SPACs or Spam?
My post today is about Opes Acquisition Corp. Their web site describes them: “OPES Acquisition Corp. (NASDAQ: OPES, OPESW) is a special purpose acquisition company headquartered in Miami and organized for the purpose of effecting a merger, asset acquisition, stock purchase or other similar business combination with one or more businesses or entities.”
It is, in other words, a blank check company, founded solely to merge with or acquire another business. In fact, its 10-Q is fairly explicit about this:
We are a blank check company formed under the laws of the State of Delaware on July 24, 2017 for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or other similar business combination with one or more businesses or entities (“Business Combination”).
On June 29, 2020, nearly three years after its founding, Opes Acquisition Corp. entered into an agreement with a company called BurgerFi, which calls for BurgerFi to become a wholly owned subsidiary of Opes Acquisition Corp.:
The Acquisition Consideration shall be payable as follows (subject to reduction for indemnification claims and potential changes due to a working capital adjustment as described below):
(i) a cash payment in the aggregate amount of $30,000,000 payable to the Members;
(ii) $20,000,000 payable either in cash or in shares of our common stock valued at $10.60 per share, in the sole and absolute discretion of our Board of Directors; and
(iii) the issuance in the aggregate of 4,716,981 shares of our common stock to the Members (the “Closing Payment Shares”)
There’s a lot to unpack here, so let’s take it one step at a time:
BurgerFi is a Limited Liability Company, for which its owners are called “members”. Thus, the reference, above, to “Members” being paid $30 million.
On top of the $30 million payout to the LLC’s Members, those Members are eligible for a further $20 million payout, which payout is in the form of either shares in Opes Acquisition Corp. or cash, based upon Opes’ Board of Directors’ discretion.
Further, the aforementioned Members are entitled to a share grant in Opes Acquisition Corp. of 4.7 million shares.
Given all of this, we can conclude a few things about this prospective acquisition:
Opes Acquisition Corp’s cash will decline by at least $30 million, and perhaps as much as $50 million, due to payouts to the LLC’s Members.
Opes Acquisition Corp’s current shareholders will be diluted due to the issuance of 4.7 million shares to BurgerFi’s Members.
The stock market doesn’t seem too impressed with this company’s prospects:
(Screenshot source link.)
The problem here is that restaurants are not great businesses. They have very high fixed costs, volatile variable costs, and survive on thin margins. Further, the covid-19 pandemic has destroyed many restaurants due to state health authorities’ decision to force restaurants to close for months at a time. Companies that don’t have great balance sheets (like restaurants) can’t finance operations without revenue indefinitely. Rent needs to be paid. Utility bills need to be paid. Insurance needs to be paid. Taxes need to be paid. Even if a restaurant lays off its staff and cancels all its vendor accounts, it still has cash going out the door every month. And, given restaurants’ terrible profit margins, that cash will quickly become depleted.
So, what we have here is a SPAC acquiring a not great business in the middle of a pandemic-induced recession.