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SPAC Attack — Wall Street's Continued Admiration For Sports Ownership

Fenway Sports Group has entered into preliminary merger talks with blank-check company RedBall Acquisition Corp, but what will they do next?

October 13, 2020

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Friends,

News broke over the weekend that Fenway Sports Group LLC, which owns the Boston Red Sox and Liverpool Football Club, has entered into preliminary merger talks with blank-check company RedBall Acquisition Corp.

RedBall Acquisition Corp., is a $575M SPAC, or blank-check company, formed by the private-equity firm RedBird Capital Partners and Oakland Athletics executive Billy Beane.

Here’s what you need to know:

  • RedBall Acquisition Corp would acquire between 20% and 25% of FSG

  • The proposed merger values Fenway Sports Group at around $8 billion

  • Once complete, the minority stake would be publicly-traded on the NYSE

  • The transaction would need to be approved by Major League Baseball

Almost a billion dollars short of the cash required to complete the transaction, RedBall started the process last week of raising between $800M and $950M for a PIPE — which is rumored to include at least a couple hundred million from RedBird Capital Partners themselves.

Sounds interesting, but what’s the big deal?

As SPACs have continued to gain traction and annual issuance has increased to historic highs, we are continuing to see new variations of the financing facility being used — RedBall’s merger with FSG is no different.

(📸 / Bloomberg)

For those that aren’t aware of the SPAC structure, here’s a quick breakdown I did a few months back.

SPACs are commonly referred to as blank check companies because they raise a blind pool of capital through an equity offering.

Investors commit a specified amount of capital for up to two years, during which the SPAC sponsor will identify, vet, and finalize a transaction with a target acquisition. If the deal is finalized and approved by all shareholders, the acquired company is now a publicly traded firm without having to pursue the traditional IPO process.

There is a catch though.

Investors have the right to veto any proposed transaction and they can take back their money if they don't like the acquisition target once it is identified. With the IPO market experiencing COVID-19 related volatility, SPAC’s have become more popular as a backdoor way for target firms to become publicly listed.

From a popularity perspective, SPACs have exploded. As markets continue to show volatility and companies look for backdoor ways to become public, SPACs have reached record issuance — even Shaq is getting involved.

In total, SPACS have accounted for a mind-blowing 51% of all US IPOs YTD.

When looking at the Redball Acquisition Corp. and Fenway Sports Group proposed transaction specifically, a few things stick out to me.

From a structural perspective, a SPAC is typically designed to take a controlling interest in the acquired holding company — but in this case, RedBall is only raising enough capital for 20-25%.

Some have speculated that means John Henry, the founder of Fenway Sports Group, is looking for a liquidity event to distribute cash to stakeholders — I don’t see it.

So what’s my guess?

They’re going to purchase a soccer team.

Given RedBird took an 85% stake in Toulouse Football Club in July, and Fenway Sports Group has a rumored desired to double down on their Liverpool investment, the idea that the two might merge and acquire a football club is not exactly an unpopular opinion.

Here’s an excerpt from the WSJ that communicates some the similarities and why the Billy Beane connection starts to make more sense by the day (Source).

“New York-based RedBird, run by former Goldman Sachs Group Inc. banker Gerry Cardinale, made its first foray into European soccer in July by acquiring a majority stake in Toulouse FC, a club in France’s second tier. Immediately after the takeover, it installed a team president, Damien Comolli, who had previously worked at Liverpool and is close to Mr. Beane, who is best known for his analytics-driven approach as depicted in the book and movie, “Moneyball.”

Whether it’s both parties already having experience in European soccer club ownership, or Billy Beane’s newfound love for soccer analytics, there are way too many connections for it not to happen.

By merging beforehand, the combined entity is able to leverage their relevant experience while avoiding the pitfalls that previous SPACs have seen when attempting to purchase sports franchises — think Sports Properties Acquisition Corps attempt to buy the Chicago Cubs and Florida Panthers (Source).

Only time will tell what Fenway Sports Group plans to use the capital injection for, if anything, but in the meantime keep an eye on how public equity related transparency impacts the average ownership structure across Major League Baseball — a sports league that has historically been tight-lipped in nature.

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