SPACS VS. IPOS

By Gambling Insider
Tim Poole weighs up the common choice facing gaming firms going public: SPAC or IPO? Investment specialists Matt Davey, Matt Sodl and Jason Ader provide the expert analysis, as we assess which truly is the king of the M&A jungle

When Microsoft, Amazon and Google went public, there was little question as to how they would do it. On 13 March 1986, Microsoft held its Initial Public Offering (IPO) at $21 per share; on 15 May 1997, Amazon IPOed at $18 per share; on 19 August 2004, Google IPOed at $85 a share. All three giants joined the Nasdaq and didn’t look back: there was no major choice as to how they would do it – IPO was the given route.

And, until recent years, the same scenario faced the gaming industry’s biggest firms. When Caesars Entertainment wanted to go public? IPO. When Las Vegas Sands took to the market? IPO. If you wanted your shares to trade publicly, there was one recognised and widely accepted method – and that, generally, was that. But when DraftKings announced in December 2019 that it will combine with Diamond Eagle Acquisition Corp, additionally acquiring supplier SBTech, this all changed. The gaming M&A picture began to shift.

Special Purpose Acquisition Companies (SPACs) are not new. Existing since the 1990s and experiencing growing popularity since the early 2000s, the SPAC route has always technically been there. Now, though, as part of the trend kickstarted by DraftKings and followed up on by several others, this is a genuine heavyweight option for gaming firms looking to go public.

 

SPACs: A backdoor IPO?

According to Matt Sodl, Founding Partner, President & Managing Director at Innovation Capital, a SPAC is “really a backdoor IPO.” He tells Gambling Insider over Zoom: “Ultimately, it’s a mechanism for a company to take their business public in a vehicle that effectively avoids the traditional SEC registration underwriter and underwriter evaluation process. What you have are guys who are called sponsors, who could be private equity guys, or it could be a couple of industry executives – like Dan Silvers and A. Lorne Weil. They filed to do a SPAC – probably one of the first in the industry – and ended up buying a gaming equipment company called Inspired Entertainment. It was before the SPAC craziness of this past 12-18 months.”

Silvers and Weil went to investors with the selling point of having strong industry relationships, without themselves holding that much capital. In filing for a SPAC, crucially, it enabled Inspired to go public and raise proceeds without the traditional underwriting fees of an IPO: typically 5-7%. SPACs involve sponsors, who provide what is called the institutional sponsorship, by going to the market with a business plan, leveraging their strong reputations and attracting capital. “They essentially put their resumes out and say: ‘we’re legitimate guys in the industry and provide a halo effect for companies we buy, and we vet them,’” Sodl adds.

SPAC investors buy their shares at $10 a share, which is a low point, and allow  18-24 months to create a deal, before it then launches and goes public. Traditionally, there is a follow-on investment called a PIPE (private investor and public entity), which funds any additional needs of the deal. “There’s been a tremendous amount of interest in SPAC sponsorships that have been filed and gone public,” Sodl says.

“The earlier SPACs have done pretty well. The SPAC sponsorship quality has gone down over the years. What really drove the SPAC trend was the DraftKings reverse merger into a public entity – you saw that stock price go crazy through the roof. A lot of these other sponsors came out and said ‘hey we can do the same thing.’ Why has that been a success? To really go public and do an IPO, you’ve got to show big-time growth. So sports betting – it’s a gold rush and there’s a significant domino effect going across the US, in terms  of more states enabling the legalisation of  sports betting to take place; retail as well as mobile. That’s been a big driver in what’s allowed DraftKings to roll out and grow their company.”

The interest in DraftKings took its stock price to “another level,” Sodl comments, which indeed sits at $52 at press time, inspiring rivals like Rush Street Interactive and Golden Nugget Online Gaming (which has since agreed to be acquired by DraftKings)  to follow suit. “That’s been the real driver of this gaming SPAC craze,” Sodl says. “There’s growth opportunities that were embedded in these brick and mortar companies, that have now been bifurcated, spun off and sold to the public.”

