WHAT SPACS MEAN FOR SPORTS

It was announced earlier this year that Billy Beane, the "Moneyball" king reportedly could soon leave the A's after spending over 30 years in Oakland's front office.

Beane, the A's executive vice president of baseball operations and owner of a minority stake in the franchise, is set to leave Oakland's front office for Redball Acquisition Corp, his SPAC, as it completes a merger with Fenway Sports Group. Owned by billionaire John Henry, Fenway Sports Group assets include the Boston Red Sox, Fenway Park, and Liverpool F.C.

SPAC Basics

SPACs are companies that raise money in an IPO and then find another company to buy. For that reason they’re also called blank checks: management is given a pile of cash to find something, anything, to buy.

SPACs typically state what they want to buy, in RedBall's case this would be sports orgnaizations, although they aren’t obligated to limit themselves. Think of them as Wall Street’s cult of personality: SPAC executives, called sponsors, are essentially saying, “Trust me, I’ll pull off a great deal.”

The trade-off is the clock keeps ticking: SPACs usually have two years to find an acquisition, and can’t start looking until the IPO. If they fail, SPACs need to return the money they raised back to shareholders. Plus, if shareholders don’t like the proposed acquisition, they can demand their original capital back. It may sound involved, but SPACs have brought 2020’s most exciting companies to the stock market, including sports gaming firm DraftKings, space travel outfit Virgin Galactic and alternative-fuel truck maker Nikola.

Why do SPACs exist?

Any company a SPAC buys could go public by its own IPO or perform a reverse merger, where it buys a company for its stock listing. IPOs demand a little more money and time than a SPAC, but mainly, companies tend to leave money on the table during an IPO, especially in bull markets.

From mid-2009 to mid-2019, the average IPO gained 16% in its first day of trading, according to University of Florida’s Jay Ritter. That means companies underpriced their stock at the IPO. A reverse merger is quicker and cheaper, but it’s frowned upon as a move lesser-quality companies do. It also doesn’t drum up investor excitement for buying shares. SPACs can take time to pitch a proposed deal to institutional investors and raise commitments to buy stock and provide more financing.

What’s in it for everybody?

For the SPAC, a lot. The sponsors get cheap stock when they close an acquisition. This stock, called the “promote,” often can be sizable, up to 20% of the new company. That incentivizes SPACs to buy something—anything—before their two years are up. (In higher-quality deals, the company being bought will demand SPACs slash their promote.)

For the company merging with the SPAC, it gets to go public at a market valuation it negotiates ahead of time. That means no runaway shares after an IPO that leaves company executives with the nagging feeling they’ve been cheated by the bankers.

For investors? A low-risk bet. Since you can demand the initial share price back (less expenses and with interest earned) until after the pending deal is announced, your downside is protected. You’re really just paying opportunity cost—the possibility that you could have invested in something else for those two years and made money. The upside is SPACs usually throw in three warrants for every share as incentive for investors to get in early (warrants de-couple from shares in a few weeks after the SPAC IPO). Shares are usually priced at $10, with the warrants executable at $11.50. That means a popular deal can pay off handsomely.

Why are SPACs appealing in sports business?

One little-discussed wrinkle is the fact a company merging with a SPAC doesn’t have to do a lot of public posturing. For an IPO, executives go on a roadshow, where they travel to drum up interest for fund managers to buy shares. Quite frankly, a lot of successful leaders don’t want the retail politicking that comes with a roadshow, according to Don Duffy, CEO of ICR, an advisory firm that works with many SPACs. That may be a reason why sports teams and large private sports business companies are exploring going public by SPAC when they’d otherwise never consider an IPO. The downside is that if a company successfully goes public by SPAC, those executives will have to face the same attention every other public company does, Duffy noted.

Why am I just hearing about SPACs now?

You’re not alone. SPACs have exploded in popularity in the past year. More companies will go public by SPAC than IPO in 2020, Ritter said. Although SPACs have popped up now and again since the 1980s, regulatory reforms in recent years have tamped down excesses by both SPAC sponsors and hedge funds that manipulated other investors. That’s made SPACs more appealing now, accounting for a lot of recent popularity—though some consider the spread of SPACs a sign of market excess.

New SPACs are being formed nearly every day, with at least 164 having IPO’d in 2020. Overall, there are 215 SPACs that have filed for an IPO or held their IPO but haven’t acquired a business (an event known as de-SPACing, in Wall Street lingo). Those firms hold $62.3 billion in capital, according to data from Dealogic.