Feb 17, 2021

Shareholders try to hold blank-check company leaders accountable Waitr Inc.  never had the resources of rivals Grubhub Inc. and UberEats. Yet in November 2018 the online food ordering and delivery business went public through a merger with blank-check firm  Landcadia Holdings Inc. Landcadia had some powerful names behind it. Tilman Fertitta, a billionaire restaurateur, and Richard Handler, the chief executive officer of Jefferies Financial Group Inc., had raised $250 million in backing for Landcadia so that the special purpose acquisition company, or SPAC, could find and take public a promising startup like Waitr. But Waitr turned out to be a disappointment. Its shares plummeted as it lost about 96% of its market value in 2019, down from a high of almost $1 billion. That triggered a class-action lawsuit claiming that Fertitta and Handler misled shareholders about the risks of Waitr’s business plan but pushed ahead with announcing their merger two weeks before Landcadia had to return investor money, as it promised. Now, in what could soon be the first ruling of its kind since last year’s record number of SPACs went public, a federal judge is weighing to what extent sponsors of these ventures can be held liable for failing to deliver. A hearing is set for March 16 and a ruling could come shortly afterward. Landcadia, Waitr, Fertitta and Handler deny wrongdoing and are urging the judge to dismiss the case. If the case is allowed to go forward, that could encourage other disgruntled SPAC investors to seek redress in the courts. In 2020, 248 SPACs went public on U.S. exchanges, raising more than $83 billion. This year is on pace to set a new record, with 143 SPACs raising more than $44 billion in IPOs as of Feb. 12. Roaring Twenties Source: Bloomberg Since the start of 2019, 13 SPAC-related shareholder lawsuits have been filed, according to the Stanford Law School Securities Class Action Clearinghouse. With so many blank-check companies scouting for suitable acquisition targets, legal experts say the odds are there will be some duds and, inevitably, more litigation. Since the start of 2019, 13 SPAC-related shareholder lawsuits have been filed, according to the Stanford Law School Securities Class Action Clearinghouse. With so many blank-check companies scouting for suitable acquisition targets, legal experts say the odds are there will be some duds and, inevitably, more litigation. Big-name SPAC sponsors with deep pockets, like Fertitta and Handler, are especially attractive targets. Richard Handler Photographer: Peter Foley/Bloomberg “You’re buying into the idea that this person is a good investor and that they will find a good deal,” said Robert Prongay, an attorney with Glancy Prongay & Murray LLP in Los Angeles who represents shareholders in securities lawsuits. “You have to look at the sponsors because you’re relying on their investment experience and ultimately they are accountable.” Fertitta, Handler and the other defendants have asked the judge to throw out the case because, they say, there’s no proof they weren’t sincere about what they told investors. They “believed what they said about Waitr’s prospects, used their best efforts to achieve success, and accurately disclosed material facts regarding the specifics of the company’s financial performance,” their lawyers said in a court filing. “But their business efforts simply fell short in the face of serious competition.” The plaintiffs say it should have been clear to Fertitta and Handler that Waitr was a bad bet for a merger and wouldn’t thrive as a food-delivery company aimed at small restaurants in under-served markets. As they see it, the problems ranged from Waitr’s management, to its location, to its business model. Representatives of Fertitta, Handler and Waitr didn’t respond to requests for comment. The company had problems from the start, shareholders claim. Its location in Lake Charles, Louisiana, was an obstacle to growth, making it difficult to recruit top-notch programmers and engineers, the shareholders allege. As a result, in 2019, after it had merged with Landcadia, Waitr outsourced its back-end technology and essentially became “a website that employed delivery drivers,” they allege. Yet, when Fertitta told investors in 2018 about the planned $308-million merger with Waitr, he described it as having “a  huge potential and a tremendous complementary relationship with my existing businesses.” The big advantage Waitr touted was that it charged restaurants only 15% on the orders it handled, as opposed to the 20% and higher that other food apps charge. That take rate was unsustainable and after it had become a public company, Waitr increased it to as high as 30%, plus an extra 3% credit card processing fee, according to the complaint. In addition, the company employed full-time delivery drivers rather than