There may be too many restaurant SPACs

Steve Salis, founder of Ted’s Bulletin owner Salis Holdings, has founded the special purpose acquisition company Sizzle. RB’s The Bottom Line wonders if they’ve flooded the market with buyers.
Restaurant SPACs
Photo courtesy of Ted's Bulletin

The Bottom Line

It’s a day that ends in ‘y,’ and that means it’s time for another restaurant-targeting SPAC.

The latest is called Sizzle, a special purpose acquisition company started by Steve Salis, who cofounded &pizza and then Salis Holdings, which went on to acquire Ted’s Bulletin. Sizzle wants to raise $125 million and use it to merge with a restaurant or hospitality company, bringing the number of restaurant SPACs to at least seven.

Salis isn’t even the only &pizza cofounder involved in a SPAC. Michael Lastoria, who founded the chain along with Salis in 2012, is involved in Fast Acquisition Corp., which is merging with Landry’s.

A SPAC takes money from equity investors and uses it to acquire a company, preferably a privately-held company that it therefore takes public. And there have been a lot of them—there have already been 252 SPAC initial public offerings this year, according to the website SPAC Research. That’s more than the 248 SPAC IPOs undertaken in all of 2020—which itself was more than four times the number for 2019. There are SPAC indexes (CNBC’s is down 15% from its February peak) and even SPAC ETFs, or exchange traded funds.

SPACs have been created by former baseball players (Alex Rodriguez) and former U.S. House speakers (Paul Ryan). The SPACs targeting restaurants feature such notable former industry executives as Julia Stewart, Cliff Hudson, Sandy Beall, Andy Pforzheimer, Dave Pace and Nigel Travis. Danny Meyer has one, though it has a broad industry scope. So does the SPAC that Travis is involved in, one created by Papa John’s investor Starboard Value.

(Pforzheimer provides some great insight about SPACs in the most recent episode of the “A Deeper Dive” podcast.)

The presence of so many of these shell companies make it that much more challenging that they’ll be able to make a deal—let alone a deal for their targeted industry. Indeed, Sizzle’s federal-securities filing this week notes this risk prominently.

“…There are still many special purpose acquisition companies seeking targets for their initial business combination, as well as many such companies currently in registration. As a result, at times, fewer attractive targets may be available, and it may require more time, more effort and more resources to identify a suitable target and to consummate an initial business combination.”

There’s another potential problem, too. “The competition for available targets with attractive fundamentals or business models may increase, which could cause target companies to demand improved financial terms.”

SPACs have two years to complete a deal, and if they don’t then they dissolve—two restaurant SPAC deals collapsed, for Chuck E. Cheese owner CEC Entertainment and for TGI Friday’s. The sheer number of these firms increases the chances of that happening again—while driving up potential prices for targets.

What’s more, many of the companies that would be the most desirable targets in the restaurant space appear to prefer traditional IPOs—though SPAC backers, including Pforzheimer, note that a SPAC merger is easier on management teams.

While a SPAC can certainly target a smaller concept (such as BurgerFi, which recently went public with such a merger), most of the blank-check companies appear to be targeting chains in the Technomic Top 100. Less than half of those could even be considered targets at all, as the rest are either already public or are part of big companies like Inspire Brands that would IPO if they went public at all . Others were just sold, as is the case with Zaxby’s and Freddy’s Frozen Custard.

A half-dozen investment groups with a looming deadline targeting only about 40 companies makes for an, uh, interesting market—while increasing the chances said groups end up making deals outside of the industry to get something done.

Sizzle, for what it’s worth, appears open to companies that were hit hard by COVID—most of the others are looking for companies that differentiated during that period. It is looking at companies with “strong brand and business fundamentals” that “may have been adversely affected by COVID-related shutdowns but have a definable path forward.” Salis’s track record also suggests he could target smaller companies, which will certainly have less competition.

Sizzle also has a broader target list that extends to industries outside of restaurants—like most SPACS. It could buy retail, consumer food, food-related technology or real estate, or businesses that service these industries. And it may buy something completely different.

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