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Deals involving special purpose acquisition companies (SPACs) exploded amid investor enthusiasm to tap into an expanding U.S. sports-betting market, but concerns of industry profitability and tighter regulations threaten to restrict future SPAC buyouts.
Mergers involving SPACs or blank-check companies are not new and have been around for close to three decades, after a pair of law-school friends invented them to give private firms another way to access investors.
Investment banker David Nussbaum and lawyer David Miller invented SPACs in 1993, but they were rarely used in the gaming industry until a few years ago when institutional investors, investment banks and hedge funds embraced them as sports betting was being rapidly legalized across the U.S.
“When I started my career [in 1993] at Goldman Sachs we wouldn’t do SPAC transactions because of the perceived or actual regulatory challenges [but] that structure has changed dramatically,” said Adam Rosenberg, senior advisor for the gaming and leisure sector at Blackstone.
The increase in SPAC deals involving gaming companies coincided with the U.S. Supreme Court in May 2018 overturning the federal ban on sports betting allowing these blank-check firms to find acquisition targets among sports betting and online gaming companies.
The most notable of these was DraftKings, which went public in late 2019 but has recently seen its share price decline to below $13, near its lowest value since March 2020.
Other operators taken public via a SPAC in recent months include Betway parent company Super Group, Rush Street Interactive, Codere Interactive and Golden Nugget Online Gaming.
In late March, Nasdaq-listed Artemis Strategic Investment Corp announced an agreement to take Malta-based Novibet public, while earlier this month a Euronext-listed SPAC FL Entertainment said it was acquiring Betclic Everest Group alongside television production company Banijay.
“An awful lot have been formed in the gaming space,” said Rob Heller, CEO of Spectrum Gaming Capital, who introduced a panel discussion on SPACs last week at the iGaming Next conference in New York City.
“Some have been successful, some have been unsuccessful.”
Rosenberg took issue with Heller saying SPACs were successful, although he agreed they had “clearly been prevalent.”
Rosenberg said one reason SPACs are so prevalent are their structural advantages compared with a traditional initial public offering (IPO) in terms of timing and cost, as well as efficiency to market.
He also attributed their success to the nature of the gaming industry and how its changed with the reversal of the Professional and Amateur Sports Protection Act (PASPA) allowing for the proliferation of sports betting and online gaming across the huge U.S. market, and their acceptance by institutional investors.
Rosenberg joined Christian Goode, CEO of IG Acquisition Corp; Katie Lever, COO and chief legal officer at Lottery.com; and Laila Mintas, founder of Mintas Consulting, for the panel discussion moderated by Paul Richardson, an advisor with Partis Solutions.
Richardson asked Lever why SPACs are so perfect for online gaming companies.
“It has been seen as such easy access to capital and post [deal] to really provide the entity with a new form of currency and to provide it a relevancy,” Lever said. “When you are a young entrepreneur or enterprise to say that you’re able to enter the public market space, it gives you perceived prestige.”
“One of the things that I want to say as a warning,” Lever told attendees, “it’s a lot like an 18-year-old girl who really wants to have a wedding but doesn’t understand what a marriage is like.
“Being public is a lot like that,” she added.
“Once you are in the public company cycle, you are in the public cycle and all of the requirements that it takes as well as meeting expectations and we all know what [Wall Street] is doing right now. Everyone is taking a beating and you don’t get to hide from that.”
Lottery.com closed its merger with SPAC Trident Acquisition Corp and debuted as a freestanding public company on November 1, 2021. The company received $63m in net proceeds from the transaction.
In terms of what makes a good option for a SPAC merger, Goode said a company has to have a real growth profile, revenues and they have to have earnings.
“The idea that you can go and burn capital, you can see what the markets are doing to those companies,” said Goode, whose company IG Acquisition is a SPAC that raised $300m to invest in the gaming, leisure and hospitality sectors.
“The reality is gaming has been successful where there has been limited supply and lots of demand,” Goode added.
“When it gets to be lots of supply and the same demand, that’s what you are seeing play out in sports betting where the cost of acquisition is through the roof and it hard to find profitability.”
Rising Regulatory Scrutiny
As newly formed SPACs have raised a lot of money, they have also attracted attention from the U.S. Securities and Exchange Commission (SEC). The federal agency released new proposed regulations in March governing the industry.
The proposed new rules would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution.
They also would require additional disclosures relating to the fairness of these transactions. Further, the new rules would address issues relating to projections made by SPACs and their target companies, including safe harbor for forward-looking statements.
Lever said with the new guidelines the SEC is treating SPAC deals like an IPO.
“What it really does is [require] full and fair disclosure,” Lever said. “So the days of going out and being a SPAC where you could pluck out of thin air what your future projections are going to be, those days are gone.
“You would say, we are going to do five or six M&A [deals] over the next two years, which means our revenues are going to look like something, and pull a number.”
Lever said the industry is seeing major sponsors walk away from deals because of liability, which points directly to the need for a SPAC listing to look like a traditional IPO.
“The liability risk has to be diminished the same way it has with an IPO,” Lever said. “There needs to be an appropriate board of directors. There need to be audited financials that are done in accordance with GAAP principals, presuming it’s a U.S. entity.”
All these things, she said, need to be aligned and in place for a period of time and not something done in the month leading up to the deal.
“A SPAC shouldn’t be seen as anything less than what it is, a merger,” Lever said.