freelancers, which was an inefficient labor model that created huge fixed costs, according to the complaint. Despite the many risks, the shareholders claim, Fertitta and Handler had an incentive to go ahead with the reverse merger with their SPAC in 2018: they were facing a looming deadline. Like most blank-check companies, Landcadia had a two-year time frame to make an acquisition or return investor money. Sponsors sometimes have as much as a 20% stake in a SPAC, giving them a windfall if they complete a deal — or nothing if they don’t. “As investors ultimately learned, a SPAC facing the end of its redemption period combined with an immature under-developed company that would otherwise have remained private is a recipe for disaster,” according to the complaint. That’s what happened here, the plaintiffs say. Waitr’s shares collapsed after a series of disclosures in 2019. A unilateral increase in transaction fees prompted a lawsuit by a group of restaurants for breach of contract; the company gave up on developing its proprietary technology platform; and its chief executive officer, Chris Meaux, was replaced as quarterly net losses tripled from a year earlier, according to the complaint. By December 2019, Waitr’s market cap had dropped to $35 million from $910 million in mid-March. As for the explosion in SPAC activity in 2020, the two-year timetable means a corresponding surge in shareholder complaints — and lawsuits — may lurk down the road. “Are there really that many worthy private companies that aren’t already on their own IPO track,” said Kevin LaCroix, an attorney at RT ProExec who blogs frequently about shareholder litigation. “The low-hanging fruit may have already been picked and will the next layer be ready to be a public company?” The case is Welch v. Meaux, 19-cv-01260, U.S. District Court, Western District of Louisiana (Lake Charles). A Sampling of SPAC Shareholder Lawsuits ALTA MESA RESOURCES INC. Sponsors: Riverstone Holdings LLC’s Silver Run Acquisition Corporation II; David Leuschen, former head of Goldman Sachs Global Energy and Power Group. IPO: $1.04 billion, March 2017. Merger: $3.8 billion acquisition of two oil and gas businesses in 2018. Allegations: Shareholders were misled in approving the merger by inflated appraisals of the target businesses. Alta Mesa had to take a $3.1-billion write down a year after the merger had closed. Response by defendants: Alta Mesa, Riverstone and Leuschen deny wrongdoing. AKAZOO SA Sponsors: Modern Media Acquisitions Corp.; Lew Dickey, co-founder and former CEO of radio-stations operator Cumulus Media Inc. IPO: $207 million, May 2017. Merger: Global music streaming platform Akazoo Ltd. in 2019. Allegations: Quintessential Capital Management released a report in April last year that Akazoo had overstated revenue, profits, subscribers and services. The company acknowledged in May that it had been defrauded by Akazoo’s former management and the shares were delisted from the Nasdaq in June. Response by defendants: Court filings indicate the case is in settlement negotiations. CLOVER HEALTH INVESTMENTS A group of all-star disruptors who pioneered digital stock trading, on-line retail, community-building for far-flung workers, and software M&A in Silicon Valley are now embarking on another kind of disruption, launching a  special purpose acquisition company  (SPAC) with plans to take a startup public. And they’re aiming at a burgeoning sector that demands more new services than any other: the gig economy. Amazingly, the gig economy space is a universe that’s so far seen only one other SPAC-driven company debut–– TalkSpace, a provider of online therapy  for remote and contract workers, promoted in television ads by former Olympic swimmer Michael Phelps. The new team’s vehicle is Z-Work, a SPAC it took public on January 28, raising $230 million. They’re now talking to entrepreneurs of venture capital-backed newcomers that, in their view, present the best opportunities in the entire world of software and services for what’s known as “Future of Work” or FOW. “This is a structural change in how people work, and COVID accelerated it,” says Z-Work co-chairman Chris Terrill. “Companies are now being forced to deal with a remote workforce, and that change means they need so many new things. It’s truly an inflection point that gives us the chance to back a new wave of world-class entrepreneurs.” The Z-Work team is auditioning trailblazers in two distinct areas. Both were waxing before the pandemic, then boomed during the crisis. The first: services catering to  the exploding ranks of “gig” workers , folks who don’t have a single, full-time employer, but labor as contract employees or freelancers. Around 40% of America’s workforce now fits that category, almost four times the share in 2005, and a double-digit gain over 2019. These are the Uber and Lyft