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SPAC-tacular Crash: The fall may not be over for the once-trendy investment craze

December 2019, DraftKings announced plans to go public via a then-novel mechanism: the SPAC, or special purpose acquisition company. The deal, a three-way merger with SBTech and Diamond Eagle Acquisition Corp., proved a tremendous success in the early going. By the time the merger closed in April 2020, shares were trading at $19.35, nearly double the standard $10 SPAC listing price. By March 2021, the stock price had climbed to over $70.

By that point, the little-known SPAC had become a household term as a series of companies sought the quicker access to public markets that SPACs provided. Through 2020 and 2021, a staggering 861 SPAC IPOs raised a total of $246 billion.

Dozens of those companies were seeking acquisition targets in sports or had been founded by top sports business leaders, including Los Angeles Dodgers co-owner Todd Boehly; Gerry Cardinale’s RedBird Capital Partners and Oakland Athletics Executive Vice President of Baseball Operations Billy Beane; NHL Chief Operating Officer John Collins and former NFL Executive Vice President Eric Grubman; and The Raine Group and Marquee Sports Holdings, among many others. Athletes who joined the fray include Stephen Curry, Tony Hawk and Naomi Osaka.

Less than three years later, the SPAC market is a disaster. Thanks to the flood of sponsors, a Securities and Exchange Commission crackdown and broad recessionary headwinds, the vast majority of post-merger SPACs are deeply in the red, and many of those still searching for an acquisition target are now expected to reach their expiration date — typically one or two years after an IPO — without completing a business combination.

In fact, last month saw the first sports-related SPAC pull the plug when Omnichannel Acquisition, led by RSE Ventures CEO Matt Higgins, failed to complete a planned merger with Kin Insurance. Many more are expected to follow suit. Red Ball Acquisition Corp., an early entrant launched by RedBird and Beane, failed to complete potential mergers with Fenway Sports Group and SeatGeek. Its clock runs out in August.

DraftKings CEO Jason Robins merged his company in a SPAC deal that closed in 2020.getty images

One reason for that struggle is simple: supply and demand. “There is an oversupply of sponsors in the market, yet only a few offer any points of differentiation,” said George Barrios, co-CEO of Isos Acquisition, which took bowling center operator Bowlero public in December. “This mismatch has resulted in a lot of sponsors struggling to find a partner for the process.”

There were 613 SPAC IPOs in 2021, compared to 480 total IPOs in 2020.

Another challenge is increasingly strict scrutiny from the SEC. The regulatory body has spent the last year-plus trying to reign in the perceived freewheeling nature of SPACs, which generally have fewer restrictions than ordinary IPOs. The SEC has changed the accounting treatment of warrants, which entitle holders to purchase additional SPAC shares, and in March it voted to propose a new set of rules requiring greater disclosure and clarifying that SPACs would not be protected from liability for misleading projections.

Those SPAC-specific issues have more recently been joined by deteriorating market conditions, with the S&P falling over 20% year-to-date. Pre-merger SPACs trading in the red have led to skyrocketing redemption rates — the percentage of investors pulling their money off the table — and post-merger SPACs have broadly struggled to perform. Of the 263 that closed a merger in 2020 and 2021, only 18 had posted positive returns through last Thursday. DraftKings followed its meteoric rise with a tremendous collapse — its shares recently trading around $12 — and it remains one of the best-performing SPACs from the last few years.

Some industry veterans are quick to note that SPACs have not, on the whole, performed any worse than traditional IPOs, arguing that the investment vehicles have been unduly vilified. Data firm Sportradar had eyed a SPAC merger with Boehly’s Horizon Acquisition Corp. II before ultimately opting to pursue a conventional IPO instead, listing at $27 per share on the Nasdaq last September. The company’s stock has since shed two-thirds of its value, recently trading around $9 per share.

Despite the apparent challenges for sports SPACs, there are still some newcomers to the space. Tiger Woods launched Sports & Health Tech Acquisition Corp. in January, and Magic Johnson is the vice chairman of ESH Acquisition, which filed for a $300 million IPO last month. Industry veterans remain skeptical.

“Why would anybody in their right mind go and raise a SPAC? You’re putting yourself at a disadvantage in the industry right off the bat,” said a SPAC insider. “And you have the new rules and regulations coming out of the SEC. They had a comment period that just concluded, and I think the SEC said they’ll come back with new regulations by the fall. Are they going to make those retroactive and put another knife in the back of the SPAC industry? Who knows.”

RATE HIKE IMPACT

Last week, the Federal Reserve raised interest rates another 0.75%, the largest single hike since 1994. It also indicated rates would likely rise another 1.75% by the end of the year.

The attempts to curb runaway inflation pose a potential challenge for teams looking to finance construction projects. But according to Steve Vogel, who helps oversee some $3.5 billion in commitments across the big five North American leagues as the managing director of U.S. Bank’s sports finance group, the general atmosphere in the industry remains optimistic. “A lot of projects right now are full speed ahead,” said Vogel. “They’re seeing supply chain issues getting resolved, and they’re certainly seeing that rates are going to be higher. But that’s OK because the projects and the business are able to support that.”

He added that interest rate management is a growing focus of conversations, and there’s been evidence of companies adjusting to the new environment. Last month, Endeavor CFO Jason Lublin told investors that roughly 23% of the company’s $5.7 billion in long-term debt was fixed, and that Endeavor would “evaluate opportunities to replace a portion of variable rates with fixed rates if it makes sense.”

Vogel noted that most pro teams have some extra security thanks to their reactions to the recent COVID cash crunch, providing further support for capital expenditures: “What almost every team did during COVID was to build a fortress balance sheet from a liquidity perspective. So most clubs and most owners have come through to where we are today in a better position than they may have thought they would have been in 12 or 18 months ago.”

This is Chris Smith’s debut column on finance news and trends. If you have comments or ideas, he can be reached at crsmith@sportsbusinessjournal.com or on Twitter @ChrisSmith813.

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