 

SPAC-tacular: The benefits

Naturally, the popularity of SPACs has not surfaced from nothing. If they were slow and inefficient, they wouldn’t have had the clout to truly challenge IPOs as the preferred route  to market of many. The opposite seems to be true, in the view of Tekkorp Digital CEO Matt Davey, who himself owns a SPAC and champions the virtues of its speed to market and forward-looking nature.  Davey’s starting position on one side of the issue may suggest a bias – but one has to ask exactly why the experienced gaming veteran, former CEO of NYX Gaming Group, has chosen to pursue this route.

“If you’re a private company and you want to go public in the US, you’ve got three primary options: you can do an IPO, a direct listing or you can merge into a SPAC,” he tells Gambling Insider. “A key difference between the IPO and SPAC is that IPOs can only speak to past revenue performance. So, above all, SPACs appeal to fast-growing businesses whose value is in their future growth, not their annals.

“By contrast, IPOs restrict what you can discuss in your public documents in terms of future forecasts. Time-wise, meanwhile, the process of merging with a private company into a SPAC is far more efficient than going through a 9-12-month IPO. If you’re facing competitive pressures and need access to capital for quick growth, SPACs can take just 3-6 months. That speed is a big draw. The SPAC process allows companies to merge into the vehicle and clearly set the table for what their growth trajectory looks like. And we’re seeing projections go out three to five years.  Investors get a good sense as to how the business is developing, where it is today and where it will go in the future.”

Davey additionally highlights the ability to work with the shareholder base and define the price at which you go public, as opposed to diving into the “public market ocean and swimming with whatever the tide brings your way.” The PIPE investment previously referred to by Sodl equally allows a SPAC to bring “sophisticated investors” over the wall before going public.

 

Maximum flexibility

Another industry investor to show faith in the SPAC route is Jason Ader, CEO of SpringOwl Asset Management. In January 2021, he added 26 Capital Acquisition Corp, a SPAC, to his range of existing gaming industry interests. He is in agreement with Davey about the direct benefits of the SPAC route, emphasising the key difference between the documents that need to be filed with the Securities Exchange Commission (SEC).

Ader tells Gambling Insider: “You file a document that’s called an S4 with the SEC, that’s versus an S1 you would file for a regular IPO. Because you’re technically having a merger, the S4 document does provide materially more flexibility to make disclosures about your business than the S1, which is just constraining. The S4 allows you to talk about your business potential and your projections beyond 2021, in some cases as far out as 2026 – although that is a bit far. For me, it’s better for companies to have the maximum flexibility without talking about their story. It could lead to higher prices – not always – but it could mean higher prices to the issuer. Or it could just mean a better understanding of the business on behalf of the investors.”

Ader feels investors should know as much as they can about the business, a task he believes is made far easier via the SPAC S4 document. He additionally references, like Davey, speed to market and the ability to collaborate with SPAC shareholders.  Using the purely hypothetical example of Flutter Entertainment, Ader suggests a SPAC would allow investors to inform him if $15bn was too high a price at which to go public,  and that $10bn might be more realistic to attract capital – essentially creating “real-time feedback.” He adds: “The IPO of dating site Bumble went up 80% on the first day – and you say to yourself why didn’t they just price it higher? This is a situation you don’t have with a SPAC.”

 

One plus one = more than two

Ultimately, creating shareholder value is the major goal in any decision to go public, or merge with a competitor. A phrase used by both Jason Ader and Matt Sodl during our discussions is “one plus one equalling greater than two.” From Sodl, this is his view on the recent acquisition of Score Media and Gaming by Penn National Gaming (in a $2bn deal). The merger of the two public entities saw Penn National’s stock soar because of the strategic benefits of the duo joining forces – helped chiefly by Penn National’s ownership of Barstool Sports. This created a “one plus one equals three” scenario.