drivers, the CPAs who book jobs through tax and audit outsourcing sites, moms who do SAT coaching after delivering their kids to school, sales people in Aspen or Ft. Lauderdale hired for peak season, and folks looking for the best online market to sell their homemade earrings and t-shirts. “Many of these gig workers have three or four jobs,” says Doug Atkin, Z-Work’s co-chairman. “My best analyst for deals is a Wharton MBA who’s pursuing his passion in photography. In between shoots in places like Tanzania, he works for me on projects that can last a month. He probably makes over $200,000 doing financial gig-work.” “Doctors used to think that Telehealth was beneath them,” Atkin continues. “Now, my wife has appointments with top physicians over  Zoom .” Atkin believes that the gig economy is democratizing the workplace. “It provides opportunities for people who ‘don’t have the right connections’ but do great work to get jobs they otherwise wouldn’t get,” he says. “And it enables full-time moms to use skills they couldn’t otherwise use to earn money.” Z-Work’s second market encompasses what what big and small employers need to navigate this new landscape. They’re typically dealing with two new types of workers: the gigsters and  full-timers working remotely . The work-from-home demographic has exploded in the pandemic. The “remote” workforce now totals about 70% of all full-timers. Millions who last year commuted to office towers in New York or L.A. now spend their days in home offices, emailing and Zooming from their laptops in Dallas or Indianapolis. The workforce is increasingly a blend of the gig and full-timers for many stalwarts including  Amazon , PepsiCo, and  Intuit , all of which “flex” their payrolls by hiring freelancers in peak periods. Spotify just announced that its employees will henceforth have a choice of working from home, going to an office, or doing both. The Z-Work team sees helping employers grapple with remote work as a sweet spot. “The hiring pool is much bigger now because people don’t need to go to an office,” says Atkin. “Employment is no longer tied to location.” Gig companies are competing with other gig companies for talent nationwide, and full-time employers are often courting the same candidates. It’s now common for a company in Chicago to hire a full-time programmer or marketing director in Iowa, whereas they’d only shopped before in cities where it had offices. A firm in Atlanta hiring accountants part-time to advise small businesses on their taxes now vies for talent with other gig outfits from all over the country. At the same time, big players in the field not previously in Atlanta may be wooing the same candidates for on-staff positions offering benefits. The gig and work-at-home revolutions have both spawned and generated huge growth for a panoply of service providers in a dozen areas that mostly didn’t exist a few years ago. The roster includes collaboration software providers Slack, Zoom, and Fuze, tech-enabled delivery platforms Roadie and Doordash, and talent-matching sites such Thumbtack and Upwork. But Atkin and the team see big openings for new players. Work times for gig jobs are constantly changing, so software that sets schedules and keeps workers up-to-date via their smartphones is a promising area. Another is technology that makes home offices as user-friendly and efficient as the most tech-enabled worksite office. Recruiting sites that give companies the tools to search nationwide for the best candidates are a potential winner. Such sites could also provide the job-seekers with the broadest possible audience, including software for staging “face-to-face” interviews on the web. Although the gig economy offers workers freedom and flexibility, they also face special problems, notably a lack of benefits and a feeling of isolation. “They’ve gained liberation in how they work, where they work and when they work, but they’ve lost a lot of the other advantages of full-time employment, such as training, sociability and benefits such as parental leave and health coverage,” says Douglas Atkin, an adviser to Z-Work who served as global head of community at Airbnb during its hyper-growth years. (Yes, Z-Work employs the services of two Douglas Atkins, a duo referred to internally as “Doug Squared.” We’ll refer to Atkin the adviser as “Douglas.”) Douglas also notes that at-home workers don’t share the same sense of community as folks who sit side by side in offices and chat in the cafeteria. “Sure, workers are highly productive on Zoom calls, but they’re feeling, ‘We miss each other.’ So companies can improve morale by organizing pub crawls or hikes, and hosting offsite events,” says Douglas. “We had loads of events at Airbnb, held in places as diverse as a palace in and breweries in Brooklyn. We’d serve lunches, answer questions, and most of all the hosts got to meet and help each other.” Douglas spoke at Airbnb Open extravaganzas for thousands of hosts, held in such venues as Paris and San Francisco. Another opportunity that Douglas rates among the most promising: Companies often employ thousands of part timers who buy health insurance on their own. A purchasing platform could leverage their huge buying power to secure more choices and better deals. A team of operators Of course, because of the way SPACs are structured, the Z-Work founders are seeking just one high-flyer from a broad roster of contenders, mostly backed by venture capital firms. The team boasts an unusually strong and diverse collection of resumes. It also has a much more pointed mission than most SPACs, which tend to search more broadly and are often run by dealmakers, not operators. Atkin is the former CEO of Instinet, the groundbreaking Electronic Communications Network (ECN) that pioneered off-exchange stock trading over the web. Atkin is also the co-founder, along with Tom Glocer, former CEO of Reuters, and Duncan Niederauer, who headed the NYSE, of Communitas Capital, a venture fund that invests in FOW companies. Its investments in include Graphite, Premise Data, and Comply Advantage. Co-chair Terrill is a Match.com veteran who served as CEO of HomeAdvisor for seven years, forging ANGI Homeservices via the 2017 acquisition of Angie’s List. In that period, Terrill lifted the company’s sales from $175 million to $1.28 billion. Z-Work’s president is Adam Roston, who orchestrated IAC’s entry into the FOW frontier through acquisitions of NurseFly and Bluecrew, and served as a director of corporate development doing tens of billions in M&A deals at  Microsoft . Isn’t Z-Work entering a market that’s already overloaded with SPACs battling for the best candidates? The team reckons that it holds an edge because its offering is so distinctive. “The headline says that the field is ‘crowded with SPACs’ and that entrepreneurs are just saying, ‘Bring me a SPAC,’” says Terrill. He notes, however, that most SPACs are less appealing because their mission is so expansive. “Some will say, ‘We’ll go after fintech, or EVs, or real estate,’” he says. “They missions are vague, they have a lack of focus. The other day, a SPAC going after real estate bought an EV company.” In contrast, Z-Work casts itself as a specialist in the new world of work. “By focusing on companies in that space, you appeal more to entrepreneurs than the SPACs that just offer money,” says Terrill. The expertise provided by Z-Work’s founders is highly appealing to entrepreneurs. The team is the antithesis of the financial engineers so common among SPAC sponsors. “They view the process as a transaction, a way to make money taking a company public,” he Terrill. Teams with deep operating experience are still far from plentiful, but their numbers have grown in the last couple of years, he adds. “High quality companies really like it when you bring operating talent,” he says. “It’s not typical that you put together a group with our breadth of experience.” The Z-Work team harbors plenty of experience with conventional IPOs. And those encounters convinced them that SPACs are a much better way to take companies public. Atkin shepherded Instinet through its IPO in the spring of 2001, and Terrill guided ANGI Homeservices through the gauntlet in late 2017. For Fortune, they gave a detailed account of how their SPAC works, and why it’s so far superior to putting Wall Street in charge. A different kind of funding flow Before its shares started trading on January 28, Z-Work collaborated with Jefferies & Co. to raise the $230 million, principally from asset managers and hedge funds. Retail investors purchased a small part of the offering. A group of seven founders, board members, and advisors contributed $6 million, with most of the cash coming from Atkin, Terrill, and Roston. Those insiders received an outsized, 20% piece of the equity to split among themselves. Explains Atkin: “The reason is that we’re paying the SPAC’s expenses until we find a merger partner, and we’re taking the risk, because if we don’t find one in 24 months, we sacrifice the $6 million.” The founders are also restricted from selling any shares until at least a year after Z-Work makes an acquisition, or until its stock rises 20% above the offering price. The $230 million is earmarked to help grow the young comer that Z-Work “purchases” and folds into the SPAC. Z-Work negotiates with the entrepreneurs and VC investors to establish a fair price. Say they agree on $1 billion. Z-Work’s $230 million contribution would give its shareholders an interest of around 23%. The SPAC is then dissolved, and the player it just acquired will go public on the NASDAQ. SPACs can also raise a lot more money just before the merger if it’s needed to fund expansion, say, of an