RedBird Capital is betting a sports-only special purpose acquisition company will work – if the firm can spot a good prospect it believes it can flip.
RedBird made headlines earlier this week when it announced it filed with the SEC to take a special purpose acquisition company (SPAC), RedBall Acquisition, public on the New York Stock Exchange. The private investment firm said it wants its new company to target sports media properties, including data analytics companies, but hasn't ruled out attempting to purchase a sports franchise. But, using SPACs for sports purchases can be difficult and haven't always succeeded in the past.
Andrew Murstein, the president and COO of Medallion Financial Corp., tried unsuccessfully in 2008 to use his SPAC to purchase the Chicago Cubs and Florida Panthers, for example.
A SPAC, also known as a blank check company, is formed to raise capital through an initial public offering to acquire existing companies. DraftKings and Houston Rockets owner Tilman Fertitta's Landcadia Holdings IIÂ used used blank check companies to go public this year. Blank check companies have no operational history, no impact on the stock market, and are not reflective of market activity.
Now, RedBird founder and sports power-player Gerry Cardinale is joining the "SPAC fest." Here's what you need to know about his plans.
SPACs and sportsÂ
In the past, blank check companies have sometimes been tied with fraudulent activity, like penny stock manipulation in 1988. But today, SPACs are seen as low risk and potential high-reward investment vehicles.
Wall Street investors Michael Klein and Bill Ackman have been among the most active investors to use SPACs to raise capital this year.
The funds are placed in a two-year escrow account, and once a deal is identified, it's presented to investors. Investors can exit if they don't approve a proposal.Â
"You're basically getting your money back," said Scott Rosner, director of Columbia's Sports Management Program. "It's safer, and you can wait out the pandemic."Â
And if a deal is secured, investors can also obtain stock warrants – options to buy shares of the new company purchased at a future date. Rosner referred to the current trend as a "SPAC fest," noting that there has been a "dramatic increase in the number of SPACs since the pandemic started."Â
According to the Wall Street Journal, roughly $12.1 billion in funds has been raised using blank check companies so far in 2020.
"It's really a great market environment in general now for SPACs," Suzanne Shank, CEO of Siebert Williams Shank, and an underwriter in Ackman's SPAC, told CNBC's "Squawk Box" on July 22. "Financial investors have significant liquidity, interest rates are low, public equity market valuations are at all-time highs.Â
"The number of public companies available to own has declined steadily, and obviously the Covid pandemic has challenged the financial position of the vast majority of companies" she added. "All these factors create tremendous opportunities for a great sponsor, the right sponsor, to get a deal done."
Mark Patricof, founder and CEO of Patricof Co., an investment firm that helps athletes invest in private equity — including CC Sabathia, Victor Oladipo, and Venus Williams — said the challenge of a SPAC in sports is the two-year deadline "ticking clock." It's hard to get a sports deal done in that time.
"There are a handful of examples where (a SPAC) has worked, but not a ton," said Patricof, whose firm is backed JP Morgan's Private Equity Group. "I'm not clear on why SPAC would be the right vehicle for sports but if some if someone is going to figure it out, I think Gerry would be the right person to do it,"Â
A respected name
Cardinale was a crucial figure in establishing Legends Hospitality with the New York Yankees and Dallas Cowboys. His track record also includes creating Yankees' YES Network, enhancing the NFL's On Location Experiences before selling RedBird's stake, and backing OneTeam Partners alongside the National Football League Players Association.
Cardinale, who recently oversaw an 85% purchase of the French soccer team, Toulouse Football Club, is being advised by Rice, Hadley, Gates, and Manuel, the consulting firm co-owned by politicians Condoleezza Rice, Robert Gates and Stephen Hadley.
Due to SEC restrictions, Cardinale is prevented from commenting, as filings are still in motion, according to RedBird's public relations team Gagnier Communications.Â
RedBall, which would fall under the symbol "RBAC.U." in the NYSE, said it wants to raise $500 million with the SPAC. The amount isn't enough to currently purchase a top major league team, which are valued in the billions, but enough for "middle market asset" like a soccer franchise in the U.S. or abroad.Â
RedBall could also acquire a variety of sports companies and combine the properties into one firm before privatizing. And Cardinale could also the money raised as recuse funding for distressed properties looking for capital.
"I would hope they have a handful of targets," Patricof said. "If he can execute it in the two-year window, someone like Gerry will find something to buy; I have no doubt."