As Hollywood constantly searches for new forms of fundraising, the Special Purpose Acquisition Company, or SPAC, has found new popularity over the past couple of years. In addition to being a welcome source of funding, these blank check investment vehicles seek to energize the sparsely populated part of the business ecosystem in the media, entertainment, sports and digital sectors.
PSPCs (blank check transactions are also known as blind pools and reverse mergers) allow entertainment companies to go public while bypassing the traditional route of IPOs. They work by raising capital through their own IPOs, becoming publicly traded entities with the specific purpose of acquiring an existing operating company.
PSPCs are streamlined publicly traded entities that are overflowing with liquidity but are not doing business at the time they go up for their IPOs. Their plans are to merge later with a private company that has not yet been selected.
“This is a tool that is less capital intensive upstream than more traditional transactions involving majors such as studio co-financing agreements,” explains Morgan Earnest, COO at Los Angeles Media Fund and CFO of its SPAC, who raised $ 253. million in November.
The advantage for this private company: avoiding the regulatory obstacles and financial control that come with traditional IPOs.
Typically, funding injects money into the upper echelons of the industry, such as funding the list of films going to major movie studios, leaving the majors responsible for business decisions. In PSPC country, Earnest says their transactions create full-fledged independent operating companies that chart their own course.
Harry Sloan, co-founder of Global Eagle Acquisition Corp., co-founded seven SPACs, including the much-publicized DraftKings SPAC.
Patrick T. Fallon
PSPC transactions are booming in the finance and media / entertainment industries. Sidelined by the video streaming revolution, Redbox branched out from its streaming DVD rental roots, merging with a SPAC providing $ 88 million in cash in October. On December 1, talent agency UTA, capitalizing on its strength in video games, announced that it was raising $ 200 million through a SPAC designed to pursue acquisitions of games-related companies.
Other SPAC deals involved science / history video streamer CuriosityStream; The acquisition of Liberty Media, from a traditional cable television / telecommunications giant, raising $ 575 million; former Disney executives Kevin Mayer and Tom Staggs raised money for the duo’s business; and others in sports and gambling. Reflecting the boom, Wall Street researcher Dealogic has 301 PSPC deals since the start of the year in November worth $ 585 million in communications-entertainment-media made or announced, compared to 199 comparable deals worth of $ 261 million over the same period a year earlier.
Entertainment companies are ideal merger targets because they are at the epicenter of today’s celebrity-obsessed culture, says Hal Vogel, veteran media analyst and CEO of Vogel.
Capital management.
“If you’re starting a PSPC, you’re looking for a business that has success and publicity,” says Vogel. “Fashion, sports, music and film have recognition, branding and normally some sort of income, whether it’s a piece of music or celebrity sneakers.”
Famous entrepreneurs dot the SPAC landscape, from basketball star Kevin Durant to former CBS executive Joe Ianniello to Mark Wahlberg.
“The media, entertainment and sports industry is an extremely large and evolving category that is inextricably linked with technology,” adds Michelle Gasaway, Partner, Capital Markets, at the law firm Skadden, Arps, Slate, Meagher & Flom. This expansion means leaps in digital streaming, mobile games, digital content creation, and online lifestyle content, sometimes with hardware attached such as exercise equipment and experiential technologies.
What energizes investors today are the examples of PSPC stocks climbing after mergers. The stock price of SPAC known as Digital World Acquisition Corp. (DWAC) was multiplied by six in October with the announcement of the merger of DWAC with the private social media firm of former President Donald Trump.
Fantastic sports / betting entity DraftKings for its SPAC deal in March 2020, after which its stock price peaked above $ 70, recently gave up a few gains. Its SPAC, Diamond Eagle Acquisition Corp., issued shares at just $ 10 a share before the DraftKings merger.
Harry Sloan, the Hollywood executive who co-founded seven PSPCs, including merger partner DraftKings, had 40 PSPCs at the time of the DraftKings merger which rose to 600 overheated, in an interview with Varietylast month’s “Strictly Business” podcast.
“I anticipate a lot more reason and less speculation among PSPC investors and therefore” less such entities in the future, “Sloan said.
The benefits for the partners of the private operating company are a simpler IPO and public listing at early stages of development, which provides the cash injection associated with the IPO of PSPC. . The traditional IPO process is more rigorous, requiring more developed companies.
Neil Jacobson and Todd Lowen have raised $ 230 million through Music Acquisition Corp. SPAC.
Ease of entry paves the way for midsize operating companies with limited corporate resources to be energized by finance-savvy PSPC partners in mergers, PSPC supporters say.
“Before, during and after in the audience [process], we help tell the story, navigate the process and believe we will be the best board members you can imagine, ”said Neil Jacobson, President and CEO of Music Acquisition Corp., who raised $ 230 million when it went public in February and trades under the ticker symbol TMAC.
“We want to empower companies that go public,” says Jacobson.
Company CFO Todd Lowen adds that the money pumped into PSPC mergers is “a permanent source of capital,” meaning equity doesn’t have to be repaid like loan financing does. . In addition, a merged operating company can use its shares to make subsequent acquisitions.
Part of this hassle-free IPO attraction is that PSPC deals are less costly to the operating company and less restrictive. Traditional IPOs focus on past financial results. On the other hand, PSPCs and their target companies have leeway to make future forecasts.
The after-sales service sector faces regulatory risks. The Securities and Exchange Commission has raised eyebrows over the guaranteed nature of a big salary for PSPC fund organizers, even in cases where shareholders lose. Regulators are also known to review how equity is accounted for and the rules for promoting SPAC.
The current PSPC revolution has flourished in dynamic financial markets. Although not a SPAC, Meta Platforms (the new name for Facebook’s parent company) today has a reported market value of $ 940 billion compared to a 2004 startup. More speculative, small investors moved as a bundle of stock offerings earlier this year from the ailing cinema circuit AMC Entertainment and video game retailer GameStop to heights that have left investment professionals scratch his head. Crypto currencies are skyrocketing with no assets to back it up.
Today’s sparkling environment presents an opportunity and a problem. Spiraling up valuations are a magnet for investors to buy PSPC stocks, but deal-seeking PSPCs may find target companies fighting for rich valuations as impatient buyers / investors do. queuing at their doors.
Typically, the owners of the private operating company get around 80% of the equity when merging with PSPC, so investors who invest in cash hold a minority stake after the merger. SPACs generally have a period of 24 months to connect with a prospect of a merger, or else must return the money raised to investors.
The flight is not always smooth, as some recent SPAC deals in Hollywood have seen some turbulence. Pershing Square Tontine Holdings, Wall Street investor Bill Ackman, $ 4 billion, was due to buy 10% of the Universal Music Group label in August, but was thwarted when shareholders filed a complaint that he was managing it like a fund and not as an operating company.
PSPCs have the aura of the Next Big Thing, but they’re nothing new. From 1993 to 1998, the late Menahem Golan – half of the “Go-Go Boys” duo that were the kings of Hollywood’s independent film industry in the 1980s – hired PSPCs as vehicles for his return attempts. Golan may have been a famous setting with many film projects, but his SPAC effort fizzled out.
