The Deal Room: The Sobering Of SPAC's And The IPO Market Heats Up

Hello and welcome back to The Deal Room, and we've got, as per last week, 5 things on the docket. Number 1 though, before we go into the rest, is your trip in New York and the East Coast, Stephen. So how, how has that been? You said before you're going on a bit of a road show. What's the latest?

Yeah, so I'm actually, uh, I'm actually now in New York. I'm supposed to be flying back today, but it's just started snowing. It always seems to be sod's law that it snows on the day that you're travelling. So I might be at a hotel airport tonight looking at the snow piling up. But it's been a great last week and a bit. We've been up into Boston, Northeastern, took a look at Harvard as well, down to New York, Columbia, NYU, Baruch, and then off to Penn State. Um, which is a few hours inland. So it's been fantastic. And, and every place that we've stopped, we've been running these M&A finance accelerators, which are open access, by the way. You can sign up to any Thursday, uh, event. We run it online, free for any student every Thursday. So check that out on the website. But this time we were doing it in person, spending a bit of time getting to grips with what M&A is, what roles investment banking look like? What makes a great analyst? And then we were doing our simulation of flagship— flagship simulation. And there was a little bit of friendly competition between the 5 colleges. I think we do have a winner that we can maybe announce.

Okay, drum roll!

Doo-doo-doo-doo-doo-doo-doo-doo-doo-doon! Okay, here we go. The winner of the Five Campus East Coast M&A Competition Penn State.

Penn State.

Penn State. The average score— we do it on a, on a grade basis— the average score of every student that submitted a piece of work from the simulation at Penn State was 75%. That beat Columbia and NYU by just 2%, with Baruch and Northeastern coming a couple of percentage points behind. But the quality was excellent. So anyone that attended those events that's listening to this podcast, Well done. It was great to meet you all and, uh, wishing you the best of luck.

So, just before I move on, of all the people you met then, this was in person, what was one observation that you think really made someone that you encountered stand out? So just as a word of maybe advice then for the broader community, that when they get these opportunities, whether with us or in any other company, any other corporate that they encounter. What's one thing that you think really stood out that you saw or observed in one person or a commonality amongst many?

Yeah, it's a really good question. I think the thing that really sticks in my head is anyone that follows up with a meaningful follow-up on LinkedIn or maybe sends me an email or something like that. So I got an email today. I won't mention who it was from, but it was a very impressive candidate that basically said, look, I'm really interested in climate finance. And the simulation that you did yesterday really helped me get to grips with some of the valuation methods. I submitted it once and I didn't do too well, but then I went back and submitted it again. So we kept the competition open for an extra few hours and I did a lot better. Thank you so much for the opportunity. Let me know if there are any other resources relating to climate finance. I'm like, all right, here we go. This is someone that's not only taken the time to send me a really well-scripted email, but also has done the simulation again that very evening just to improve on their score. I'm like, all right, get this person, get this person into a job in climate finance. I don't know whether you're a freshman or a sophomore, but you know, um, so that for me, anyone that has got that kind of wherewithal to follow up in a really constructive manner, that's going to stay in my brain. That's why I'm talking to you about it now. So don't just follow up with a random, you know, whatever, try and think really deeply about what you're going to say, uh, and hopefully it will land.

Okay, very sound advice for anyone. I don't know about your LinkedIn account though, it's about to get absolutely hammered now, so good luck.

It's hammered on a daily basis.

So, so in terms of the things we're going to talk about then, we've got 4 things. We're going to talk about the IPO market, seems like it really has started to heat up a little bit now, and I know there's a number of deals ongoing, so just a general overview to kick things off. Um, we're also going to talk about SPACs, special purpose acquisition companies. And this was something that was really big when COVID hit. Um, everyone was talking about SPACs and then they kind of vanished. So a lot of people might just be new coming into finance and thinking, what on earth is a SPAC? Because they missed that period, or equally so, why are we talking about them again now? So I know you're going to explain that. And then Tod's take private. Do you own a pair of Tod's, Stephen?

No, I don't know why.

Brand well enough.

I'll tell you why in a little bit, why I don't own a pair of Tod's, but we'll have to wait to the end of the episode for that.

