Special Purpose Acquisition Companies (SPACs) are the flavor of the year on Wall Street, following big high-profile SPAC-fueled IPOs like DraftKings (DKNG) and Virgin Galactic (SPCE), and we’re seeing a bunch of newsletters and financial pundits try to leverage that popularity… the latest is Enrique Abeyta, who is launching a SPAC-focused newsletter on Thursday for Empire Financial Research (title and price unknown at this point, the pitch for the event is here if you’re curious).

And they also hint at the deal that Abeyta is going to highlight for this launch, so shall we try to ID it for you?

OK, you got it. I can’t resist solving a puzzle. Here’s how it’s pitched in the teaser for the event:

“On October 8th, we’re airing the deal of a lifetime.

“It’s called a ‘SPAC’… A type of deal you’ve probably never seen before.

“A chance to invest in what could soon become the most exciting new company in America… essentially BEFORE it goes public. Like a Pre-IPO, but even better.”

OK, SPACs are surely exciting for investors these days… but there have also already been more than 100 new SPACs that have launched just this year, so which SPAC is it?

More clues:

“The man behind the SPAC we’re sharing on October 8th is one of the most connected dealmakers in Hollywood. He’s worked with Tom Cruise… Sylvester Stallone… and helped relaunch the James Bond franchise…”

OK, so given the relatively small world of SPAC sponsors that’s probably enough… but let’s just make sure by checking the other clues…

“The last time he launched a deal like this (in 2019), you could have quadrupled your money in just 6 months!”

So that confirms we’re being teased about a SPAC sponsor who has done this before. Other hints?

“He’s the former CEO of the studio that produced The Wizard of Oz! His business partner is a former co-president of Sony Entertainment.”

And that’s about it. Ready for the Thinkolator? It takes but a few minutes to pour in those few cups worth of clues and get the Thinkolator chugging, and only a couple seconds of actual work to get our answer: This is Flying Eagle Acquisition Corp (FEAC).

Flying Eagle Acquisition Corp. is the sixth SPAC that has been launched by Jeff Sagansky and Harry Sloan, who are almost certainly the two Hollywood dealmakers teased by Abeyta, so it has gotten a fair amount of attention — these guys aren’t rookies, and, in a world where your latest hit is all anyone cares about, they’re also riding pretty high on their last deal right now… their fifth SPAC, launched about a year before this one, in the Spring of 2019, ended up making a deal to take DraftKings public. That was Diamond Eagle Acquisition (DEAC), which became DraftKings (DKNG) after the merger was completed, and is now widely seen as the most successful of the recent crop of SPAC mergers (more on that in a moment).

Will Flying Eagle’s next deal become another DraftKings, Nikola, Hyllion or Virgin Galactic? Or will it falter like many lesser-known SPAC deals have done in the past? That depends entirely on what kind of deal Sloan and Sagansky have come up with this time, and, at least in the short term, on whether that idea catches fire with investors… and that deal has been announced, so what is it?

Flying Eagle will be merging with Skillz to take that mobile gaming company public, and if we assume the deal is approved by all parties (it probably will be, the share price is signaling no trepidation on that front), then the combined public company will issue a lot more shares to current Skillz (private) shareholders and new institutional investors (at $10 per share), and be renamed Skillz, with the new ticker SKLZ, with supervoting shares meaning that Skillz leadership will maintain voting control of the company. The deal will probably be completed before the end of 2020, assuming no surprises, but I don’t know if the actual FEAC shareholder vote has been scheduled yet.

The deal was announced on September 2, and caused the stock to jump by about 25% right away. Like many SPACs recently, it is a combination of an existing business, the cash from the SPAC ($690 million held by Flying Eagle), and additional private investments being made as part of the deal by institutional investors. Those large investors are putting in another $159 million in cash, according to the initial press release, but that release also noted that Skillz expects to have a closing cash balance of $250 million once the deal closes… that’s the minimum, Skillz insiders can sell some shares as part of the deal and existing Flying Eagle shareholers can redeem their shares (though probably few will, given the current share price of $12+), but they’re limiting Skillz insider sales to make sure they end up with at least $250 million. The pro forma valuation they cite for the combined company is $3.5 billion, with a business that expects to generate $555 million in revenue in 2022, so that looks pretty rational on the face of it — that’s just a little more than 6X anticipated 2022 revenue.