In Ader’s eyes, the biggest example of this was the DraftKings/Diamond Eagle/SBTech transaction – which he uses to champion the greatest benefits of the SPAC route. He comments: “You have the ability to do a merger as part of the listing process.  The DraftKings situation: never has there been a way for a company to merge, as they did with SBTech, and list as a combined co and vehicle. In those cases, one plus one needs to equal greater than two – maybe three, maybe four but more than two.  And so being able to be creative around an M&A situation and list concurrently is a very unique advantage to the structure.”

 

The X-factor

The partnership of the sponsor can, too, be considered another SPAC strength.  Via this route, the private company can recruit a specialist who can guide it through the public process. For Ader this is a “unique” advantage: “This way, you can get myself, Rafi Ashkenazi and Joseph Kaminkow, and we become advisors who don’t even need to become directors.  That’s unique, bringing in Matt Davey is unique, bringing John Malone in from Liberty Media is unique – his SPAC trades at the highest valuations.

“There are a lot of really great businessmen and successful entrepreneurs who are sponsoring SPACs/owning SPACs, who are bringing an X-factor to a company – who could go IPO. It’ll take longer; they won’t get to say as much about the business, the pricing factor will be more of a guess. This way you could leave money on the table and annoy your shareholders. It is your team versus a team that is so skilled and so regarded by the market, they were able to raise money without a business – in the expectation that they can find a business and help it become a successful public company.”

 

IPOs – still a popular alternative

It is with some confidence, however, that we can say IPOs are still around – and won’t be going anywhere anytime soon, despite the plethora of pro-SPAC factors discussed above. SPACs in gaming are very much the new kids on the block and, while their benefits are clearly plentiful, IPOs are still considered the traditional route. As Davey acknowledges, IPOs and direct listings remain “popular alternatives.”

Perhaps the biggest single example in gaming this year is Sportradar. The sports betting data company recently announced it will IPO, having unsuccessfully attempted the SPAC route with Horizon Acquisition Corp. II, led by Los Angeles Dodger Co-owner Todd Boehly. None of our analysts wanted to be too speculative and guess exactly why this SPAC didn’t reach the start line, but the fact it didn’t raises the serious possibility the SPAC isn’t a one-size-fits-all solution.

Hypothetically at least, one reason a SPAC might not work is a disagreement on valuation. As Sodl proffers: “Maybe they won’t like the valuations they are getting from the sponsors. And they feel the dilution they’d be taking from that sponsor value-add isn’t worth it. So they might say okay, if we’re not going to get the valuation, let’s just go and do it direct, and pay the underwriters. That’s really the trade. I think that would be the most common drawback.”

Agreeing that it can be a case of sponsors vs underwriters, he adds: “In these SPAC deals, there are underwriters involved, because there is traditionally a very large PIPE that needs to be issued. That PIPE is still done by an underwriter, but with a lower price than an underwriter of an IPO.”

 

The biggest drawbacks

Capital dilution is a potential sticking point for a SPAC, according to Ader. Going public via this method creates warrants that are paid to the original SPAC’s shareholders, which are potentially dilutive. Typically, Ader says, warrants give you the ability to buy shares at $11.50 over a five-year period. On top of that, SPAC sponsors typically get a 20% grant of shares based on the amount they raise.  In the case of a $200m SPAC, it’ll be $40m in shares; if it’s a $500m SPAC, the sponsors would receive $100m and so forth.

He continues: “What I hear from people going the IPO route is ‘we love the speed, we love the S4. But we have a very clean company and merging with you, we have warrants now we have to think about.  We have a lot of dilution from you, Jason, and you, Matt Davey (hypothetically). You guys didn’t really do as much work as we did to raise the money – but you get a pretty big ownership in our business.’” Because of this, Ader says the headline of the post-SPAC bubble from last summer is, to preserve a good deal, sponsors are now being more creative about giving away their economics to the company. But it’s still a fair chunk of your business to let go of.

Sodl reiterates this point: “The disadvantages are there has been a very significant equity interest that goes to the SPAC founders. That can be up to 20%. That has been dialed back big time by the SEC, because there’s really a disalignment of interest between the SPAC sponsors and the company that’s merging in. The sponsors put up little to no money and they get effectively up to a 20% interest in the company, in exchange for their sponsorship.”

