While Special Purpose Acquisition Companies (“SPACs”) have been investment vehicles since the early 1990s, they have only recently gained traction in the gaming industry. With this post, AM Steinberg Advisors intends to give a brief history of SPACs, an assessment of the recent transactions in the industry and identify potential future targets.
In brief, a SPAC is a publicly traded company that has no current operations, or business plan, and the initial public offering (“IPO”) proceeds are held in escrow for a future acquisition of an operating private business. SPACs have become increasingly popular in recent years. In 2019, there were 59 SPAC IPOs that raised $13.6 billion, an increase of 26% from 2018. Thus far, in 2020 (as of August 8) there have been 64 SPAC IPOs that have raised $25.6 billion, exceeding the 2019 record totals.
Figure 1: SPAC IPO Transactions by Year (2010-2020 YTD)
Source: SPAC Insider
It should be noted, that some SPACs are formed to pursue acquisitions in a specific industry, while still others have no specific focus but, instead, can pursue opportunities from a broader sample of acquisition targets. Typically, a SPAC has not identified, or begun discussions with, its acquisition target at the time of its IPO. If it has done so, the SPAC must disclose the target in its Form S-1 initial registration form. Other items to consider during the IPO process include:
100% of the IPO proceeds are placed into a trust account: The trust funds cannot be disbursed until either i) an M&A transaction is completed; or ii) the SPAC is dissolved and the public shares are redeemed if the SPAC does not complete a transaction in the appropriate time frame
SPACs offer units, which consist of shares and warrants to purchase additional common stock
Sometimes other securities are included in the units, such as rights
The SPAC units become separable after the IPO and both the shares and warrants freely trade
The SPAC sponsors acquire “founder” shares
With some variation, the founder shares will ensure the sponsors own approximately 20% of the outstanding common stock of the post transaction company
Similar to a post-IPO lockup in a typical initial public offering, the founder shares are usually subject to a one-year lockup, but in this case, it is for one year after the M&A transaction
Typically, the SPAC must agree to acquire an operating company within 18 months of the IPO and the transaction must be completed within 24 months
AM Steinberg Advisors believe this requirement is the reason SPACs have not, until recently, been acquirers of gaming companies. The regulatory review and licensing requirements, particularly for entities operating in a large number of jurisdictions, would have made this time frame extremely challenging
As noted above, the SPAC must announce and complete a transaction within a specified time frame, typically 24 months. If no transaction is identified and consummated one of two things will occur i) all public shares are redeemed on a pro rata basis for the cash remaining in the trust fund; or ii) the sponsors can request a shareholders’ vote to extend the deadline.
A key consideration of a SPAC in identifying its target acquisition is that the fair value of the target must be equal to at least 80% of the cash in the SPAC trust fund. However, the acquisition value is often 3x-4x the amount raised in the IPO with additional shares or debt issued to consummate the transaction. Once a target company is identified and a merger has been negotiated, the SPAC will file the required information disclosures, including 3 years of audited financial statements plus unaudited interim financial statements, and set a date for a mandatory shareholder vote to approve the transaction or redeem the shares for a pro rata portion of the trust proceeds. It should be noted that at the time of the IPO the sponsor commits to voting their founder shares, as well as subsequent purchases of public shares, in favor of the transaction. Thus, at the time of announcement at least 20% of the SPACs shares are committed to voting for the transaction. To achieve shareholder approval from 50% of the SPACs shareholders, it is only necessary to get approval from less than 38% of the remaining shareholders.
In recent years, SPACs have targeted companies in the gaming industry, but this has not always been the case. We believe this is due to the regulatory requirements of the gaming industry. This is especially true for some of the slot machine manufacturers or large casino operators that are licensed in a large number of jurisdictions. For example, Penn National Gaming agreed to acquire Argosy Gaming in November 2004 with the acquisition closing nearly one year later in October 2005. Even more recently, Twin River Holdings announced the acquisition of two casinos (Isle Kansas City and Lady Luck Vicksburg) from Eldorado Resorts in July 2019 and completed the transaction in July 2020. This timeframe necessary to obtain the regulatory approvals would have been inconsistent with the timeframe to complete a SPAC transaction.
Recent changes to the gaming industry have altered the dynamic and made the industry more attractive to SPACs, including the emergence of retail gaming, such as video gaming in non-casino settings, the 2018 decision by the Supreme Court to overturn the Professional and Amateur Sports Protection Act and the emergence of legalized online gaming in the United States. This has led to several companies going public via the SPAC route.
Figure 2: Recent SPAC Transactions in the Gaming Industry
Source: Company reports and AM Steinberg Advisors
Based on data from SPAC Track, AM Steinberg believes there are approximately 104 SPACs that have completed an IPO and have not announced an acquisition target with an additional 28 in the process of raising funds through an IPO. For a variety of reasons, including a focus on a specific industry, not all 132 of these SPACs are positioned to acquire a gaming company. Still, we believe there will be further M&A transactions involving a SPAC and a gaming company. Notably, Flying Eagle Acquisition raised $600 million in an IPO in March 2020. The Flying Eagle sponsors are the same team from Diamond Eagle Acquisition, the SPAC that acquired DraftKings in December 2019. Likewise, other SPACs at the intersection of online or land-based gaming and sports include Leisure Acquisition Corp (LACQ - $200 million IPO proceeds)[1], Oaktree Acquisition Corp (OAC - $204.7 million), Pivotal Investment Corporation II (PIC - $232.2 million), Ascendant Digital Acquisition Corp (ACND - $414 million), and BowX Acquisition Corp (BOWX - $420 million).
Below, we provide information on some potential acquisition targets in the gaming industry for SPACs looking for a target. This list is not meant to be exhaustive but highlights some potential opportunities.
William Hill US: the US arm of London Stock Exchange Traded William Hill plc is an interesting target as proceeds could be redeployed to improving its UK retail betting and online offerings in the US and UK
Penn National Online: growth opportunities due to Penn National Gaming and its presence in 19 states plus free to play social gaming
ROAR Digital: a joint venture between MGM Resorts and GVC, ROAR has exclusive access to all MGM US land-based and online sports betting opportunities
Caesars Interactive: the parent Caesars Entertainment is the largest casino entertainment company in the US with 55 facilities worldwide
Sportradar: one of the largest providers of sports data globally for sports betting and based on recent news reports is prepared to go public via a merger with a SPAC
AM Steinberg Advisors is an international consultancy with experience in Asia, Europe and North America. During his career in the gaming industry, our CEO has analyzed and opined on over 70 M&A transactions valued at over $100 billion. Our firm can be an addendum to your existing corporate resources in identifying, negotiating and completing your M&A transaction. For additional information and to contact us, please see our website at amsteinbergadvisors.com
[1] Leisure Acquisition Corp agreed to acquire Gateway Casinos & Entertainment Limited for $1.1 billion in December 27, 2019. The transaction was terminated in July 2020.
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