Sports SPAC’s Pivot to Pharma Reflects Blank-Check Market Headwinds

·5 min read

Bull Horn Holdings (NASDAQ: BHSE) recently announced it has come to a definitive merger agreement with Coeptis Therapeutics (OTC: COEP), a biopharmaceutical company developing cell therapy platforms to treat patients with cancer. Bull Horn is a SPAC focused on sports and entertainment, so it’s logical to wonder if the decision to combine with a company outside of the sector is indicative of a dearth of viable sports investment opportunities. Remember, 2021 was a particularly active year for M&A, and at least a dozen SPACs in pursuit of a sports and entertainment business have pulled their IPO plans within the first four months of 2022.

Super Group Holding Company chairman Eric Grubman, while not able to speak to the specifics of the BHSE-Coeptis merger, believes the number of companies looking to do a deal or go public today is the same as it was during the height of the SPAC craze. “It was [just easier] to get a SPAC deal done a year or [18 months] ago, because the market reacted with enthusiasm to every announcement. Now, it is really hard to get a deal done.” Many companies are choosing to wait for the equity and PIPE markets to “reopen” before pursuing a direct listing. For perspective, Q1 was the weakest quarter for IPO volume in a decade.

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JWS’ Take: While the number of companies who want to go public may be the same, the market shift from growth to value means far fewer of them should—particularly those without scale. The problem is when these small businesses become micro-cap stocks there is little liquidity to it. And without liquidity in the stock, especially in a weak equity market, it simply isn’t going to trade well.

Companies of scale that show significant cash flow can still benefit from SPAC vehicles for speed and certainty (think: will have equity research coverage, institutional investors backing them). But those companies have options (think: Fanatics) and can opt for a direct listing through a traditional IPO.

SPACs large and small are having trouble closing deals right now. J.P. Morgan reports there is $160 billion of capital raised by SPACs currently searching for a business combination. The vehicle has fallen deeply out of favor with investors; JPM also reports an 86% redemption rate across 28 de-SPAC transactions in Q1 ’22, up from 61% across 49 transactions in Q4 ’21. Meanwhile, the regulatory environment is so grueling that companies with viable alternatives to go public are taking them. Sponsors recognizing the headwinds are increasingly pulling IPOs rather than putting their capital at risk. Remember, there is typically a two-year window for SPACs to do a deal.

Bull Horn was rapidly approaching its May 3 deadline to do an initial business combination when it announced the deal with Coeptis. The SPAC was in the process of requesting a deadline extension, but had the window closed without a tie-up, BHSE sponsors would have lost out on 100% of their investment (think: underwriting fees worth 2% of the $75 million raised plus ~$2 million in “search costs”). So for them, finding a company that wants to go public and hoping the deal can get done beats the alternative, even if the value of BHSE stock were to fall precipitously post-merger.

Rob Striar (CEO, Bull Horn Holdings) insists the timeline did not force Bull Horn’s hand. “We had already filed for our extension,” he said. “We struck the deal because it was a great target with the most upside potential.”

Nor did a lack of viable targets. BHSE leadership (which also includes Michael Gandler and Baron Davis) saw a “tremendous amount” of deal flow. Striar explained the blank check company kept its “options open to identify a target that would enable us to drive shareholder value. We looked at a wide range of targets across sports, entertainment and a variety of other categories, including healthcare.”

The decision to merge with Coeptis came down to the biopharma company giving BHSE shareholders the greatest potential upside, from both an impact-investing and ROI standpoint, Striar said. “The ultimate goal in any SPAC is to drive shareholder value, and we believe that the transaction we have announced will do that.”

While backing a biopharma company pre-FDA approval is highly speculative and could certainly result in investors losing their investment, It is hard to argue a sports or entertainment company could return more value than a drug that treats cancer—if it is a success. It should be noted Coeptis has a portfolio of assets, so it’s not necessarily dependent on just one product.

In many SPAC situations, one can look at a SPAC’s stock and warrant price to gauge how enthusiastic the market is about a pending merger. “After a deal announcement, on a good deal, a stock should trade at or above $10,” Grubman said, “because investors will want to get in on the perceived upside. On a less well perceived transaction, a SPAC stock will still trade near $10 because the redemption is there.”

Grubman again emphasized he was speaking in generalities and had no opinion on the BHSE transaction. BHSE is trading for $10.10 at the time of publication, indicating possible enthusiasm for the merger.

But the signs may not be as promising on the warrant side. “In my view, a warrant that trades above $1.50 indicates investors probably think the deal will close and that it is a relatively good deal,” Grubman said. “A warrant trading below a buck [indicates] a possible view that the value could be below $10 post close.”

BHSE warrants were trading at just $.08 as of this publication, which would be a bearish indication if that theory holds.

Grubman emphasized, however, that for some SPACs, the trading volume in the stock and warrants is simply too low to get a good picture of how a broad group of investors might view a transaction. He also noted that in a scenario in which a SPAC runs out of time and dissolves, the stock is generally worth $10, while the warrant expires worthless.

That does not necessarily mean the deal will fail to close or that the share price will tumble after closing. If there were a short squeeze, or if Coeptis were to announce a positive outcome from the FDA, which could happen at any time, shares could skyrocket (which is why there is an avid group of investors who invest in biopharmaceuticals).

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