SPACs on life support but not dead yet
The liberalisation of the U.S. sports betting market drove a boom in the use of special purpose acquisition vehicles (SPAC), but with equity prices falling and concern over the profit outlook for the industry rising, some are questioning if the market is now dead.
A SPAC raises money through an initial public offering on a stock exchange, but has no operations of its own. That money is put in trust and the vehicle has 18 months to find an acquisition target and 24 months to complete the deal.
According to figures from French bank Societe Generale, SPACs raised $162 billion in the U.S. last year, double the amount of the previous year. There were 610 in total.
Some of the big names in the online gambling world that have gone public through SPAC deals include DraftKings, Golden Nugget Online and Genius Sports.
Donna B. More, a partner with U.S. law firm Fox Rothschild, said one of the key advantages for the companies is the speed to market. A traditional initial public offer is a longer process with a heavy burden on regulatory compliance and documentation.
SPAC market cooling
But she says the froth has come off the market, where valuations last year had become “crazy.”
“SPACs have died down a lot,” she said. “The whole M&A market is coming off due to higher interest rates.”
So far this year, the U.S. NASDAQ Index is down about 30 percent, while the Dow Jones Industrial Average is off 24 percent. Investors are concerned about rising interest rates as the Federal Reserve moves to tackle high inflation, while analysts are warning of an imminent recession.
“I don’t anticipate much being done on the SPAC side in the gaming world. That has been pretty quiet for a while,” said Colin Mansfield, a senior director at Fitch Ratings. “It’s not surprising as the equity markets come down. SPACs in general are a pro-cycle kind of instrument.”
Mansfield, who heads the agency’s gaming, leisure and lodging sector, said that the main driver in the U.S. had been the excitement about the total addressable sports betting market as states legalised and regulated.
Over excitement for sports betting
“You got a lot of people excited for something that we as credit analysts would try to remind our investors constantly that doesn’t generate a lot of cash flow,” he said. “I think over time people started to realise that yes the market is growing from a revenue perspective, but it’s not profitable and everyone is losing money.”
“There are a few bigger players that are emerging as dominant. All of the smaller ones who went for a land grab for market share, some through SPACs, are getting crushed on the market share and aren’t making any money, so where’s the investment story?”
“Sports betting SPACs are not successful in my opinion,” he adds.
For all the SPAC deals that were announced in a fanfare of publicity, many also fell by the wayside, with some, such as Sportradar, choosing to go it alone through the traditional IPO route.
Failed deals
Last month, lottery operator Allwyn said it was not going ahead with a merger with Cohn Robbins Holdings, a U.S. SPAC. While Playtech dropped talks with Caliente Interactive for the Mexican sports betting firm Caliplay to list in the U.S. via a SPAC.
Another wrinkle has been tighter regulation that was introduced by the Securities and Exchange Commission in March this year, which sought to boost disclosure and investor protection.
Still, there are those who still see a bright future for SPAC deals and say the market is not dead yet.
Reasons for optimism
There was a spark of life in September when sports betting operator PlayUp said it was listing on NASDAQ through a SPAC transaction. The merger with IG Acquisition Corp valued the company at $350 million.
Societe Generale is also bullish. There may be a slowdown due to the current environment, however, there are opportunities particularly in Europe and Asia.
“This SPAC boom halted when the Securities and Exchange Commission (SEC) issued new proposed rules for SPAC listings on March 30, 2022,” Societe Generale wrote in a note. “While the new rules are still at proposal stage, US market participants dramatically reduced SPAC activity and the number of SPACs launched in 2022 tumbled.”
“Despite the resulting market “blip”, we think that there is still a lot of potential for SPACs in Europe. “
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