acquisition a lot bigger than $1 billion. Atkin and Terrill much prefer SPACs over IPOs for two reasons. First, SPACs generally do not result in a giant price “pop” on the first day of trading that diminishes the cash going into the issuing company’s treasury. Second, retail investors get the same crack at buying shares, at the around the same prices as the big banks, funds and everybody else. That preference reflects their own sobering encounters. Atkin relates that when Instinet went public, the investment banks wanted to price the shares in the underwriting, reserved mostly for their asset management clients, at $12. “I saw there was demand for a lot more shares than we were selling, so I asked the bankers to lift the price to put more money in our coffers. They reluctantly agreed to $14.50.” His tough stance helped, but still didn’t prevent the bankers from underpricing Instinet’s shares. On the first day of trading, Instinet closed at $19.50, handing a 35% gain to the money managers who got the shares for a bargain. Their gain was Instinet’s loss. If the company had received the full $19.50, Instinet would have raised $624 million. Instead, it collected $464 million in cash, leaving $169 million on the table. “Conventional IPOs really benefit two constituencies,” says Atkin. “That’s the investment banks, and their big trading clients. The banks convince the company that the IPO is great if the stock bounces 100% the first day, leaving tons of money on the table.” He adds that retail investors are locked out until the stock starts trading, in this case, generally at much higher prices than hedge and mutual fund clients paid. “Then the price often goes down,” he says. The losers are the company and the everyday investor. “In the Instinet deal, the bankers told me, ‘It was a great IPO.’ But they didn’t finish the sentence. Sure, it was great for the banks and the clients that win the lottery by getting handed free money. But it wasn’t a good deal for Instinet and it was unfair to retail investors.” SPACs avoid those pitfalls, says Atkin. The SPAC lifecycle actually involves going public not once, but twice. The whole SPAC process is designed to avoid “pops” and ensure that a maximum portion of the cash raised goes towards building the young enterprise it acquires. All SPACs price their shares at $10 at their debut. Z-Work raised $230 million by selling 23 million shares at $10. Its only asset is that $230 million war chest. A money manager that owns 10% of Z-Work effectively owns 10% not of an operating company, but shell holding cash. It’s logical, then, that the shares didn’t move much when Z-Work went public and started trading. It did get a slight bump, rising 4% to $10.40 by the close of trading on its opening day. But that’s a trifle compare to most IPOs, and tiny first-day moves are a hallmark of SPACs. Retail investors were able to buy Z-Work shares on the first day at prices extremely close to what the hedge funds and asset managers paid. In the second leg, the SPAC team will arrive at a price for its merger partner in talks with the VCs and entrepreneurs. Though the SPAC founders could push for a lower price, the other side pushes back. So the arms-length negotiation results in something close to a fair value. Once the shares of the combined entity start trading, all investors have an equal crack at the shares. “To me, it’s the SPACs are investor friendly way to go public.” Atkin is harnessing the vehicle that’s revolutionizing how tech goes public to hasten the transformation in how America works. The below references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. $CCIV – continued its crazy run reaching highs that no SPAC has ever seen on a rumored negotiation and breaking $40 before ending the week at $39.34. SPAC negotiations in 2020 averaged around 68 days with the longest at around 130 days (LOI to DA). The latest Bloomberg update states that negotiations began on 1/11 so with a typical negotiation we are most likely to hear something around March 22nd but maybe as far as May 24th. Can the froth survive that long? This assumes of course that Lucid does decide to go the SPAC route as I’m sure they are weighing a direct listing with this level of retail excitement. $AACQ – a rumor dropped late Friday afternoon that they are in talks to take public Origin Materials. This was bolstered somewhat by them scrubbing their website of references to fintech which was their original focus. Origin is a pretty exciting clean tech target if they can get it having deals with Nestle, Danone and PepsiCo to replace their plastic with a new carbon negative version made from renewable inputs. They are similar in many ways to recently SPAC’d company Danimer ($DNMR). The stock ended the week at $14.13 on the news. $ACIC – to merge with Archer, an electric aircraft manufacturer. $ALTU – this