While the largest part of my portfolio consists of long term investments (generally cheap stocks), currently a relatively large portion comprises short(er) term trades. The size of this bucket within the portfolio varies throughout time depending on the opportunity set available. Interestingly, over the past few years these trades have mostly been related to spac warrants.

Just over the past year alone we’ve had three big opportunities to buy spac warrants at significant discounts. I was fortunate enough to have been keeping a close eye on the sector during these periods and was able to make the most out of the given opportunities.

The first was during March of last year, in the midst of the big sell-off. If even shares of spacs got clobbered, down 10% / 15%, imagine what happened to spac warrants. Everybody just sold the hell out of the things and many dropped from >$1 all the way to 20 – 40 cents. At such moments, just randomly buying a basket of pre-deal warrants with far out deal deadlines would have led to a great return. Even better though were warrants of announced or recently closed good deals. Examples are Alta Equipment (ALTG US), which had the bad fortune of closing end of February, and Open Lending (LPRO US) where the spac principals were able to renegotiate down an already good deal (!) several times (!) thanks to the prevailing market uncertainty. (As a side note, another proof that generally if they want to close the deal, they’ll get the deal done no matter what). Since then Open Lending moved up to ~$40, and you can imagine what the warrants did.

The second opportunity was during October and beginning of November last year when after a strong summer spac premiums to nav dropped back to practically nil. In addition, it was clear that we were potentially entering a period of craze for spacs, particularly ESG / sustainability related spacs, as ‘pops’ on deal announcements started to increase drastically and new spac ipos were moving as well. This was about the time I started this blog and you might recall me writing on some of the things I was looking at.

The latest opportunity was last week and is still ongoing. Spac premiums have once again dropped to almost zero and have stabilized. Exactly one month ago, I wrote about how “finding a spac which negotiated a good deal with basically 100% certainty of deal closing and having that spac trade down is gold to me”. Recent events have again opened up the opportunity for me to start hoarding warrants of good spac deals at excellent prices (thank you rising interest rates, spac oversupply, crappy deals, spac frauds).

I have been keeping a watchlist of spacs who announced particularly interesting deals to me. I decided to share what I have been buying over the past week.

But before sharing the names, a few house rules and guidelines:

• If you don’t understand what I’m writing about, stay away. I’ll repeat what I’ve previously said: Anything can happen anytime with spacs and particularly spac warrants.
• Spac warrants can go to zero. Position accordingly. How would you feel if your entire warrant basket drops to zero?
• The list below is not intended as a deep dive on the names. I intend to keep it short and simple. It’s just a quick summary of the ones I like and why. As always, do your own due diligence.
• These warrants relate to post-deal announcement, but pre-deal close spacs. Again, anything can (still) happen; expect a LOT of volatility going forward, particularly around the timing of deal close.

A few technical notes:

• Spac warrants are generally in the money once the underlying share price reaches $11.5. Keep in mind that after the shares move >$18, warrants generally trade in line with a conversion ratio, not intrinsic value. This can make a big difference when prices move fast.
• It’s always a tricky thing to determine the exact number of shares outstanding to use in spac valuations due to public and sponsor shares, warrants outstanding, staggered earn-outs, equity incentive plans, etc. To keep it simple, I just take the number of shares outstanding and warrant dilution (cash exercise) into account and ignore the rest. You should assume further dilution going forward. Then again, these positions are supposed to be relatively short-term trades to me where I’m not looking for +50% or +70%, but rather truly outsized (>4x) returns. So having a ball-park estimate of the number of shares is good enough.

Now let’s look at these things.

CCX / Skillsoft

I’ve written a couple of times on the CCX / Skillsoft deal and do not have much more to add. Warrants dropped to <$1.5 which is quite attractive. The deal is expected to close in May. Skillsoft generates strong cash flow, is poised for accelerating growth, multiple rerating is to be expected and the deal is structured favorably. It’s important to note that Skillsoft is one of the few companies in spac world that increased its 2020 guidance.

FGNA / OppFi

My favorite position. By far. Another example that luck plays a big part in generating investment returns. If FGNA would have announced the OppFi deal in January, shares would have skyrocketed. Instead, they announced a killer deal just before the start of the big spac premium unwind. Finserv (which is acquiring peer Katapult) is still trading at a 25% premium to nav just because the stock was at $19 before the correction in spac land.

OppFi is a fintech company focused on providing short-term, small ‘emergency’ loans to the sub- and near prime segment of the market. Loans average $1,500 and are less than one year in duration. The focus is on speed, accuracy (of risk assessment) and strong customer digital experience. OppFi started as a direct lender but moved to a bank partnership model a couple of years ago and are now fully committed to that model. OppFi has been growing tremendously fast and is expected to continue to do so.