Okay, and then the, the final one is another oil and gas mega deal. Diamondback Energy have agreed to buy Endeavor for $26 billion. Deal. So we'll unpack that one as well. So perhaps Stephen, to start, we could go with the SPAC side of things. So what is a SPAC, first of all?

Yeah. So a SPAC is a special purpose, as you mentioned, a special purpose acquisition company. This was a big deal, as you said, in the frothy period of 2021, low interest rates. Etc. And a SPAC is an IPO, an initial public offering, through the back door. Now, IPOs are obviously very, very popular. They're a good, uh, liquidity event or an exit event, a good way to raise money. But the process of going through an IPO is incredibly long-winded. It's very expensive. The regulatory requirements are very, very strenuous. And stringent. So a special purpose acquisition company, effectively what it does is it lists a shell company on a stock exchange, on the New York Stock Exchange, and it's called, you know, Stephen and Anthony Acquisition Vehicle One, um, and you can buy a share for $10. And then it's got about 2 years to go out and find a company effectively to acquire and take public through a SPAC merger, right? And this is a way, historically, of bypassing quite a lot of the difficult, strenuous, costly IPO process. SPACs tend to be really, really popular with maybe slightly more speculative companies, companies that haven't necessarily made a profit, tech companies, et cetera, which would explain to an extent why in 2021 there were 613 SPAC IPOs, which represented 63% of all IPOs, right? So it kind of dominated the market back in 2021, and that's all we were talking about. And again, if you're new to finance, you may not have come across it, because in 2022 there were only 86, right? So it's fallen off a cliff as the markets have withdrawn from speculative assets. And actually, we've now had a couple of years of evidence to see the performance of some of these 2021, uh, special purpose acquisition company acquisitions. So I'm just going to pick a couple, uh, that went public in 2021 through a SPAC, not through a traditional IPO. So Virgin Galactic, Obviously, we, we know what Virgin Galactic is and what it's trying to do. Uh, its SPAC acquisition price, though the merger price, um, for Virgin Galactic was $2.3 billion. So you could have picked up a share in Virgin Galactic for $2.3 billion back in 2021, now trades at $740 million. So you would have had a bit of a haircut. The Lucid Group, which you might have come across. Lucid IPO'd or SPAC IPO'd for $24 billion back in 2021, now worth $8.3 billion.

Yeah, I remember talking to peers at the time. That EV bubble was just madness at the time.

Oh God, it was Rivian, wasn't it, that IPO'd normally and just popped to about $120 billion on day one. And then suddenly, you know, fraud charges, etc. I don't even know what they're market capitalization is now. Uh, but the last one I wanted to mention was Clover, which is, uh, Clover Health, which is health insurance, kind of digital health insurance. $3.7 valuation, market cap now under $500 million. So this is relatively representative of the speculative nature, the loss-making nature of a lot of these companies that obviously wanted to IPO through the back door that have subsequently not become a, you know, not become a favorable investment asset from an institutional investor perspective.

Can I ask a naive question then? So it sounds bad what you've described, like awfully bad. A lot of money has been lost in terms of value there, but presumably the people who drive these SPACs are in it to make a quick buck, so to speak. And like, would they have made their money, like the original people involved the financiers involved got paid at the point of those very toppy valuations, and what happens thereafter is really not their business.

