On August 4 the names Sandy Beall, Kevin Reddy and Doug Jacob appeared in a prospectus for a blank-check company called FAST Acquisition Corp (FAC). Known formally as a Special Purpose Acquisition Company, or SPAC, FAC is among 64 other such entities filing so far this year to go public for the sole purpose of combining with a private (“target”) company.
A SPAC, which typically has two years to find a target, is required to place the IPO proceeds in a trust until they’re used to acquire the company (a decision that rests upon shareholder approval). The proceeds are returned to shareholders in the event time runs out without a transaction.
FAC’s filing says it’s searching in “the restaurant, hospitality and leisure sectors in North America, targeting companies with an enterprise value between $600mm and $1bn.” Looked at another way, the target company would have a cash flow between $40 million and $150 million.
Beall and Reddy are industry executives with accomplished track records. Though less well-known, Jacob is a successful restaurant investor and brand consultant. According to his LinkedIn profile, he co-founded &pizza in 2010, a 36-unit chain in which Beall has invested.
Familiar names pop up in the prospectus as management, board members or advisors, among them former Think Food Group’s CEO Kimberly Grant, executive recruiter Alice Elliot, Focus Brands COO Kat Cole, and &pizza CEO Michal Lastoria (who Inc. magazine recently described as an “unlikely auteur of tomorrow’s restaurant”).
SPACs are the hottest business trend of 2020 and aggregate proceeds do much to demonstrate it. Those 64 blank-check companies have raised $25.6 billion so far this year alone, nearly doubling the SPAC amount for all of 2019, notes SPACInsider, a website that tracks activity.
“This has become a commonplace approach in the current environment when so many investors are searching for return in a zero-interest rate environment,” says investor Roger Lipton of Lipton Financial services.
“Everyone has been talking about SPACs,” declares Jessica Kates of Rellevant Partners. “They’re attractive to investors because they’re liquid.”
The attraction stems from uncertainty about the future. “A SPAC creates an opportunity for a company that is currently operating well, or a great brand that’s been negatively impacted by COVID-19,” says UBS Investment Bank Executive Director Brian DeLeo, whose employer (along with Citigroup) is underwriting FAST Acquisition Corp. He adds an injection of capital from a SPAC-driven IPO can help to solve the problem.
SPACs, however, are hardly new in the space. Five years ago, Levy Acquisition Corp. merged with Del Taco in a $150 million transaction. A year earlier, Justice Holdings, a $500 million SPAC controlled by Pershing Square Capital Management, combined with Burger King and Tim Horton’s.
When Tom Baldwin (now Benihana CEO) and a partner formed a SPAC in 2013 to acquire a tableware company, they told “The Deal Pipeline” that the “secret [to a SPAC] is an initial public offering of at least $75 million by a seasoned management team, targeting operating businesses with values between $300 million and $600 million, and working with underwriters and financial advisers from bulge bracket firms.”
Currently, Opes Acquisition Corp., a SPAC that raised $115 million in a March IPO, is pursuing a business combination with BurgerFi, a 130-unit fast-casual chain based in South Florida. Officials said in an August 8-K filing that the merger was “progressing smoothly.”
Restaurant companies themselves have largely shied away from public markets since the mid-teens; fund-rich private equity firms have stepped in to fill the capital gap, often paying a high EBITDA multiple for the privilege. DeLeo believes the space now contains plenty of companies with EBITDAs of $20 million or more that could trade publicly. “There’s a large pool of available opportunities,” he claims.
ICR President Don Duffy, an expert on SPACs, explains that while the candidate pool for restaurant companies the size of a Chick-fil-A or a Panda Restaurant Group is limited, private-equity owned assets with cash flows of $40-plus million are good targets. “Because if you do the math and let’s say it’s a growth business—and you’re paying 15 to 20 times [EBITDA]—that’s a $600 million to $800 million enterprise value,” he explains, adding it’s a range that works.
When I separately asked Beall and Reddy to name a segment where FAC might find restaurant companies that fit the valuation, both declined to answer, citing stock exchange rules. Yet the prospectus paints a fairly clear picture of what they’re looking for.
“We intend to seek to acquire companies that fit the following criteria,” the filing explains. “Quick service restaurant or small footprint fast casual with drive-through; strong off-premise program and technology capabilities; large regional or national presence, and potential for international expansion; iconic brand with the ability to build cultural relevance and purpose into the brand.”
It sounds like a shareholder’s dream investment. But is it reality? “If you wrap your IPO in a SPAC wrapper, is it going to perform differently?” says Allan Hickok, a former restaurant analyst who now advises restaurants for Boston Consulting Group.
A private equity investor whose firms own restaurants and who didn’t want to be named doesn’t think it will. In fact, it may perform worse when it comes to restaurants. “Once the dust settles on SPACs, what there will be is a bunch of smallish, micro-cap restaurant chains that are public, not followed by Wall Street research and too small to be of interest to the larger money managers,” he notes in an email. “Not a good recipe for the long-term sustainability of the valuations being assigned to restaurants acquired by SPACs.”
Update: On August 20, 2020, FAST Acquisition Corp. (FST.U) completed a $200 million offering of 20,000 units for $10 per unit.