travel focused SPAC saw some action late in the week as the team dropped 2 new SPACs leading to anticipation that an announcement is imminent. $ARYA – will take public Nautilus Biotech. $CMLF – announced they would merge with Sema4, a “disruptive AI-driven Genomics and Clinical Data Platform Company”. $DCRB – signed their DA with Hyzon as was rumored previously. $FCAC – signed a DA to take public ShareCare, a digital health company. $FGNA – to merge with OppFi, a fintech platform company. $FRX – the “Shaq SPAC” is merging with fitness and nutrition focused, the Beachbody Company as well as home cycling provider Myx Fitness. $FUSE – signed their DA to take public fintech company MoneyLion. $GRNV – will merge with Helbiz, Inc. a “micromobility company” (they do electric scooters). $GRSV – in less exciting can related news they are rumored to be in talks to spin off Ardagh Group’s beverage can business into a public company. $INAQ – shareholders approved its merger with Metromile, the new ticker is $MILE which ended the week at $17.29. $MCAC – shareholders approved their merger with Playboy, the new ticker is $PLBY and it ended the week at $12.22. $NGAC – is in talks to take public EV manufacturer XOS Trucks. I was surprised there were so many EV manufacturers out there but then I was reminded that there were 485 automobile manufactures when they first became commercialized before everyone was bought out or went out of business and we got paired down to a handful. $NSTB – was said to be in talks with Apex Clearinhouse. Some may remember Apex as the company Robinhood threw under the bus for increasing margin requirements on $GME and other “meme stocks”. $PSTH – had a bit of a runup on news they were increasing their PIPE size which implies they may be close to a deal but it may have just been some administrative paper shuffling. Will it be Stripe or perhaps Subway or will Bill keep us waiting another 18 months? $RMGB – is rumored to be in talks with ReNew Power a large renewable energy provider in India. $RTP – which last week was rumored to be in talks with online insurance company Hippo was suddenly said to be close to announcing with Joby Aviation, another electric aircraft manufacturer. $SNPR – announced a DA with electric charging company Volta. Shout out to the guy who noted last week a member of the SNPR team was liking Volta posts on LinkedIn. Volta has a different business model then the other charging companies as they provide charging for free subsidized by the retailer whose parking lot they are placed in and their chargers are like giant billboards on which they sell ads. Their price looks very attractive compared to the other charging SPACs at the moment. Chinese EV startup Byton was reportedly considering going public via SPAC. L Brands is said to be considering spinning off Victoria’s Secret via SPAC. I thought the Shaq SPAC would be peak SPAC but now Colin Kaepernick is launching a SPAC. The company, one of India’s largest renewable energy firms, is in talks to merge with RMG Acquisition owned by Nasdaq-listed SPAC Riverside Capital Management, the people cited above said on condition of anonymity. ReNew Power had shelved its Indian initial public offering plan in 2019 amid market volatility. As per Securities Exchange Commission rules, while Riverside will hold up to 20% in the newly listed avatar of ReNew Power, Goldman Sachs along with CPPIB, ADIA and the company’s founder-cum-chairman Sumant Sinha will hold the rest 80%, one of the two people cited above said. “The due diligence process for the listing of ReNew Power through SPAC has already begun and once completed, it will mark the largest ever listing of an Indian company in the US through SPAC route,” this person said. “In the case of ReNew Power, SPAC Riverside is expected to put in $300 million through equity and another $150 million through warrants.” Emails sent to Riverside and ReNew Power remained unanswered, while a Goldman Sachs spokesperson declined to comment. ReNew is one of India’s largest renewable energy independent power producers with a capacity of 10.14GW, of which 5.73GW is operational. For the April-September 2020 period, ReNew Power’s total income stood at ₹782.5 crore as compared to ₹576.6 crore for the same period in 2019. Its total loss ballooned to ₹230.4 crore during April-September as compared to ₹26.7 crore in the year-ago period. Since the outbreak of covid, the SPAC market has become popular as issuers worry that the conventional IPO market could take many months to recover. Data from Refinitiv, a data analytics firm, shows 126 SPAC IPOs raised $44 billion in the first nine months of 2020, which is more than three times the sum raised during the same period in 2019, as corporate value creators and investors seek to dodge the volatility and uncertainty of the traditional listing process.