100%. And this has been an accusation levied at the likes of Social Capital. Social Capital, a company, uh, that took, I think, SoFi and Clover, uh, public through a SPAC. And yes, they have between a 15 and 20% ownership upside. So when the merger through SPAC happens, they can sell their shares. And effectively, there is a basically a 15 to 20% fee for fundraising and bringing that company public. And then they don't really mind what happens afterwards, right? That company can die because they've made their few hundred million dollars. And that is the kind of— again, we talk about it a lot on this podcast— the kind of where does the, where does the risk land? When you pass the parcel, who is the sucker at the end of the deal? And quite often, again, in these frothy SPAC-like companies, the sucker has been the retail investor that gets excited about getting access to Virgin Galactic, only to realize 6 months later that there's no liquidity there and no institutional investor interest. So the price bottoms out. So yeah, it's still a little bit of a Wild West. But the reason why I wanted to bring SPACs to the table or back to the table, is because there's been a bunch of new rules coming out from the SEC. Obviously, SEC can be a little bit dry, but this one's quite interesting. So when going through a normal IPO, right, you have liability for forward-looking projections. So if I say, you know, Amplify is going through an IPO and it's going through the traditional IPO channels and we estimate 250% revenue growth year on year, year, with a gross profit margin of 98%. I'm on the hook for that if I've, if I've been deemed to be materially misleading to IPO investors, right? And I could get sued, and that's not very nice. Whereas historically, if you do a SPAC and you effectively buy Virgin Galactic into your SPAC, you don't have— like, there's no liability for forward-looking projections. So Virgin Galactic can easily just say We're going to grow 800% a year. And if we grow at 0% a year, there's nothing you can do. So the rules have changed basically to say that if there's any form of SPAC action, there is now liability on these projections, which makes it a lot safer from an investor perspective. You're not getting the wool pulled over your eyes. And it also means, look, I can't make stuff up. You know, I've got to stand by the numbers whether I'm going through an IPO process or whether I'm going through a SPAC process. This just seems to make sense, and it might actually mature the market.

So having though more process around this in kind of a more accountability fashion, does that stifle— I don't know, is there a degree of innovation or necessity to get to market quickly that this could have an impact on?

Yeah, so I mean, the critics to this— yeah, you're absolutely right. They say, look, this might kill it, this might kill the SPAC industry, and all of these exciting companies that may be loss-making aren't going to go public. And obviously the retail investor doesn't really get access to these companies when they're private, so they're going to be missing out on these really exciting opportunities to get in earlier on tech companies. Now, obviously it's been borne out that SPAC performance has been pretty terrible. The 2021 vintage, you're not going to be seeing a lot of return on your investment. So maybe let's take that critique with a bit of a pinch of salt. But I think for any students, this SPAC thing, it's been around for quite a long time, by the way. It didn't just appear in 2021. It's been around for 20+ years, but this SPAC thing is not going away. So it's really good just to have an understanding You know, if you're applying for a position and maybe you're edging towards the equity capital markets space of the investment banking division, good to know what these things are.

And just my final one is on that point, more making it land from a career potential. What is the fee element of running a SPAC from a bank's perspective? Like, how aggressive is the pricing on that, and how— and therefore, how willing is the bank to participate in that and drive that type of business?

Yeah, so I think, so I think the pricing from a bank perspective is relatively comparable. Maybe it's a little bit cheaper than going through an IPO process. I think historically it's been all of the other stuff that you have to do that banks can help, can help out with and charge a fee. For example, submitting a red herring prospectus, drafting the perspective, getting these SEC filings ready, doing the roadshow. All of that stuff is going to be more costly necessarily than potentially trying to raise money through a SPAC. So I think that if I was in an equity capital markets team, I'd definitely rather be on a proper IPO. There's definitely more cachet there as well to be on the front of the, of the S-1, of the prospectus. Yeah, and the, and, and the, and the financials are probably better as well.

All right, well, look, we can roll over into the IPO market in itself, and you can get us up to speed on what, what's been going on.

Yeah, and this, and, and this I guess probably tallies with some of the stuff that you and Piers are talking about, the, the, the pretty rip-roaring start to the year in terms of U.S. equity markets and the S&P crashing through 5,000 and new highs across the tech spectrum, um, and across the, across the listed equity space. And often, you know, you maybe talk about it from a Magnificent Seven perspective and from a kind of big macro perspective. But obviously the other side of this kind of listed equity space, you've got the big blue chips and then you've got the new IPOs. And often it takes a little bit of time, a little bit of time translating an S&P rally into, hey, now's probably quite a good time to IPO. There's maybe a little bit of a delay and you kind of saw that at the back end of last year. But we have had a really, really strong start to the year in terms of US IPOs. There's already been 29 IPOs this year. In fact, there were 9 just last week. Just to put some context, there were only 154 in the whole of 2023. So, you know, we're kind of basically already a quarter there and we're only a month, month and a bit into the, into the year. Um, and you know, there's all sorts of IPOs lined up. Um, there's a couple that just got away last week. Mexico retailer BBB, which I think basically the Aldi, if you know Aldi, it's the Aldi of Mexico.

Do I know Aldi? I love a bit of Aldi.