The fact that they didn’t mention 2020 revenue means I bet that number is a LOT smaller, so I did go into the SEC filings to see what they’re not highlighting (if you only see what management wants to include in a press release, of course, every company looks good). Their S-4 filed in early September is the most recent document I saw, in case you want to check into it for yourself (you should, if you’re thinking about risking actual money on this deal)… the basic financial metrics, though, are pretty interesting, if only because of the growth rate. Here’s how that looks in the filing:

What stands out? For me, two things: Very high revenue growth, and equally high growth in sales and marketing costs (revenue and “selling costs” are almost the same number for them so far, and are growing at essentially exactly the same pace).

That 100%+ revenue growth from 2018 to 2019, and then the 93% revenue growth for the first half of 2020 over the first half of 2019, that’s where the lust comes in. That makes their prediction of a $555 million revenue year in 2022 sound rational, since they’re on track for something like $200 million in 2020, though it’s far from guaranteed.

That’s not enough to make them profitable. It looks like their sales and marketing costs are persistently high and are essentially equal to revenue, which is a little bit worrisome and indicates that buying this revenue growth has been expensive for the past couple years… and makes me wonder if it will cost them $500 million to bring in that 2022 revenue, since that’s more cash than they’ll have on hand following this business combination, but that kind of growth does tend to get investors’ attention. And who knows, maybe these are just startup costs and the popularity will snowball, bringing in a network effect (more players begets more players), and letting Skillz spend less to bring in a growing amount of revenue from this point. This year, their revenue per active user has actually declined a little bit… though last year, that number jumped by almost 20%, so I don’t really know that we can assume any particular trend on that front just yet.

Skillz is an interesting company, though I can’t say that I really knew anything about them before today. They essentially provide a platform that lets mobile game developers turn their games into competitive eSports, and then Skillz runs tournaments in those games. In practice, it seems like these Skillz games are mostly knockoffs of popular mobile games or are based on existing gameplay, like Candy Crush knockoffs, or various card games, and they add to it a layer of player matching and player-to-player competition, either for real money or for their play-money currency (real money skill-based games are apparently legal in most states, kind of like DraftKings’ fantasy football games, but not everywhere).

So maybe this is worthy of a speculation, you’ll have to make your own call on that — I don’t have a sense of how popular these Skillz games are, or whether they’ve got the potential to really grow dramatically in some organic or viral fashion to let revenue growth outpace their marketing costs, so that’s my biggest question. That’s not a deal-breaker as long as the market is going to be real and growing, and as long as they can acquire players who stick around and play more games and deposit more money for real-money contests, DraftKings has similar challenges in its income statement and that has obviously worked out fine so far for DKNG shareholders… so although I have a lot more confidence in DraftKings as a national brand than I do in Skillz, that might just be because I’ve never run across Skillz before.

I confess, I’m not much of a gamer… my kids are not allowed to play real money games, and I’ve been kind of busy during this pandemic shutdown so haven’t been trying to make money with my e-bowling skills, so maybe I’m just missing a big social trend. I can see some appeal here, clearly eSports and online competitions are a growing market, I just don’t have a sense of the value or appeal of Skillz specifically yet… which leads me to be a little bit cautious. In the next couple quarters it wouldn’t be surprising to see a surge of investor interest if they continue to report 100% revenue growth as the deal goes through… and if Enrique manages to get investors fired up about this one, well, who knows what might happen in the near term. The biggest concern I have is the lack of a real brand name, despite years of pretty high marketing spending, but, again, perhaps it is a solid brand outside of my known universe.

They have attracted some small game developers, who I guess see better revenue potential from this kind of eSports contest than they do from mobile in-game ads, but they have not yet built or hosted any really high profile games as far as I can tell, and nothing that has been able to grow without a lot of marketing, so presumably that’s the big operational challenge. I imagine that the big mobile game publishers publishers like King or Zynga aren’t interested, or would host this kind of tournament on their own instead of using the Skillz platform… but it’s quite possible that the gaming/eSports business is big enough, and growing fast enough, to nurture lots of smaller companies like Skillz as well as the big fellas.

Flying Eagle, like every other SPAC I’ve seen, also has warrants attached to the deal — those who bought FEACU at the IPO received a quarter of a warrant stapled to their share of FEAC, and, as is typical, those began trading separately a little after the IPO, so you can now still buy the original FEACU units that haven’t been separated (each is one share plus 1/4 of a warrant), or just buy FEAC or the separate warrants, which are listed at something like FEACW, FEAC-WT or FEAC/WS, depending on your broker.