Currently the company is mainly a one product company (installment loans) but has recently introduced new products (SalaryTap and credit card). It’s impressive that they’ve been able to maintain ebitda constant during 2020, given that their addressable market collapsed during the year. The company also recently announced that based on their 3m performance they are trading ahead of 2021 guidance. I actually believe the forecast to be conservative. Based on the current roll-out status of their installment loan product, they should be able to reach their targets with just the current offering. Not much potential seems to be included from its new products.

If you wonder why you never heard of OppFi its mainly because they’ve never raised outside funding, which is an impressive feat. The reason to going public was therefore not to raise cash, but rather moving more into the spotlight, particularly given where peers are trading. More on this in a moment.

The best thing to the story however is the valuation. Based on ~100m shares (excl 25m earn-out shares) and the company’s (conservative) projections, OppFi will list at <5x 2022e ev/ebitda (!). Ebitda after 2022 can easily continue to grow >35% for some time. This is very cheap on an absolute basis. Furthermore, OppFi’s peers are companies such as Upstart, AfterPay, Sezzle, Open Lending, Katapult, Affirm, Repay, etc. Those that have 2022e ebitda >0 are trading at at least 25x multiples. I cannot emphasize enough how cheap OppFi is going to list.

Let’s look at some of the risks to the story. Though already a big earner, the company is still relatively young. 63% of net loan originations (~63% of net rev – ca $200m) are from one bank, FinWise (since Nov. 2017). Two other bank partners started in 2020 and are ramping up, which will take some time. Also, I guarantee you that this is going to be a crowded space. Most companies are still focused on the prime segment, but there’s a rapidly growing pack of companies which will compete with OppFi at some point. This will put pressure on fees. But again, I don’t intend to keep the warrants for years. Very probably they’ll be converted much sooner.

Another risk is that the business combination is subject to the condition that the company have at least $200m of Available Closing Date Cash (cash in trust – redemptions) at the closing. As there’s $243m cash in trust, max 17.7% of trust shares can be redeemed. This is not a lot and we know anything can happen in the markets. Then again, OppFi didn’t need to raise a PIPE, the Schwarz family (billionaires) will still own ~50% and the story is extremely compelling. They’ll easily be able to raise additional capital quickly if needed.

The acquisition is expected to close in June. With warrants at $1.8 and shares which could easily trade >$20 and more probably >$30, a price of >$10 per warrant is certainly achievable. The blue sky scenario is an Upstart-like valuation.

As a last thing, it’s good to have a profitable company with a sense of humor (shows confidence):

NBA / Airspan

I’ve been following Inseego with much interest over the past years, so when I saw the Airspan deal, I was definitely interested. Airspan is a US wireless equipment maker. It has been listed before, but over the last years has positioned itself under new management to be ready for the 5G infrastructure capex wave. More importantly, Airspan’s focus is on OpenRAN, which after years of promise now seems to be seriously ramping up. OpenRAN tech allows the connection of a wireless device to the core backbone with infrastructure assembled from different manufacturers. Historically this has been a problem, as one-stop shop providers were used as much as possible. Though convenient, not all parts of the infrastructure were of the same quality and some companies are better at specific hardware and software than others. Furthermore, as software started to become ever more important and entrenched, particularly with 5G infrastructure, this created additional problems. With hard- and software developed with OpenRAN standards it is now possible to build the infrastructure using hardware and software from difference providers. Updating and maintaining the network will be much easier. Most importantly, capex and opex savings can easily reach 40%.

Revenues have been declining over the past few years, but that’s mainly due to the Sprint churn. 2020 was the inflection point and Airspan has good visibility into future growth. I expect strong operating leverage to kick in as of this year. Also, let’s not forget that even under the current US administration preference will be given to US hardware and software providers in the roll-out of 5G infrastructure.

Risks are of course related to execution. Covid strongly delayed infrastructure capex. Also, even though Japan is going for OpenRAN, there might be less appetite in the US (though not very probable at this point). Another thing to take into account is that once the big 5G infrastructure related capex spending is done, growth will strongly decline. This is not a near term worry however and I intend to be out of this trade much sooner.