Are you an Aldi or a Lidl?

Aldi or Lidl? I'm a Lidl, to be honest. The middle aisle of Lidl. That's where you'll find me.

Christmas sorted every single year. Uh, so yeah, so the Aldi of Mexico, uh, BBB Foods rose by about 10% end of day one in terms of the IPO launch, selling at $17.50, closed at $19.05. So, you know, so again, a little bit of momentum. Add that to The US Healthcare REIT. Well, that's what it's called. The US Healthcare REIT priced a $672 million IPO, climbed 9.3% after the offer price. Hiverna Therapeutics and Metagenomi. There you go. Whatever that is. It's backed by Moderna, so I know the name Moderna. So again, two biotech startups that are IPO'd. And again, think about it. Biotech startups, loss-making, quite speculative. When these start going, going away in the market and doing relatively well, you are really starting to see the IPO market heat up. And again, remember the companies waiting in the wings, the likes of Reddit that we spoke about, the likes of SeatGeek, the ticketing platform, uh, Rubrik, cloud and data security. They're all kind of getting ready taking a little look at this market, thinking to themselves, well, actually, a lot of our peers are getting some pretty successful IPOs away in the market. You know, I'll look back to, um, August, September last year, and I'm looking at Arm, and I'm looking at Birkenstocks, and they're all performing extremely well post-IPO. So this is the time, and the, you know, the opening up of the IPO market is a brilliant thing for all private equity investors as well, and private capital investors. Finally, The spigot has been opened and the well-functioning of the system is starting to kind of work again.

Well, one thing just to add in that you might not have seen is just a short while ago, US CPI came out and it was quite a bit higher than expected. Stocks were obviously ripe for a pullback and have dumped appropriately. Yields and dollar sharply up. I mean, the CPI number is not, not crazy, but it was 0.2 higher, both headline and core. And the market has wiped off the table a March cut. It's now not priced in a May cut. It's now fully shifting, full pricing a rate cut to July. So we've gone from about only 5 weeks ago, 6 weeks ago, it was full board, 6 cuts this year. To now it might not even be half that.

Yeah, and, and, and who's to, you know, who's to speculate that this, this kind of CPI, uh, can gets kicked further down the road and, you know, we may end up with, with, with no rate hikes this year if, if, you know, and I know that the Fed want to be as cautious as possible and it's probably the right thing. So, and again, a plug to listen to both podcasts, right, because there is so much overlap between the market side of things and the macro picture, and then the more micro picture and what we're talking about with M&A deals and IPOs. It really does interlink quite, uh, quite deeply.

Yeah. Okay, well, let's, let's move on and let's talk about Tod's. You promised you were gonna give me the reason of why you do not own a pair of Tod's.

So, okay, so, all right, so Tod's, they're very famous for, well, relatively famous in certain Italian circles for their leather driving loafers. If I was to buy you, Ant, a nice pair of leather driving loafers from Tod's, what do you reckon it's going to set you back? Or set me back? Sorry, I'm buying it for you.

So there's two things in my head that go off. One is when I think of Tod's, for some reason I think of kickers. I don't know whether they have like a little red label or something on a black shoe. It triggered that for me.

You'd be shocked to hear that.

From my schools. Days. However, I've also seen Tod's in like Monocle magazine and things like that, so that means they must be fashion high-end prices. So yeah, maybe, um, maybe something as brutal looking as a kicker's shoe can go for high-end, probably lands it in the more expensive end of the footwear spectrum, I'd imagine.

So I would be paying $695 for your, uh, for your pair of Todds, which again, you're not going to find that on the middle of Lidl. That's pretty punchy, right? And you know, so obviously you might want to contextualize that with, you know, other shoe brands and cheaper shoes, and you can pick up a pair of decent loafers for £100 or whatever it might be, and this seems really, really quite expensive. But then maybe you can actually compare it against a Birkin bag or something like that, and suddenly it's actually relatively reasonable price as a status symbol, you know, cheaper than a watch.

A Birkin bag? What is that?

