As Hollywood constantly looks to novel forms of funding, the special purpose acquisition company or SPAC, has found new popularity over the past couple of years. Besides being a welcome source of funding, these blank-check investment vehicles look to energize the lightly populated middle of the corporate ecosystem in the media, entertainment, sports and digital sectors.
SPACs (blank-check transactions are also called blind pools and reverse mergers) enable entertainment companies to go public while bypassing the traditional IPO route. They work by raising capital through their own IPOs, becoming publicly traded entities for the specific purpose of acquiring an existing operating company.
The SPACs are streamlined publicly traded entities that are stuffed with cash but operate no business at the time they mount their IPOs. Their plans are to later merge with a yet-to-be-selected private operating business.
“This is a tool that is less capital-intensive on the front end than more traditional transactions involving the majors such as studio co-finance arrangements,” says Morgan Earnest, COO at Los Angeles Media Fund and CFO of its SPAC, which raised $253 million in November.
The advantage for said private business: avoiding the regulatory hurdles and financial scrutiny that accompany traditional IPOs.
Typically, financings shower money on industry’s upper echelon, such as film slate funding going to major movie studios, leaving the majors in charge of business decisions. In SPAC land, Earnest says their transactions create full-fledged, independent operating companies that are charting their own course.
SPACs transactions are booming across finance and media/entertainment. Sidelined by the video streaming revolution, Redbox diversified from its DVD rental roots to streaming, merging with a SPAC providing $88 million in cash in October. On Dec. 1, talent agency UTA, capitalizing on its strength in video gaming, announced that it’s in the process of raising $200 million through a SPAC designed to pursue acquisitions of gaming-related companies.
Other SPAC deals involved science/history video streamer CuriosityStream; Liberty Media Acquisition that sprouted from a traditional cable TV/telecom giant raising $575 million; former Disney executives Kevin Mayer and Tom Staggs raising money on the duo’s business chops; and others in sports and gambling. Reflecting the boom, Wall Street researcher Dealogic counts 301 SPAC deals year-to-date in November worth $585 million in communications-entertainment-media completed or announced, vs. 199 comparable deals worth $261 million in 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
“If you are creating a SPAC, you are looking for a business that has traction and publicity,” Vogel says. “Fashion, sports, music and film have recognition, brand equity and normally some kind of revenue whether from a piece of music or celebrity-branded sneakers.”
Celebrity entrepreneurs dot the SPAC landscape ranging from basketball star Kevin Durant to former CBS executive Joe Ianniello to Mark Wahlberg.
“The media, entertainment and sports industry is an extremely broad and evolving category that is inseparable from technology,” adds Michelle Gasaway, partner, capital markets, at law firm Skadden, Arps, Slate, Meagher & Flom. That broadening means leaps into digital streaming, mobile gaming, digital content creation and online lifestyle content, sometimes with hardware attached such as exercise equipment and experiential technologies.
What energizes investors today are instances of SPAC values climbing after mergers. The stock price of the SPAC known as Digital World Acquisition Corp. (DWAC) spurted six-fold in October with the announcement that DWAC was merging with former President Donald Trump’s private social-media venture.
Another high-flier is fantasy sports/betting entity DraftKings for its SPAC deal March 2020, after which its share price peaked above $70, though it recently gave back some gains. Its SPAC, Diamond Eagle Acquisition Corp., issued stock at just $10 a share prior to the DraftKings merger.
Harry Sloan, the Hollywood executive who co-founded seven SPACs, including the DraftKings merger partner, counted 40 SPACs at the time of the DraftKings merger that swelled to an overheated 600, in an interview with Variety’s “Strictly Business” podcast last month.
“I do anticipate a lot more sanity and less speculation among SPAC investors and therefore” fewer such entities in the future, Sloan said.
The benefits for the private operating company partners are a simpler IPO, and also getting listed on a public stock exchange at earlier stages of development, which provides the attendant IPO cash injection from the SPAC. There’s more rigor in the traditional IPO process, which requires more fully developed companies.
The ease of entry sets the stage for mid-size operating companies with limited corporate resources to be energized by finance-savvy SPAC partners in mergers, say SPAC proponents.
“Before, during and after in the going public [process], we help tell the story, navigate the process and believe we’ll be the best board members you can imagine,” says Neil Jacobson, chairman and CEO of the Music Acquisition Corp., which raised $230 million in its February IPO and trades with the ticker symbol TMAC.
“We want to empower the companies going public,” says Jacobson.
The company’s CFO, Todd Lowen, adds that money injected in SPAC mergers is “a permanent source of capital,” meaning equity doesn’t have to be paid back as loan financing does. Further, a merged operating company can use its stock to make later acquisitions.
Part of that low-hassle IPO attraction is that SPAC deals are less costly for the operating company and less restrictive. Traditional IPOs put the focus on past financial results. On the other hand, SPACs and their target companies have the leeway to issue future forecasts.
The SPAC sector faces regulatory risks. The Securities and Exchange Commission has raised eyebrows over the guaranteed nature of a big payday to SPAC fund organizers, even in instances in which shareholders lose. Regulators are also known to be looking at how equity is booked and at rules on promotion for SPACs.
The current SPAC revolution bloomed during buoyant financial markets. Though not a SPAC, Meta Platforms (the new name for Facebook’s parent) today carries an indicated stock market value of $940 billion from a 2004 startup. More speculatively, small investors moving as a pack bid up shares earlier this year of battered movie theater circuit AMC Entertainment and video game retailer GameStop to heights that left investment pros scratching their heads. Crypto currencies soar in dollar value without any assets as backing.
Today’s bubbly environment present an opportunity and a problem. Valuations spiraling upward are a magnet pulling investors to buy SPAC stock, but then SPACs chasing deals can find target companies arm-wrestling for rich valuations because eager buyers/investors are lined up at their doors.
Typically, the owners of the private operating company get around 80% of equity when merging with the SPAC, so investors who put up cash hold a minority stake post-merger. SPACs typically have a 24-month deadline to connect with a merger prospect, or else must return money raised to investors.
It’s not always smooth flying as some recent Hollywood SPAC deals hit turbulence. Wall Street investor Bill Ackman’s $4 billion Pershing Square Tontine Holdings was set to buy 10% of major label Universal Music Group in August, but was thwarted when shareholders filed a lawsuit that he was running it like a fund, not an operating company.
SPACs have the aura of the Next Big Thing, but they are not new. From 1993 to 1998, the late Menahem Golan — half of the “Go-Go Boys” duo that were kings of Hollywood’s indie film sector in the 1980s —engaged SPACs as vehicles for his comeback attempts. Golan may have been a celebrity executive with lots of film projects, but his SPAC effort faded into obscurity.