As you probably noticed by now I tend to keep close track of spacs and spac-warrants. You might not be aware of it but 2020 is the year of the spac – there are currently more than 200 spacs listed, having raised more than three times the funds raised during 2019. It is not their current popularity though that I find attractive. The main reason is actually their unpopularity among professional investors. You see, it normally are crappy-to-mediocre businesses that use spacs to become public companies. That hasn’t really changed; there are still plenty of bad companies among new spac combinations. However, if retail investors generally don’t know spacs and professional investors tend to generalise and dislike (more like abhor) them, who’s looking at these things? Well, I am. If not many eyes are looking at a sector, big chance you’ll find something interesting every now and then.

Enter Legacy Acquisition Corp (LGC). Legacy is a spac that has been listed for quite some time. Soon after they finally announced a business combination with Hong-Kong based Blue Impact, the corona-crisis hit. I don’t know Blue Impact well, but my guess is Covid wasn’t good for it’s ‘global marketing’ business. Given the new circumstances and the fact that the business combination was not completed, Legacy terminated the deal. After just a couple of months, Legacy announced a new business combination, this time with Onyx, owner of CarID. It might appear strange that they were able to find another company so soon after breaking-up with Blue Impact, but remember that a spac’s only purpose in life is to search and find a private company to acquire. It is very probable that they already knew Onyx and did their due diligence. Also, remember one of the reasons we discussed why spacs are so popular today: They are very good vehicles to play into hypes and trends. And CarID plays very well into a trend. I’ll explain this in a moment.

But first, the most interesting part of this story. Every now and then, when a spac announces a business combination, the management of the spac might decide to buy out all the spac-warrants. Remember that a warrant is like a long-term option; you can buy a share of the new business combination during a certain period and for a specific price. For spacs this period is normally during the first 5 years after closing of the business combination, and the price is $11.5 per share. Legacy’s intention is to do precisely that: Buy out all warrants for a total consideration of $1.00 per warrant, payed out partly in cash and partly in shares (read the specifics here). The good part is that the warrants (LGC/WS) are currently trading at $0.62. This means that you can buy the warrants now and make >60% in a month (closing is expected 20 November).

The question now is why the difference? There are several reasons. For starters, given the low liquidity of the stock and particularly the warrants, it is very difficult to arbitrate (I’ll skip the explanation). Also, remember what I previously explained; not many people are keeping a close eye on this sector. Another reason is that there’s always a possibility that the deal might not go through, though I don’t think that’s very probable as will be clear in a minute. One last reason is that the deal is part cash, part shares and if the shares tank after receiving them, you might make less than $1.0. Though this last reason is a possibility given the mechanics around spacs – particularly after the closing of a business combination – I believe it might actually result in more upside.

Remember that the deal is to acquire Onyx, owner of CarID. CarID is a online (re)seller of car parts. This is a mediocre business at best; generally no differentiating product (offering), relatively easy to replicate, commoditised end-markets with low single-digit growth, competition from Amazon – all reasons why this should be a low growth, low margin stock trading at an unspectacular valuation. Well, guess what happened this year as a consequence of the corona-crisis? Sales went through the roof, +60% year on year. In addition, CarID has one very similar publicly listed peer, carparts.com (PRTS). Since the beginning of this year, PRTS shares went into hyperspace, up >5x since January.

Furthermore, compared to PRTS, CarID is a better business (though still operating in a mediocre industry). Legacy is very aware of this and they don’t shy away to directly compare themselves to PRTS in their investor presentation:

Now remember, this is not a fantastic business and PRTS’ valuation is extreme at the moment. It would make a good short I believe. However, as everybody is still confided home for the time being, I’m betting that Q3 and Q4 will be good quarters as well (remember that the comparison with 2019 is still strong). But more importantly, CarID – the better business compared to PRTS – will be listed at a big discount to PRTS.

So we have a good market back-drop, a very comparable peer currently trading at a sky-high valuation and we are (partly) getting shares at a much lower valuation compared to this peer. This might eventually not lead to more upside, though it certainly protects the downside.

The deal is expected to close around 20 November. Click here for the CarID presentation.