A Birkin bag. Um, so the very famous— again, not men's fashion, women's fashion— the famous Birkin bag that is very limited in terms of its supply sells for upwards of $4,000. You know, the resale value is massively, massively high. It's a relatively strong statement of the state of the luxury market. So yeah, maybe $695 is not excessive. So anyway, so Tod's, Italian company, leather, mainly shoemaker, famous for its leather driving loafers. It is listed in Milan at about a €1.1 billion valuation. It has just been acquired. So the shares have just been taken off the market. It's just been acquired by a combination of El Capitan. So that's the LVMH investment vehicle. We spoke about El Capitan on the pod in the context of Birkenstock, which it owned until IPO, still owns a big chunk. Also, the founding family of Tod's, the Della Valle family. Brothers who are basically taking this company private with Al Qatari. Just as an aside, one of the brothers actually sits on the board of LVMH as well. So you can imagine, like, I've got this kind of big Florentine palace where they all sit around with their espresso and decide how to carve up the luxury fashion industry. No kickers in sight, I don't think. But anyway, so this is basically a story Um, and we talk about this a lot when we're teaching M&A. This is basically a story about a subscale brand that is struggling to compete with the big beasts in the industry and therefore are kind of compelled to set— to sell. You know, they're valued at €1.1 billion, or they were on the Milanese stock market. Is that really representative of their true value? Is there a kind of smallness discount that is being applied to them because they don't have the distribution network or the reach of some of the bigger names. And we're talking here, I think I just counted 5, 5 luxury fashion companies with a valuation of over $70 billion. Estée Lauder, Richemont, Christian Dior, Hermès, and LVMH. So, you know, there are some big beasts out there. And if you're a subscale company, like Todd's, you're just going to be struggling. So this is a classic case of a, you know, of a take private due to strategic necessity.

Okay, well, I think that wraps that up quite succinctly. So makes a lot of sense, and we'll see, we'll see if, um, if it warrants me pushing the boat out for your Christmas gift this year.

Yeah, and I think it's also the other— the last interesting thing about this is I always— it's always interesting to see what other companies have a little bit of a pop when a deal is announced. So when the deal was announced to take Todd's private and Todd's shares, obviously, I think the premium was about 18%. The share prices of, let's take a look, of Burberry, Bruno Cucciolini, and Salvatore Ferragamo all popped. And these are all kind of mid-$1 to $5 billion market capitalization luxury fashion businesses. And they're like, all right, if this is consolidation time, we're going to have a piece of the action. You know, it's happened with Tod's, maybe Ferragamo's next. So you can just see the kind of rippling effects of this strategy across the market, which is just quite interesting.

To connect this to, um, trading, one of the things I remember when I was used to run a research desk because we were committing in real time. So when news like this would break, it would be that knowledge you described that could allow that arbitrage where you could enter a trade in the intraday environment and execute in and around kind of second, third order relationships, either like that or supply chain related, where that depth of knowledge is a really potent force, which is why people tend to specialize in certain, um, market segments, either size or sector.

Yeah.

So you know that company, that industry, those relationships very well. So it's an immediate response on when you hit this news, because when you trade, you're definitely not fast enough to hit the first point, which is the company's announced. It's then who can think of the domino effect of, well, if that happens, this happens, that happens. Well, then this is going to happen. And then if you can execute that, then that's where the edge is in that.

Yeah, so it's much like the, uh, the share price drop of McDonald's when Wegovy is announced, and the, you know, and, and the, and the weight loss drugs and the appetite suppressant drugs are deemed to be a blockbuster, you know, McDonald's falls off a cliff. So it's just, yeah, it's that first and second and third order, uh, effect.

Cool. All right, well then the final one for the episode is talking about another oil and gas mega deal. This time probably two, two companies. I mean, we've had Exxon Pioneer, Chevron Hess, Chesapeake Energy. These are all might be familiar names to a lot of people, but they probably haven't heard of these two. So who are these two?

