Good riddance to the SPAC boom

It’s clear by now that SPACs have run out of road.

For those not familiar, a special purpose acquisition company or SPAC is a company which is created and floated on the stock exchange in order to acquire a private business to create a listing for them. The entities are sometimes known as “blank-cheque” companies since often the business is formed without a specific target in mind.

The practice boomed in 2020 as savings piled and investors looked for new investments. An abbreviated list of gaming SPACs include DraftKings listing in a three-way merger between SPAC Diamond Eagle Acquisition Corp and SBTech; Super Group’s business combination deal with Sports Entertainment Acquisition Corp and Genius Sports listing with dMY Technology Group Inc II.

However, the practice increasingly looks like something of a fad as SPAC after SPAC fails to get over the line or else ends up backing dubious businesses.

Notable recent failures in gaming include Gary Cohn’s failed effort to take lottery operator Allwyn Entertainment public through Cohn-Robbins Holding Corp, as well as Playtech and Caliente’s joint venture – Caliente Interactive’s failed listing through Tekkorp Digital – both of which failed just in the last few weeks.

Target poor environment

But failing to acquire is not the worst outcome that may befall a SPAC. In March, there were more than 600 SPACs looking for private companies to acquire. That dwindled to around 450 by September according to analysis by Bloomberg Law, but that’s still a large number of blank-cheque companies seeking targets.

This less-than-target-rich environment has meant that the SPACs often have to look far afield from their founders’ initial areas of expertise to find suitable targets. Trident Acquisitions Corp, the SPAC that got Lottery.com listed on Nasdaq, started out life hunting for oil and gas businesses to acquire.

Lottery.com has become infamous for the circumstances of its ignoble collapse – a story which involves accounting errors, inability to make payroll, threats of delisting, a mysterious and controversial investor, as well as a board in open civil war – but even before the most dramatic events became widely known the company was well on its way to becoming a penny stock.

From the business’ peak share price value of $15.70 on 5 November not long after the Trident deal closed in October, the stock quickly collapsed to $5.55 by 3 December. Barring a brief resurgence to $6.67 at the end of the month, the stock price has steadily dwindled to zero – currently trading for $0.25 a share, leaving the business the target of multiple class action lawsuits as investors seek restitution.

Different rules

So why do SPACs rocket, then crash and burn?

One reason might be the different rules that apply to SPACs vs other listing methods such as IPOs. For example, SPACs had less stringent rules around forward-looking statements than more old school listing methods – with many taking advantage of the rules to give more optimistic accounts of the future than they would otherwise.

A study published in the Harvard Law Forum on Corporate Governance reported that 65% of SPACs fail to meet their revenue projections. Gaming SPACs haven’t been immune, with Super Group among the post-SPAC businesses that adjusted earnings targets downwards soon after going public.

That’s why in July 2021 the Financial Conduct Authority (FCA) imposed tougher rules on SPACs to ensure investors were protected. Central to this, the SPAC framework generally is a “redemption” rule which ensures that investors can withdraw their money at any point before the deal is completed. This, more than any other reason, is why SPACs are failing now.

The redemption option

In short, too many investors are now taking advantage of that option.

“If you walk to a SPAC promoter, so the CEO of a SPAC, the first question everyone asks now is, ‘How’s your relationship with your investors and what redemption level are you looking at?’” says Partis Solutions partner and M&A expert Paul Richardson.

“The redemption is what is killing SPACs. When people raised SPACs two years ago there wasn’t much to do with your money.”

Richardson argues that the decline of SPACs in gaming reflects both macro-economic forces and trends within gaming itself.

“That whole world has changed – and from a gaming perspective as well, the valuations have dropped to the floor, the DraftKings bubble has well and truly popped, there’s massive contagion – and now all the investors are saying ‘Whatever the case, I don’t care, I want my money back, I want to put my money into something where I know it won’t get any worse if it’s going to crash in value.’”

This has created an environment in which, as Richardson states, “There’s a lot of SPACs out there which are, not dead, but certainly not alive.”

The upshot

2020 was, for obvious reasons, a wacky time for investment and finance. A heady mix of government stimulus, loose monetary policy and decline in demand created a situation where there was plenty of money to invest, but nowhere for it to go.

That was true across the economy as a whole, but all of this aligned almost perfectly with the opening up of major new betting and gaming markets, especially in the US. Gambling businesses seemed to be especially appealing to SPACs, as investor excitement around these companies perfectly aligned with the boom in blank-cheque companies.

More than just a listing method, SPACs were a craze, and gaming SPACs perhaps an even bigger one, with investors desperate to get in on the shiny new thing. Yes, some SPAC listings were perfectly reasonable business transactions, but stories of SPACs acquiring dubious and untested businesses, only for them to rocket then crash in value once the core business model was exposed as being unworkable, are common.

The environment depended on each SPAC and target business soaring in value to keep buyers enthusiastic about the next one over the hill. When some newly listed entities began to run out of steam, the whole sector felt the effects.

In March, when the SEC floated new rules to align SPAC rules on forward looking statements with IPOs, dissenting commissioner Hester Peirce stated that the new regulation “seems designed to stop SPACs in their tracks”. But if requiring more transparency for investors would kneecap the sector, maybe they should be stopped in their tracks.

Still though, the decline of SPACs as a listing method will have implications for industry. The other common listing method, the initial public offering (IPO) may mean that it is in practice harder for some businesses to list. As Richardson says: “It’s still cheaper and quicker to do a deal with a SPAC than it is to do a straight IPO.”

This means that investment could take a hit, even as interest rates rise. In a world with much less VC money sloshing round the sector than there was a year ago, SPACs are both a cause and a symptom of wider forces in investment – but when market conditions eventually improve, gaming investors should remain wary of SPACs.