual investors' impact in the equity markets, especially in highly shorted companies. Individual investors have also made their mark on IPOs. Special Purpose Acquisition Companies (SPACs) are now outnumbering traditional IPOs, 45 to 10 last week.
Traditional IPOs essentially shut out individual shareholders. IPO shares are allocated to the underwriters' most significant and best-paying customers. SPACs, on the other hand, welcome the individual shareholders from the start. In a traditional IPO, the largest funds receive a visit from management teams during the whirlwind multi-city roadshow. At the same time, other institutional investors get the IPO "chicken lunch" presentation (since there is no time to take orders, everyone is just given a chicken lunch). In traditional IPOs, projections came from the underwriters' analysts, who generally wrote down what management said. In a SPAC IPO, management teams are free to discuss their business publicly and provide their projections directly. That is an important distinction. When the company going public it does not earn a profit or even have revenues.
Despite all the recent attention, SPACs are not new to us. One of our Best Idea Longs, Nomad Foods (NOMD), came public through a SPAC in 2015. The co-Chairmen have a lucrative compensation structure that is similar to hedge funds. The incentives have been effective in aligning management with shareholders for the long term. Understanding the incentives and the merger target's motivation to partner with the particular sponsor is an integral part of our SPAC research process.
With the increase in SPAC offerings, investment research is needed more than ever. EVs and ESGs are the most popular SPACs, often doubling just based on the sector without any figures. You do not need Hedgeye if your investment process simply consists of buying the next EV or ESG company, but there is good reason to be more discerning when it comes to SPAC investing. SPACs come with considerably more dilution than traditional IPOs. That dilution tends to come into play in the post-completion phase when hype and projections are replaced with earnings reports and insider selling. The Chart of the Day depicts the dispersion of returns for recent SPACs. The vast majority of SPACs underperform in the latter phase.
SPACs are likely here to stay as long as individual investors are directing their trades. The more democratic IPO process seems to fit with the times. However, the structure will probably have to change in the next cycle to reduce dilution and retain capital.
"What if the promote was smaller? And only owners got warrants?
Then there would be more winners, who can afford chicken dinners."
Right – I'll stick to research and leave the rapping to others.
Back to the Consumables Macro Grind…
On Tuesday, we will present our first SPAC Research Roundup. We will dig into the business models, strategies, incentives, competitive moats, and valuation for two recent SPACs in the consumer staples sector. Bespoke Capital Acquisition Corp. (BSPE) announced its merger agreement with Vintage Wine Estates three weeks ago. AppHarvest (APPH) completed its merger the same week. We hope you can join us for what should be our first of many!
Vintage Wine Estates is primarily focused on wines priced between $10-$20 per bottle. The company has built a portfolio of over 50 wine and spirits brands on the West coast. The company has a long track record of organic growth and successfully integrating acquisitions and extracting synergies. The company will have a billion dollars of acquisition capital to deploy in a fragmented industry of over 8,700 wineries just in the U.S.
Being an older investor hasn't made me wiser (I can no longer help with my son's homework), but it has given me the perspective of pattern recognition. That is the hard-learned lesson that the market has drilled into me when I have lost money and when I have the endorphin release of a multi-bagger winner.
In Vintage Wine Estates, I see several commonalities with Nomad Foods. Both companies have organic growth tailwinds resulting from their position in the supply chain, both compete in large fragmented markets where scale has advantages, both have a history of successfully integrating acquisitions, both are set up for the long-run with management teams looking to create shareholder value, and both are not well known in the public markets, selling at a discount to better known comparable companies.
AppHarvest is building some of the largest greenhouses in Appalachia, closer to where the demand is. The company's technology enables it to grow produce in a way that is better for the environment - with fewer transportation costs, no chemical pesticides, hybrid lighting, and efficient use of rainwater. Its technologies' net impact enables it to grow up to 30x more fruits and vegetables on an acre than traditional agriculture.
The company has only recently harvested and sold some of its first grown tomatoes. Its purported yield, unit economics, scale efficiencies, and end demand are still projections in a spreadsheet. Its competitors operate with lower labor, land, electricity, and capital costs. Companies with these critical unknowns and zero revenues stayed private in the past. With a SPAC offering, the risks and unknowns are sold to the public, which has bid the shares up more than three-fold to $33.
If greenhouses are indeed the future, I would have you compare Kalera AS (KAL-OSL). It already operates greenhouses in the U.S. using technology that makes it ESG friendly. It grows lettuce instead of tomatoes, but Kalera's unit economics have been tested in the real world. Kalera also has significant growth plans, projects to report positive EBITDA in 2021, and is trading at one-tenth of AppHarvest's market cap. What Kalera does not have is a U.S. listing, providing the opportunity.
If you would like to learn more about my research team's in-depth investing research please reach out to .
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.25-1.47% (bullish)
UST 2yr Yield 0.11-0.15% (neutral)
SPX 3 (bullish)
RUT 2 (bullish)
NASDAQ 13,361-14,288 (bullish)
Tech (XLK) 132.01-140.19 (bullish)
Energy (XLE) 46.18-51.32 (bullish)
Financials (XLF) 31.90-33.93 (bullish)
Utilities (XLU) 59.35-61.68 (bearish)
Gold Miners (GDX) 31.98-34.97 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 290 (bullish)
VIX 18.84-24.08 (bearish)
USD 89.68-90.83 (bearish)
Oil (WTI) 57.92-63.65 (bullish)
Nat Gas 2.70-3.24 (bullish)
Gold 1 (bearish)
Have a great day today,
Daniel Biolsi
Consumables Analyst