Each full warrant gives you the right to buy FEAC at $11.50 a share for five years, so would be “in the money” now and theoretically worth at least $1, plus whatever you consider to be that time value, (since FEAC is trading at $12.50 or so)… but you usually can’t exercise those warrants until the deal is done and those new shares that underly the warrants are registered with the SEC, so that “in the money” value is still a little theoretical. As is the case with most SPAC warrants these days, the price has run up dramatically because people love trading them. FEACW is now trading at about $3.50, which assumes that the deal will definitely go through, and if you’re buying FEACW instead of FEAC right now, you’re essentially betting that the FEAC share price will eventually hit at least $16 or so. As with most SPAC warrants, there’s also an early redemption/forced exercise clause, so the leverage is limited — if FEAC trades above $18 for 20 days out of a 30 day period, they can either speed up the exercise date (in which case you’d have to act, either exercising or selling your warrant to avoid having them redeem it for one cent), or do a cashless redemption at whatever a fair price at that point would be (essentially, just trading your warrants for what would be a value-equivalent number of shares).

If you’re not familiar with SPACs, these Special Purpose Acquisition Corporations are also often called “blank check” companies — they are pools of capital raised by managers, with a listing on the stock exchange. They raise that money, based on either connections or their name, and then all the cash that is raised goes into a trust fund until a deal is done — traditionally, they’re all done at $10 a share and the deal includes some kind of a warrant (sometimes a full warrant with each share, sometimes a partial warrant), so those who buy in initially get a little bonus if things go well… and shareholders in the SPAC can vote against the deal or ask for their share of the trust fund to be redeemed, usually for roughly $10 plus interest, if they don’t like whatever deal the managers come up with. The managers are compensated by the fact that they buy founders shares or founders warrants cheap at the beginning, but their real incentive is to get a deal done — if they don’t make a deal for some kind of “business combination,” which is usually a merger that brings a new company public under their SPAC listing and sometimes also includes a secondary capital raise as part of the deal, then they don’t make money.

Buying a SPAC at the SPAC IPO is essentially a riskless exercise, so that’s easy — all you’re really risking before the deal is finalized, assuming there’s no big fraud or something odd happening with that particular SPAC (and I’ve never seen that), is time and opportunity cost. If you don’t end up liking the deal the managers come up with, or if the managers don’t come up with a deal at all, you can essentially get your $10 back from the trust fund, though it might be tied up for a couple years as you wait (most SPACs have a two-year term, though it varies a little)… and you get some warrant exposure for additional upside if there happens to be a good deal in the offing. There’s also a case to be made for buying SPACs if they’re ignored and unloved after the IPO, but before they agree to a deal — sometimes those trade down below $10, and that gives you basically a free option on whatever deal might come, with still that ability to back out and get your cash.

That’s not the case if you buy in later, during a period of enthusiasm, and pay $11 or $12 or more for the shares — then you’re taking a little more risk, the floor is still ~$10 if the redemption date hasn’t passed yet, and the warrants can easily be worthless if the managers make a bad deal, or don’t make a deal… and if you buy in after the voting and redemption is done, and the SPAC has made its merger deal, of course, there’s no floor at all, everything depends on the quality and future potential of the company they merged with.

The biggest risk for SPACs right now, I’d say, is that they are buyers in a seller’s market — the pressure is all on the SPAC managers to find a deal, within two years, so they either have to be really excellent managers who a target company wants to work with… or they have to agree to a deal that the target company thinks is advantageous, either because the target wants a higher price than they could get in an IPO, are too small to get a good IPO deal done, or just wants to move more quickly than a typical IPO. With this unprecedented amount of money in SPACs chasing deals now, and with all those SPAC founders and managers fully aware that their upside comes ONLY if a deal is done (that’s when their founders warrants and their insider shares become valuable… otherwise, they’re basically working for nothing for two years), the pressure to do a deal makes me generally nervous about the quality of the deals being done.

That doesn’t mean some good ones won’t come through, or that SPACs are evil. It’s just that the odds are pretty weak for the group as a whole, I fear, particularly if we hit a weaker market for a few months that tamps down on the IPO “hot story” enthusiasm with which so many SPAC mergers have been greeted so far this year. That doesn’t mean anything in the context of this specific deal for Skillz, those are just my thoughts about the SPAC market right now in general.

