Breaking Down The SPAC: Why Sport Is Becoming A Key Investment Focus

In this week’s Meet The Team piece we take a dip into the financial world, as Sandy Case, our Chief Strategy Officer, provides a simple breakdown into what could be viewed as a complicated part of the sports industry, the rise of SPACs. Much has been discussed about these companies in the past 12-18 months in sport, so read what they are all about here…

One of the interesting areas that is developing in the sporting world is the SPAC (special purpose acquisition company). They have been around for a while and were talked about when I worked in the financial world back in the 1980’s. Many people have seen the word and noticed that Jay Z or Shaquille O’Neal are involved and nodded wisely without really understanding what they are…

It’s actually a very simple concept that could have some drastic outcomes in the sport industry.

“The new world is disruptive and regularly challenges the age old established fee structures. This does that and more.”

With no apologies to the experts I will avoid financial jargon where I can. SPACs are broadly speaking a shell company, with money, that intends to buy or merge with another working business. I’ll explain some of the benefits at the end.

There are normally several phases:

Phase 1: It starts with a group of investors who raise some money and form a SPAC. There is no working business, just an empty shell. That is why you often hear them described as a ‘blank cheque company’.

Phase 2: The management team will normally have an expertise in a specific area and will usually announce that they intend to buy a company (using the investor funds) in a particular sector. They won’t necessarily name the company but just the type of business they would like to buy.

Naturally this is likely to be within a sector that they are themselves knowledgeable about. Currently the hot sectors for growth are EV (electric vehicles), space (travel, exploration, infrastructure), crypto (blockchain business), green energy (hydrogen, solar etc) and tech. All the areas that we read about daily that are going to allegedly change our lives. We’ll come to sport later.

Phase 3: The SPAC announces a target business that it wishes to buy. There’s no guarantee they will get the deal done but if they have chosen wisely and done the right negotiation then they are good to go to the next phase. Clearly this excites the financial press and lots of speculation about intentions arise.

Phase 4: The deal gets done and the SPAC name changes into the target company name. If, normally after 2 years, no deal is done, then the original investors get their money back. This is a pre agreed arrangement to protect the original investors if no deal can be done – you get your money back.

Back to the reason why they go through the above process – well it’s because the process skips having to involve banks and investment firms (who like to charge hefty fees) making the process faster, easier and far cheaper. The new world is disruptive and regularly challenges the age old established fee structures. This does that and more. One other key area is that share prices regularly see large jumps immediately (not always but regularly) after an IPO leaving the selling company pretty frustrated at how much money they have left on the table.

So it’s not “traditional” but that doesn’t make it wrong. Of course not. In fact, I believe that the traditional IPO will die a slow death and that this is how more and more companies will come to the market.

But why sport? Many will remember DraftKings going through this process and there are rumours of a SPAC merging in a deal with Sportradar worth $10bn.

Well in my view sport hasn’t always been a fertile shopping ground for investors but the rise of broadcast fees has meant that now there are many opportunities. For me it is tech that will change business models. Put simply the new technologies that exist today are offering rights holders new avenues of revenue and the world is shifting. No longer does a club, and I’m talking the larger clubs, rely on gate receipts for the primary area of income. In fact it is tiny and it won’t be long before that model changes and people are paid to attend matches. Watch this space. These new revenue streams mean valuations can really start to accelerate so I think we will see a similar acceleration of SPACs being created for investment into the sporting world.

“For me it is tech that will change business models. Put simply the new technologies that exist today are offering rights holders new
avenues of revenue and the world is shifting.”

To back this up: In excess of 80 SPACs have been created in the last 18 months raising an approximate $30bn between them. About half of that has been invested but there is still a large amount out there waiting to be pumped into sport and 2021 is growing at x2 the pace of 2020 so we can expect to see a lot of cash looking to make its way into the sports market. It’s incredibly exciting and therefore of huge relevance to us all in this industry.

In conclusion I realise this is a simplistic overview and there are many nuances to the process. Investment will likely only be in the larger sport businesses. There are also questions around where the money is coming from and if it is only speculative then where will that leave the sport once they have exited. How will long held tradition sporting values be impacted now there are potentially aggressive investors that require an ROI. SPACs are a simple concept and there will be some very disruptive outcomes.

For further listening please do check out Michael Broughton’s simple video
explaining some of his own thoughts here –