Yeah, so I, I, I noticed a really good LinkedIn post that you did yesterday on this acquisition. Diamondback acquiring Endeavor for $26 billion. Just as a reminder, I mean, this is— this is the oil and gas— the U.S. oil and gas market keeps delivering from an M&A perspective, keeps a lot of people in business. Uh, reminder, uh, Exxon late last year acquired Pioneer for $60 billion. Hess was acquired by Chevron for $53 billion. And this is probably the latest mega deal, tens of billions of dollars. Now, this deal is very, very different from the Exxon deal and the Chevron deal because Diamondback has a $30 billion market capitalization, and it is acquiring a company, Endeavor, for $26 billion. So it's always worth thinking about the transformational nature of these different types of acquisitions. So when Exxon announced the acquisition of Pioneer for $60 billion, its market capitalization was $440 billion, still 15% of its total market cap. That's a big acquisition. That's chunky. That's not a bolt-on, but it's not a kind of totally game-changing acquisition. Whereas this basically feels like a merger by any other name. Right? So it is Diamondback acquiring Endeavor, and Diamondback will have 60% of the ownership— Diamondback shareholders will have 60% ownership of the company, but Endeavor shareholders will get 40% ownership of the company. So it's pretty level in terms of the way that this is structured, and it's just again worth thinking about, all right, what does this mean in terms of integration? What does this mean in terms of consolidation and things like that?

So, so I, I read that I think Conoco was the other company that was in the running here. So strategically for Diamondback, why, or for Endeavor, I should say, why go with Diamondback and not Conoco? What would be the pros and cons of going to a much larger one or one of an equal size then, in, in simple?

Yeah, so this is, so this is a classic defensive merger between two organizations that had definitely, as you rightly said, had definitely received advances. I'm sure both of them had from the big oil majors. When you're a $25, $30 billion market cap company, Endeavor's private, but again, you know, $20, $25 billion, and you see this wave of consolidation in the Permian Basin. Remember when we spoke about this last year? You know, this is a maturing, consolidating, extremely lucrative shale oil and gas production zone in the south of the US, where we've gone from a bunch of wildcatters, individual producers, to these pretty big companies. And I can imagine the CEOs of Diamondback and Endeavour getting together again with a cigar in their hands at some kind of club in Houston. Let's, let's, let's just imagine.

We've gone from Milan to Houston, have we?

I know, I know. We're traveling around the world here. To Lidl. And saying, look, you know, we are, you know, we're targets here. And the only way that we can stop being targets to these big beasts that will suck us up and not give us a board seat and not give us real control and basically will integrate us into the bigger operating structure is by coming together, forming a much larger entity that suddenly becomes too big a mouthful for these bigger companies. So the combined entity is going to own 300— 838,000 acres with a production capacity of 816 barrels of oil equivalent per day. That starts to become a pretty hefty acquisition, and it probably means that they get to continue with their kind of independent mindset. Ward— board seats will be split in maybe 5 um, to Diamondback, 3 to Endeavor. They'll split quite a lot of the managerial infrastructure. That's why they're going to go for this deal over and above just selling out to Econoco.

So whenever there's a big deal, there's obviously a lot of jostling for position amongst the financial firms and who's going to run it and advise on the deal. Was there anyone within that mix, either from a lead advisor or corporate advisory services point of view, that It was interesting.

Yeah, so I mean, so the advisor for, uh, Diamondback was Jefferies, and the advisor for JP Morgan was Endeavor. Now, I, you know, the economics for each investment bank in terms of an advisory fee will be relatively similar. You know, you're on to a winner if you're advising the seller or advising the buyer. You know, this is a big deal, this is going to be a big payday, but The upside of advising a buyer is that you get maybe to help to originate and organize the financing. So there was an $8 billion bridge facility that was in the mixer, which actually ended up getting offered by Citi, but I'm sure that Jefferies played a hand, or at least, or maybe Citi got a mandate on the buy side as well, on the M&A advisory as well. There was an $8 billion bridge facility commitment from Citi in order for the new entity, or the kind of combined entity, to set up loan facilities that were more conducive to the bigger company. So when you are advising a buyer, and especially if you're a kind of full-service bank, you can be like, all right, I'm lead advisor, but I'm also going to put you in touch with our debt guys, I'm also going to put you in touch with our equity guys, and suddenly one advisory fee becomes two, becomes three, and it's a real blockbuster. So yeah, there's a lot of, you know, there'll be a lot of people clinking glasses over the course of this week.

Well, with that, with that visual in mind, well, we'll conclude. Well, look, thank you very much, Stephen, for giving up your time. I know you're still on the trip. Safe journey home. And yeah, see you when you're back in London.

Thank you so much, Ant.