- Pace Holdings (PACE), a SPAC, is buying Playa Resorts in a deal scheduled to close this month.
- Despite the history of SPACs, I find the deal and company attractive
- Due to post size, I split my overview into two pieces: part 1 (below) covers why I'm so negative on SPACs, and part 2 (see here) covers why I like Playa.
- The incentives encourage the SPAC’s sponsors to do any deal. If the SPAC ends up liquidating, the sponsors are out 2+ years of time in addition to any of their out of pocket expenses for setting the SPAC up, looking at deal targets, etc. However, if the SPAC successfully completes a deal, the sponsors are given a significant amount of equity (called “founder’s shares”) and warrants in the new company for basically nothing. Getting 10%+ of the company plus a ton of warrants for almost nothing is pretty typical; given the SPACs are generally raising hundreds of millions of dollars, that free equity is incredibly valuable.
- This is somewhat related to the incentive to do a deal at any price, but SPAC investors can be assured they are paying top price for any company they are buying. SPACs are financial buyers with no synergies; in general the only way they’re successfully buying a company is if the company is at an auction and the SPAC is the highest bidder. Not exactly the recipe for finding undervalued companies. And SPAC common stock holders are actually hit with a double whammy: not only did the sponsor buy the company for top price, but the common shareholders effectively pay a 10%+ premium on top of that after you adjust for the free dilution given to the SPAC manager as a reward for successfully completing a deal.
Pace is in a deal to merge with Playa Holdings. There are a lot of things about the deal I like. There are also a lot of things about the deal I don’t like. I have a small position in the stock and warrants now, but it’s tough for me to wonder if my position is because I actually fundamentally like the company or if I’m acting like Joe and trying to catch up to Chad after seeing the success of TWNK / LMB.
In part 2 of this post, I discuss what I like / don't like about Pace / Playa.