SPACs (Special Purpose Acquisition Companies) have become a useful mechanism for travel companies to go public.
Rather than the regulatory hoops that many brands have to jump through to secure a traditional initial public offering, SPACs allow an alternative route through the creating of shell companies without any operations of their own but with the ability to merge with another organization.
The combined entity (shell company + brand), larger than the sum of its individual parts, then becomes a publicly traded entity. Everyone wins!
Not so straightforward, as is now becoming apparent.
When deciding to go public, many travel companies have weighed the pros and cons of a traditional IPO versus a SPAC.
For private travel companies, a SPAC can provide a faster way to go public compared to a traditional IPO, potentially making it easier to capitalize on quick-moving market trends.
Additionally, since SPACs aren't subject to the same scrutiny in relation to forward-looking statements, the model can make it easier for founders to paint a pretty picture of the future.
And while pricing uncertainty is a given with a traditional IPO, a SPAC provides the target company with greater control over valuation. For the sponsors (the creators or founders of the SPAC) and initial backers, a SPAC can be a lucrative proposition.
Sponsors often stand to gain millions upon IPO, typically receiving 20% of the target's shares post-merger, known as a "sponsor promote."
In 2020 and 2021, skyrocketing interest led to a flood of SPACs entering the market due to challenges with traditional IPOs, an abundance of startups seeking capital and eager investors.
Rapid growth has attracted backers ranging from reputable investors such as Thayer Ventures, Altimeter Capital and Lakestar, to celebrities including Jay-Z and Martha Stewart.
Travel companies considering a SPAC should carefully scrutinize the sponsors, investors and overall deal. At the positive end of the spectrum are sponsors with deep sector expertise who are committed to the long-term success of the companies they merge with.
These SPACs include teams that continue to play a role in the company's development post-IPO, often contributing expert board members, and maintaining a vested interest in future performance. At the other end of the spectrum are sponsors with little sector expertise whose interest in the SPAC market is purely financial, with the IPO itself serving as the endgame.
Reality bites in travel
In 2021, there were signs that the SPAC market was not as healthy as purported.
In 2022, the warning signs are flashing bright orange. A CNBC analysis of SPAC research data in September 2021 showed that 97% of pre-merger SPAC deals were trading below the typical $10 target price. In many cases, share prices have fallen further post-merger.
Redemption rates were through the roof in the first quarter of 2022, climbing to over 90% in February, versus just 10% the previous year. Compounding the challenges, PIPE investments, which can save a deal amid high redemptions, are drying up.
Recent travel SPACs have weathered this turbulent market with varying results.
Many have been subject to slumping or erratic share prices and sky-high redemption rates, and some abandoned their mergers altogether.
- Grab: Ride-hailing giant Grab merged with Altimeter Growth Corp. in December 2021 and its shares plummeted more than 20% on its opening day. The deal included a $4 billion PIPE led by Altimeter Capital Management and shareholder redemptions were just .02%. However, Grab's stock plunged following a dismal 4Q21 performance, currently trading at just over $3 a share. The turn of fortunes has some investors crying foul, and several U.S. law firms have announced investigations into the company's trading practices.
- HotelPlanner/Reservations.com: The two companies planned a $688 million merger with Astrea Acquisition Corp. However, the deal was called off in February 2022, joining a string of other cancelled deals so far in 2022.
- Inspirato: Inspirato's public debut in February 2022 followed a merger with Thayer Ventures. With a redemption rate over 98%, the reduction in outstanding shares made the stock particularly volatile, surging to over $100 share by the third day of trading before falling. The stock is currently trading at over $6.50 per share. Despite the high redemption rate, the deal included a PIPE of over $100 million.
- Vacasa: Vacasa became a public company via a merger with TPG Pace Solutions in December 2021, saw its stock price slump below $10 on its opening day and the stock is currently trading below $8 a share. However, Vacasa CEO Matt Roberts cites numerous positives of the transaction, indicating that deal structure is critical for travel companies considering a SPAC. "With our transaction, there were no warrants, minimal sponsor promote, and high-quality shareholders in the SPAC as well as in the PIPE and Forward Purchase Agreement. Plus, with no selling shareholders, all proceeds went to the balance sheet."
- Sonder: Sonder merged with Gores Metropoulos II in January 2022, with a redemption rate of 96%. The deal included PIPE investments totaling $310 million. On its opening day of trading, Sonder's stock price fell, and is currently trading at under $5 per share. In its first earnings call, the company reported 2021 revenue up 101% versus 2020.
For travel companies still considering a SPAC as a potential route to going public versus a traditional IPO, the recent turbulence in the market is likely to give pause, and rightly so. While SPACs offer potential benefits, a range of factors weigh in favor of a wait-and-see approach.
The Federal Reserve's expected interest rate increases, continuing inflation, sky-high redemption rates and a decline in PIPE investment all increase uncertainty.
Following the SPAC market's intoxicating surge in 2020, the subsequent return to earth is a good reminder that becoming a public company is difficult, whether via SPAC or traditional IPO. However, while regulatory and voluntary changes are likely to tweak the SPAC blueprint in the years to come, SPACs in some form are likely to be part of the mix for the long haul.
* This article is an edited version of a Phocuswright report, The Spectacular Rise (and Fall?) of SPACs In Travel, which is available here to subscribers.