29 August, 2018
Alex Gavrish discusses main guiding principles for successful investing in SPACs
SPACs (Special Purpose Acquisition Corporation) market is becoming more active lately. One of the reasons might be the overall decrease in the number of public companies in the US over the last two decades, due to large waves of mergers and private equity buyouts. Subsequently, there is a need for exit and SPAC vehicles provide an alternative route for companies to return to public markets.
According to Alex Gavrish, CEO of Etalon Capital, an event-driven and value equities investment firm, SPAC segment is risky and opaque, but despite this SPAC companies share many characteristics similar to spin-offs.
Merger or acquisition by SPAC vehicle of an operating business represents an important corporate event. Similarly to a spin-off, it becomes an important turning point in the company’s story. Naturally, it is easier or investors to develop an investment thesis when such an event exists. It is a reasonable assumption that attractive investment opportunities could be found in this niche.
However, investors should proceed with extra caution when dealing with SPACs, as many of them go “bust” and returns are often negative. In order to limit the risk, investors should take three main steps. First, they should focus only on large SPACs – those companies with an enterprise value of $1 billion or higher. Second, they should focus only on companies with stable and long operating histories. Third, despite the chance that returns and upside will be compromised, investors should wait for a period of time, say 6 or 12 months from the announcement of a transaction. A good illustrative example here is our recent investment in Nomad Foods.
Nomad Foods was a SPAC (blank-check) company established by Noam Gottesman and Martin Franklin and also included Bill Ackman’s fund as the investor. During 2015 company completed acquisition of Iglo Foods Holdings, Europe’s leading frozen food company, and subsequently acquired continental European Findus Group business. Nomad Foods became a leading frozen foods company building a global portfolio of best-in-class food companies and brands within the frozen category and across the broader food sector. Nomad Foods produces, markets and distributes brands in 17 countries and has a leading market share in Western Europe. Company’s portfolio of leading frozen food brands includes Birds Eye, Iglo, and Findus.
As of December 2016, the company was valued at an estimated EV/EBITDA multiple of x7.8 and had a FCF Yield of 14%. According to Etalon Capital, the shares could have returned almost 100% over the next three years. In less than two years, the stock price rose 114% percent. The main factors that contributed to the positive performance of this SPAC company was a large size (an enterprise value of about $3 billion), relatively safe and stable industry sector and a long operating history of the acquired companies, and a very conservative valuation quite a long period after closure of acquisition transactions.
Presently, we see similar attractive characteristics in shares of recent SPAC that completed an acquisition. Interesting parties or investors are welcome to contact us to receive more details.