SPACs do have a purpose, and there is a rational reason for them to exist and to be thriving right now — private companies have gotten such a flood of venture funding, so there are a lot of companies that have been growing up to a natural IPO over the past 5-10 years… but there’s a limit to public IPO enthusiasm and investment banking interest in small IPOs that don’t already have recognizable brand names or great stories, so if you’ve got a company that’s worth less than a couple billion dollars, you’re not as likely to get the attention of the big Wall Street banks and strong backing for an IPO, which makes the quick exit of a SPAC deal, and the guaranteed funding and relatively sweet valuations that sellers can demand right now, look pretty compelling.

Each SPAC has to be evaluated on its own, and will be judged based on the business it merges with and how successful that business turns out to be… but we should at least take a moment to see whether Sagansky and Sloan are consistent in their ability to turn these “blank check” companies into real businesses. So let’s look at those past SPACs these two have sponsored, and how they’ve done in the market once those deals were consummated:

Global Eagle Entertainment (now GEENQ), which was their first SPAC that raised money back in 2011 ($190 million, which at the time was the biggest SPAC in many years), bought inflight connectivity companies Row 44 and Advanced Inflight Alliance, and this is how it has done since…

So that’s not terribly compelling, though you can see that the shares got a bump around the time of the initial DraftKings mania — probably just some misguided trading, I expect.

The second one was a merger with a company that was already public but not US listed, the Indian video distributor Videocon (ticker was VDTH), with the deal to move Silver Eagle Acquisition’s capital into that Indian firm completed in early 2015. A year later, Videocon merged its operations into a new company with part of Dish TV India, becoming d2h. That company then later delisted from the NASDAQ, so Videocon shareholders had to elect how to transfer their holdings, but at this point it looks like one share of that initial SPAC would be worth about 40 cents if held through today (it turned into roughly 8 shares of Dish TV India, of which shares last traded OTC in the US for about five cents). That could be unfair and I could have missed something, it’s a convoluted deal, so please correct me if I’m wrong about that… but it seems unlikely to have been a big winner given that Dish TV India, at least on the Indian stock market, has lost about 80% of its value in the last five years.

The third one was Double Eagle Acquisition, and I actually remember looking into this one at the time — they merged with Williams Scotsman, also called WillScot, which builds and leases temporary buildings (like those extra classrooms that might sprout up outside a school during a renovation project or expansion, for example). WillScot had its ups and downs as a newly public company, but was clearly a real business even if it wasn’t growing much — and then just a couple months ago it merged with one of its main competitors, Mobile Mini, to roughly double the size of the business and create perhaps some economies of scale (it’s a business that works much better with good local or regional scale, given the cost of moving, setting up, servicing and later repurposing those semi-mobile buildings). At the moment, what is now WillsScot Mobile Mini (WSC) looks pretty good as a result… but SPAC investors would have had to hold on through some big swings over the past few years (the deal was announced in late 2017):

And Platinum Eagle Acquisition has been pretty disappointing, following their merger that created Target Hospitality (ticker is now TH). Largely, it seems from reading the past few press releases, that’s because the businesses they merged with, Target Logistics and Signor Lodging, have been destroyed by the combination of the collapse of the oil business and the COVID-19 pandemic… that company builds, owns and operates customized housing communities, and to a large degree that means they built temporary housing complexes for oil and gas workers. No idea how it will do from here, but at this point it has certainly been a disappointment for those SPAC investors — and that was true almost from day one (it never got above $11, the deal was announced on November 13, 2018 and finalized on March 15, 2019, and was back below the IPO price of $10 by May):

So that string of deals didn’t generate a huge amount of excitement for Diamond Eagle Acquisition (DEAC) when it came public las summer as their latest and biggest SPAC (until now)… but once the deal was announced late in December for them to merge with fantasy sports leader DraftKings, things looked up a little bit… and after the deal closed in April things really took off as sports gambling became a hot story and the growth at DraftKings caught everyone’s attention. Here’s how that latest SPAC from these two has done so far:

Sometimes you only need one, right? If FEAC is to soar higher in the short term, it will be because Skillz catches the imagination of investors, and folks start daydreaming about that “next DraftKings”… if it soars higher a few years from now, it will because Skillz is showing some sustained growth and beginning to give investors hope that they can either become dramatically larger or, if growth slows, that they can improve their margins and show some path to profitability.

So there you have it — one SPAC in the offing that seems to match what Enrique Abeyta is hinting at for his big event this week, and some thoughts about SPACs in general and a quick look at Skillz for you… and with that, I leave you to your own decisionmaking. Think this will be the next DraftKings, or the next Target Hospitality? Something in between? Have other SPACs that you favor, either as short-term trades or as longer-term investments? Let us know with a comment below. Thanks for reading!