Perhaps a final drawback Davey is willing to raise – albeit one he disagrees with – is the view that there is now too much SPAC money chasing too few opportunities. This relates back to Sodl’s earlier point about the quality of SPAC sponsors diminishing with time. Although Davey and Tekkorp Digital feel this is not the case, he acknowledges SPACs subsequently “won’t be for everyone” as a result: “You need the desired asset to be aligned with the appropriate management team.”

 

Worth the sacrifice?

So, despite the speed to market, increased flexibility and greater ability to forecast growth (and include that in your business’ valuation), it’s fair to say the largest disadvantage of the SPAC route is dilution. The big question, then, is: is it worth the sacrifice? It’s a trade off of the industry expertise, reputation and relationships of the SPAC sponsors versus independence and retaining a greater share of your business (it is worth remembering you also save on the potential proceeds of the IPO going to an underwriter).

Perhaps it is a case of taking the plunge and looking to the future, rather than holding on to the traditional concepts of the past? This is no doubt how a SPAC supporter would see it. And yet if this was good enough for DraftKings – now one of the leading entities in the industry – why shouldn’t it be for anyone else?

“Clearly, we have our own SPAC in Tekkorp Digital, so we’re perhaps prone to subjectivity here,” Davey remarks. “However, the DraftKings deal set the US market ablaze and provides a SPAC bellwether which is as instructive as it is obvious. DraftKings required a complicated merger, effectively combining three different assets (two of which were operating assets) under a Nevada structure, and the task was to take it public during a pandemic.

“In short, it’s the formidable forerunner which paved the way for others to go public, shining a light on the public’s unswerving belief and faith that sports betting is an entertainment format with a long-term future for Americans across all states. Importantly, it both framed and validated betting as a legitimate entertainment product, too, showing it could follow in the digital footsteps of Amazon and Netflix – for whom  the Covid-induced move to digital has naturally been a huge net positive.”

In Davey’s eyes, the SPAC model is performing a “great service for the investment community.” This is particularly apt given iGaming and sports betting have huge growth built into them as sectors, as opposed to having virtually zero history in the US. “The migration from land-based entertainment consumption to online is driving this growth.”

The list of impressive recent SPACs, meanwhile, is an envious one. Outside gaming, Virgin Galactic has seen success, now trading at $24 but having reached as high as $55.91 – having begun at $10. A SPAC that helped a rocket go into space is a good case study, according to Ader. In gaming itself, Genius Sports is now trading at $17 and Rush Street Interactive at $12, not forgetting that pioneering DraftKings deal all the while. Gaming has become one of the best-performing areas for SPACs, alongside the electric vehicle and alternative area sectors.

 

Concluding statements

Drawing an objective conclusion, Davey says: “Really, potential IPO drawbacks are just the upside-down of the SPAC advantages we’ve spoken about. So let’s go with: comparative sluggishness, allied to far less certainty around pricing and a weaker grip on price terms. The current caricature seems to be that SPACs represent the new kid in town who’s turned the heads of investors, while the traditional IPO grudgingly waits it out on the sidelines for the fad to fade. However, the reality is that both routes have their strengths or specific merits, and can happily co-exist together in the long-term.”

So with the various benefits and drawbacks to consider, SPACs vs IPOs is the primary choice facing private gaming companies today. As Sodl summarises, SPAC and IPO “are the two main options – and/or merge with another company.” Perhaps the biggest hypothetical example we can refer to is Bet365, which Ader believes would command a “compelling valuation, more premium to Flutter Entertainment or DraftKings.” If it had any interest in going public, Bet365 would be able to attract enough capital via the SPAC route, going public at a huge price; at the same time, an IPO would more than likely see its price soar by popular demand.  It’s Speed, Penetration, Agility and Creativity versus Independence, Provability and Order. The choice is yours.

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