These are the Worst SPAC Deals of the Year
The Rundown - Your weekly SPAC Deep Dive (12/23/21)
When Investors think about SPAC deals, they often think about companies like DraftKings, Lucid Motors, or Virgin Galactic. However, SPACs are just as likely to fail as IPOs (or more likely given the volume of deals) as investor enthusiasm, lofty projections, and inexperienced management can weigh down on the valuations. While SPACs were red hot in February, they have crumbled amidst regulatory scrutiny and growing investor skepticism. Just six months after a deal closes, the median SPAC underperforms the Russel 3000 by a staggering 42%. While most De-SPACs faced a torrid time, these were the worst-performing deals of the year.
Talkspace: Talk About a Bad Deal
Online Behavioural Therapy company Talkspace has seen the perfect storm of events, resulting in one of the worst debuts on the market. Ever since Talkspace completed its SPAC merger with Hudson Executive Investment Corp, the stock has essentially been in a free-fall, with shares now down over 85% since its debut. The horrendous de-SPAC performance, can at least in part be attributed to lofty projections made by management, in a time when market conditions for SPACs were euphoric. However, several other factors resulted in a collapse, including the resignation of Co-founder and CEO Oren Frank, Head of Clinical Services Roni Frank, and COO Mark Hirschhorn, which essentially left the company without its core management team, at a time where the industry is seeing increased competition.
Furthermore, losses continue to widen at the company (Talkspace posted an Adjusted EBITDA of -$20.8 million compared to -2 million YoY), even though revenues grew by 23%. Revenue growth in the B2B segment may decelerate further as consumers shift to working in offices once again. Based on the trajectory of the stock, one would assume that Talkspace is headed for bankruptcy, but that could be farther from the truth (at least for now). The company had nearly $223 million in cash at the end of Q3, which made up 73% of its market cap, implying that the core business was worth just $85 million. Given that the company will generate over $115 million in revenues in FY21, the company seems undervalued given the current risk/reward.
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Beachbody: Taking a Beatdown
In the last eighteen months, Beachbody saw a surge in demand for its at-home fitness platform, primarily due to the tailwinds from the stay-at-home order issued during the pandemic. Management believed that there would see a structural shift away from gyms to at-home fitness in a post-pandemic world, offering a market with sizeable opportunities. As a result, the company decided to go public to capitalize on the boom in demand and shore up its finances. Unfortunately for investors, the timing couldn’t have been worse, as the stock has seen a selloff due to a multitude of factors. The primary driver of the collapse in Beachbody stock is the underperformance of the core business itself.
In Q3, Beachbody delivered revenues of $208 million, which was down 17% YoY, with the company delivering a net loss of $40 million vs a profit of 13.8 million (due to declining gross margins). Beachbody isn’t the only stay-at-home fitness company to underdeliver this quarter, with Market leader Pelaton seeing a similar selloff (down 72% from its highs) due to lower guidance and weak operating performance. Despite the recent challenges, there are some bright spots for Beachbody, including the fact that Digital Subscriptions (which is a higher-margin business) grew, albeit moderately, and that the company has a healthy balance sheet with over $340 million in cash & inventory. The long-term uncertainty around the stickiness of revenues from consumers remains a concern for the company, but if management can deliver an effective strategy to retain customers, there is still an opportunity to turn things around.
TMC The Metals Company: Under the Sea
TMC decided to prematurely hit the public markets and was destined to have a disastrous debut from the start. In theory, at least, TMC’s business model sounds like a promising one. The company has ambitions to mine the depths of the Pacific Ocean for rare metals to electrify 280 million vehicles. Despite having a promising idea, TMC’s De-SPAC was plagued by a litany of issues that included investor withdrawals, legal challenges, and no revenues. While target companies have seen high withdrawals from investors in recent months, TMC found itself as a rare De-SPAC where PIPE investors withdrew from the deal (Ramas Capital Management Failed to Deliver $200 million), resulting in the company raising just $137 million.
Given that management projected that it would need $7 billion for large-scale commercial production, the company would need to significantly dilute existing shareholders to reach its operational goals in the future. TMC Shareholders not only face operational and financial headwinds but legal challenges as well. The legal battle against Ramas Capital in the Supreme Court will be an expensive affair, and the recent lawsuit led by investors (claiming securities fraud) won’t do the company any good. The final nail in the coffin for TMC is the mounting environmental challenges (over 500 scientists have signed a letter calling for a moratorium on deep-sea mining) and potential regulations that may lie ahead. Given that the company has two dozen employees and a CEO with a shaky track record (where he led another deep-sea mining company that lost $500 million), it wasn’t a surprise that the company couldn’t hold on to its $2.9 Billion valuations for long.
CarLotz: No Cars, No Problem
While CarLotz should have massively benefited from the boom in used cars, the company has instead become a victim of several simultaneous failures in the economy, leading to questions about the viability of its business model in the long run. The company offers consignment-to retail used car marketplace that connects several actors including dealers, wholesalers, auction houses, and customers. While CarLotz should have benefited from the massive demand for used cars (due to the semiconductor shortage), quite the opposite has happened, with the company’s corporate vehicle sourcing partner deciding to pause consignments.
This was a huge setback for the company, as 60% of the company’s inventory came from this partner. Furthermore, due to the lack of visibility in the wholesale market and commercial vehicle sourcing operations, management decided to withdraw earnings guidance for the year, resulting in the stock plummeting. The decline in the stock was inevitable, given that even a slight miss in the lofty projections would spell disaster for the valuations of the company. While there is continued uncertainty around the operations, the company had an upbeat Q3, where revenues grew 12% YoY to $68 million, with the company’s EPS Beating Analyst Forecasts (-0.03 actual vs forecast of -0.20). If the company can navigate the challenges of the supply shortages and continue to grow at its current pace, it may be able to create value in the future.