Description

This is a short write-up on an arbitrage play. Newly issued ASZ units are now trading at slightly below NAV, implying the market is assigning zero value to a possible deal announcement (6-12 months by my estimate). Bill Foley, deal maker of this SPAC, is a well-regarded businessman/investor with a long and established track record. Buying at the current price, Investors are getting the optionality of Foley’s new SPAC for free. Although the upside is hard to define, it is still a very favorable asymmetric bet because besides the opportunity cost there’s little downside to buying ASZ unit at the current price.

Structure of ASZ:

Public Units:120M units raised 1,200M assuming no over-allotment

Founder Shares: 29.6M shares

Performance Shares: 29.6M shares. Only vests if after the business completion the stock trades more than $15.25 before the 3^rd anniversary, $23.00 before the 6^th anniversary, or $35 before the 9^th anniversary.

Public Warrants: each unit contains ¼ of a redeemable warrant exercisable at $11.50/share and callable at $18.00/share

Private Warrants: Bill Foley’s Cannae Holdings purchased 17.3M private warrants that are exercisable at the same price of public warrants at $1.5/warrant. 

Unit Separation: 52nd day after the IPO

Targeted Investment Area: Although the target can come from any industry, the initial search will focus on fintech or IT.  The SPAC may also a target outside of the financial technology or information services sector that fits within Mr. Foley’s historical areas of business expertise in real estate, insurance, alcoholic consumer beverages including wine and spirits, sports and B2B business services. The target should have attractive market positions, strong growth prospects and high performing management teams. The SPAC will also focus on prospective target businesses that have unseen potential for revenue growth and/or operating margin expansion with high recurring revenue and cash flow, defensible intellectual property and strong market positions within their industries. During a recent interview, Foley said he is also looking at buying carveouts from public companies.

Bill Foley’s Brief Resume:

You can read his full list of accomplishment in the prospectus, but here’s the short version:

“Mr. Foley has over 32 years of experience in industry consolidation and delivering stockholder value, with a principal background in the financial, technology, insurance and services sectors. As a pre-eminent operator, Mr. Foley has led six separate multi-billion dollar public market platforms with hundreds of acquisitions, including FNF, Fidelity National Information Services, Inc. (“FIS”) (NYSE: FIS), Black Knight, Ceridian, FGL Holdings and Cannae Holdings. As founder, former Chief Executive Officer, and now Chairman of FNF, Mr. Foley, has built the largest title insurance company in the United States, growing equity value from $3.0 million to over $13.0 billion at its peak. Additionally, Mr. Foley has created over $140.0 billion in market capitalization of companies since founding FNF. “

Risk/Reward analysis:

Downside: The warrants, once commence trading, should be trading at least around $1. The reasons are: 1). Private warrants which are almost the same as the public warrants are being purchased by Foley at $1.5/ea. 2). The warrants last a very long period of 5 years after the business combination which needs to be factored into its valuation 3).There’s possibility that Foley could find something the market likes which will push the stock higher 4). Foley’s performance shares don’t vest unless the stock hits over $15.25 within 3 years so he has all the incentives to find a target that the market likes and in this scenario the warrants should be trading at more than $3.75

If we can agree on the price of the warrants, the ¼ warrants embedded in the units are worth 0.25 at least, which implies the stock is trading at 9.95, below its NAV. 

The real downside is the opportunity cost that investors have to consider in the event that we have a major correction of the market and the liquidity becomes so tight that unit holders will either have to force sell below NAV or wait for the unit price to bounce back but miss out on a better buy. 

Upside: it’s hard to quantify because it’s up to the market and to a large extend the new generation investors to decide. Foley’s previous 2 SPACs deal announcements have disparate reception from the market: while BFT’s merge with Netporter, the leader in digital wallet for iGaming, propped the stock to as high as $20, WPF’s merger generated little excitement and the stock is currently trading at $10.23(unit is trading at $10.82). His third SPAC TREB has yet to find a target after more than half year on the market and the unit is now trading at $10.9. 

It’s unlikely for Foley to buy a speculative but sexy company like Lucid Motors because I believe he has a reputation to protect. He appears unwilling to just pump and dump as some news yesterday quoted him questioning some of the other SPAC deals. His relative conservatism in the SPAC space adds some downside protection to the unit but at the same time lowers the return potential.     

This is a short-term opportunity

 Given the current market condition, I couldn’t find things that are truly on discount and this SPAC gives me an alternative to bond to park some cash.  This is a short term opportunity and if this gets me about 10% within a few months I will be happy to exit or keep just the warrants for potential upside. 

  Foley also took yet another SPAC AUS public and the AUS units are trading at near NAV as well. These 2 new Foley units are identical except the raised amount. I also own AUS units.

Catalyst

IPO market / SPAC space heats up again

Merger deal annoucnement