The Private Equity Firm Taking Over Sports

How one investment vehicle is changing the way sports entities go public

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Friends,

Last week, Private-equity firm RedBird Capital Partners announced they are teaming up with Oakland Athletics executive Billy Beane to launch a $500M special purpose acquisition company (SPAC) to fund the potential purchase of a sports related entity. Let’s take a look at what a SPAC is and how they work:

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.

RedBird Capital intends to take their SPAC public on the New York Stock Exchange and wants to target sports media properties. Potential acquisition targets include data analytics companies, but the investment firm hasn't ruled out attempting to purchase a sports franchise either. In July, RedBird took an 85% stake in Toulouse Football Club and is rumored to be considering similar professional teams. With the broader SPAC market seeing issuance levels not seen since 2007, we have increasingly seen sports related entities attempt to join the party.

In December 2019, daily fantasy sports company and bookmaker DraftKings merged with Diamond Eagle Acquisition Corp, a SPAC with a market cap of roughly $500M. The merger allowed DraftKings to become a public company while forgoing the typical IPO process. It’s been considered one of the most successful sports related SPAC’s ever with the stock rising over 200% since the merger.

Although DraftKings was successful, using SPACs for team purchases hasn’t always worked in the past. In 2008, we saw Sports Properties Acquisition Corp. raise $200M via IPO in an unsuccessful attempt to purchase the Chicago Cubs and Florida Panthers (Source). Typically, the execution of a SPAC can run into two main issues:

  1. Difficulty executing a transaction within the 2-year window required for SPACs.

  2. Companies often need 18-24 months to prepare for the transition from a private firm to a public one - this timeline is significantly sped up since the acquired operating entity assumes the regulatory profile of the already public SPAC. Poor timing can lead to regulatory difficulties, bad press, lower market value and even unpleasant shareholder action.

With an IPO process that is expensive, lengthy and turbulent, I think we will continue to see creativity in the sports acquisition space through SPACs. RedBird should be able to execute a transaction with a company in the media and analytics sector, but I think they’ll run into challenges when it comes to major sports franchises. There isn’t a consistent supply of teams available and transactions tend to take longer than the 2-year SPAC window. Issuing firms need to have a short list of potential acquisitions and strike fast once a deal is available, which means that it is unlikely that major US professional sports franchises will fit that mold.

If I was RedBird, I would target the interactive home fitness space which includes companies like Peloton, Tonal, and Hydrow. I’m extremely bullish on the sector as we continue to see significant growth due to the increasing number of consumers actively inclining towards home workouts. On top of hardware-related revenues from per-unit sales, these businesses are ultimately membership communities and if history has shown us anything, communities can monetize really, really well. With Lululemon buying home fitness startup Mirror for $500M, they seem to agree.

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Extra Credit

RedBird Capital Partners, along with Dwayne “The Rock” Johnson, swooped in with a $15M offer to buy the assets of the bankrupt XFL just hours before it was set to go to auction yesterday. Early reports claim, Johnson split the $15M evenly with RedBird Capital, who decided to join forces rather than bid against each other. It’s rumored that Vince McMahon put over $200M into the XFL, which averaged about 1.9M viewers per game on FOX.

Read the Bloomberg article here

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