How should SPACs prepare for the Coronavirus?
About three weeks ago, when it looked like we might be able to get away with the Coronavirus being contained to just China, it was theorized here that the effect would primarily only be felt by the announced SPAC deals. Specifically, ones that had ties to the China/Asia region. However, now that the CDC has issued a warning to prepare for the Coronavirus in the U.S., it’s most likely no longer going to be a geographically specific issue. And potentially even more problematic is the fact that we don’t know the time horizon for how long this will last.
Nonetheless, SPACs (at least the ones that are currently searching for targets) are in a unique position in that they are not operating companies, so there is no “disruption” to any actual company operations. And furthermore, many still have enough time left on their clocks so that they do not have to announce a combination for quite some time. The hope being that by the time these SPACs are ready to announce a deal, the Coronavirus is no longer a threat. However, keep in mind that we currently have 23 SPACs that have yet to announce a deal and have less than six months to go before they expire. That’s a significant amount of SPACs that could potentially need to extend their deadlines.
For the “Announced SPACs” on the other hand, it could get very tricky. There is a lot of uncertainty right now about the virus and that presents a real dilemma for deals with both direct and indirect reliance on business models affected by the Coronavirus. Do you revise your forecasts and objectives now? Do you even address it yet? And what does this mean for valuations?
Valuations have probably the biggest question mark. Speaking to Neil Shah, Senior Managing Director at Evercore, he said, “It is difficult to calibrate the impact of the Coronavirus on SPAC valuation discussions right now given the uncertainty and timing of its broader impact. Clearly, if this volatility continues or cases increase in the U.S., then valuation expectations may need to change or be restructured into an earnout. This could present a good buying opportunity for investors with a long term mindset. However, certain sellers may remain disciplined on price and not reduce value if this is viewed as a short-term situation with no impact on their business fundamentals.“
However, if we consider some of those sellers who want to remain “disciplined” about their valuations, there could be longer-term ramifications. The obvious being that companies that were previously very attractive targets might decide to decline going public (SPAC or otherwise), effectively sitting on the sidelines rather than IPO at a lower valuation. More importantly, what this does though is shrink the universe of available SPAC targets if more and more companies decide to wait it out. Keep in mind that we have 81 SPACs currently out searching for combinations and many of them are in the same sectors. For instance, we currently have nine SPACs searching within the “consumer” sector. That’s a lot of competition and it will get increasingly competitive as the pool of available targets shrinks.
Furthermore, Christopher Capuzzi, Partner at Ropes and Gray, LLP, pointed out something I hadn’t even considered – “SPACs that are searching for targets in jurisdictions that have been affected by the virus need to be cognizant that companies may be operating with skeleton workforces. Strict quarantines will make for an even more difficult situation. Things like conducting due diligence, producing required disclosure for proxy statements, and delivering financial statements in a timely manner could become problematic for SPACs that are under a deadline to close their combinations.” We live in an “online” age, but there are some things you still really need to do in person and due diligence is one of them.
Additionally, for SPACs with currently announced deals that are directly impacted by the current Coronavirus situation, namely, Far Point and EdTechX, creating marketing materials or providing information on the target company in a rapidly changing landscape is especially difficult.
EdTechX, which intends to combine with Meten Education, a provider of English Learning Training (“ELT”) in China, chose to tackle their distribution of information head on. EdTechX released a new presentation yesterday and Meten Education (their target) put out a press release as well. Within that press release, Meten provided information on their gross billings between February 1st and 17th for Meten’s online courses, so investors could get a better sense for how they’re faring during the crisis. It also discussed how their “in-person” learning centers in China are currently closed, but they are waiting on guidance from the Chinese Ministry of Education and local Education Bureaus as to when they can re-open. However, since Meten also has a digital offering, in a charitable gesture they have also extended a 1-month rollover on their 18-month contracts so students who were previously “offline” (in-center customers), can continue their education via a 1-month tuition credit. As an FYI, Meten’s online business line is obviously doing quite well given the current situation, but as EdTechX’s CEO Benjamin Vedrenne-Cloquet said, “Morally, it’s very difficult to make a victory out of a pandemic“. Sobering words, indeed.
Far Point (FPAC), however, is in a much different situation. Their revised presentation, which was filed this morning, did update their risk factors to include the Coronavirus (last page of the presentation): “Our business is highly dependent on international travel, which may be adversely affected by regional or global circumstances or travel restrictions, including the impact of the Coronavirus outbreak or similar health-related travel disruptions.” However, if you go to the disclaimer in the front of the presentation and read the fine print:
“The financial forecasts and medium-term objectives included herein are forward looking statements that are inherently subject to significant uncertainties and contingencies, many of which are beyond Global Blue’s and FPAC’s control, such as, for example, the Coronavirus outbreak that will have a sizable negative impact on Global Blue’s business, results of operation and financial condition, and is not taken into account in the financial forecast information and medium-term objectives included herein.“
So FPAC is not including the current circumstances in their forecasts, but to be fair, how would they even begin to do that? Anything they project would just be a wild guess since, again, we don’t know for how long this disease is going to last and how far it will spread yet. We’re really only about six weeks into flight restrictions and mass quarantines. However, they do seem to be conceding that yep, it’s going to have a “sizable negative impact.” It’s just that not many people read the disclaimer notices…which may have been the point.
The bottom line is while we’re still in a “wait and see” holding pattern, all signs seems to be pointing to some sort of impact. The real question is, how much of an impact. The next two weeks should be crucial in assessing the virus’s spread, but as they say, “Prepare for the worst, hope for the best”.
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