Based on ~100m shares and $195m net cash, I have Airspan listing at ~13x 2022e ev/ebitda. Not at all aggressive given the expected growth. Inseego, a good peer for Airspan, which is targeting break-even operating profitability this year and $22m ebitda in 2022, is trading at ~50x 2022e ev/ebitda given the strong expected growth. Given the relatively good visibility, strong market positioning, upcoming capex cycle and preference for US tech providers, I don’t see it as stretch for Airpan to trade at >20x 2022e ev/ebitda. With warrants trading at just ~$0.75 at the time of writing, >5x is very much achievable.

Keep in mind that NBA has a minimum cash condition on the balance sheet after the deal of $135m. This indicates max 26% of trust shares can be redeemed. Again a risk that has to be monitored as this is not a large buffer. Current shareholders include Softbank, Quallcom and Foxconn.

EMPW / Holley

This is an easy one. Holley is a cash flow machine with a very loyal customer base in a stable, fragmented market.

Holley sells performance car parts mainly to enthusiasts. If you like to work on cars, you know Holley. Holley’s focus is on the higher end customers. These customers are not only very loyal, but also very much recurring. Car modification is a hobby with no end, which is reflected in the historical stability of the performance automotive aftermarket; there has not been a year of negative growth in the period 2001 – 2019.

Holley has several strong growth divers. Organic growth in the sector is generally relatively predictable in the mid- to high single digit %. As previously explained, car modification is a continuous hobby; there’s always something new. It can be lumpy however every now and then when important new products are introduced. Growth is furthermore expected to continue to be supported by the company’s expansion of its (digital) DTC offering; now 14% and rapidly increasing. In addition, given the fragmented nature of the market, m&a is a big growth driver. The focus is generally on new products and client relationships.

The increasing penetration of EVs is generally mentioned as a risk to this sector, particularly for Holley, as most products sold relate to ICE cars. I believe this risk is very much overstated at the moment for several reasons. Car parts enthusiasts will not put a stop to their hobby as more EVs populate the market. Also, although rapidly increasing, EV penetration is still very low. In addition, my checks with car enthusiasts indicate that it actually might be a tailwind as content in cars in increasing, particularly electronics. Nonetheless, Holley is clearly not taking any risks and has been expanding its electronics offering a lot over the past years. We can expect this to continue with future acquisitions.

Holley has an impressive (pro-forma) financial profile, with high margins and strong cash flow generation. Ebitda has grown at ~40% per annum since 2014 via a combination or organic growth and acquisitions. I expect this growth to continue although at a slower pace given the increased size. As the car market expands particularly in content, it is important to continue to expand the offering as well.

What I particularly like about this deal is that Holley will retain ~3x net leverage, manageable given the strong cash flow conversion. This also means that a small rerating of its valuation already leads to strong share price movements. Combine this with Holley listing at ~9x 2022e ev/ebitda and we could have an explosive combination.

EMPW smartly compares Holley with other enthusiasts brands, most of which are trading at >20x 2022e ev/ebitda multiples. Autozone and O’Reilly are currently trading at much lower multiples, in the 12x – 15x range, though Holley is more high-end and will grow faster than AZO and ORLY. Furthermore, Holley as more brand power than AZO and ORLY. I would expect Holley to trade at 15x – 20x 2022 multiples. Given the leverage, 15x 2022e multiples already leads to a ~$18 share price. With the warrants trading at $1.2, >5x is again clearly possible.

The minimum cash condition at closing is $350m, a small hurdle; between the PIPE, FPA and trust max. 76% of the share can be redeemed, which is a pretty large buffer.

ANDA / Stryve Foods

The last one is Stryve Foods. Stryve is a rapidly growing healthy snack company. Stryve intends to play into the trend of healthy snacking, starting with its Biltong air-dried meat snacks. The company has many other products lined up.

The growth story here is simple:

• Introduce (new) healthy snacks
• Grow the channels
• Grow penetration in existing channels and expand SKUs within the channels
• Continue to expand the e-commerce channel

Stryve is still relatively young, but is ready to scale. The company’s current capacity is ~$100m revenues, which it intends to reach in 2022.

Stryve is a more risky investment as the company is still very young and execution is key. The products seem to be liked and according to management “business is exploding”. The cash raised is mainly for working capital and marketing. I’m impressed with the ceo which seems a marketing beast.

One negative here is that there’s a large warrant overhang. Assuming full conversion of the warrants will lead to ~50% dilution. Based on ~34m shares (incl. warrant conversion) and $172m net cash, Stryve will list at ~11x 2022e ev/ebitda. This is a very reasonable multiple in my opinion, particularly given the current premiums in the market for ‘healthy food’ companies. With warrants at $1.0, I’m willing to take a relatively small position on what again could be a >5x return.

ToffCap

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