Special Purpose Acquisition Companies (SPACs) have fallen out of fashion in media this year, meaning publishers are seeking new ways to raise capital.
Press Gazette has taken a closer look at SPACs and the wider market for raising investment in media.
What is a SPAC?
Often referred to as blank-cheque companies, SPACs are publicly-traded entities that don’t do any real business. Instead, they exist for the purpose of merging with or acquiring a private company – with the effect of bringing the latter onto the public market.
They came to wider attention in late 2020 when a string of companies – often younger tech businesses – used them as vehicles to go public. Richard Branson’s Virgin Galactic, sports betting company Draft Kings and content promotion service Taboola were among those companies to go public by merging with a SPAC.
SPACs are not a new invention, and they are not gone either: on Tuesday French music streaming company Deezer went public on Europe’s Euronext stock exchange by merging with a SPAC named I2PO. (Although most prominent SPACs have been in the US, they can be used elsewhere.)
But Deezer’s early fortunes hint at the way the SPAC trend has gone: its share price sank 35% on debut.
Neil Begley, an analyst and senior vice president at Moody’s, told Press Gazette SPACs became so popular because they helped companies come to market faster and with fewer of the preconditions a company might encounter going public through a traditional initial public offering (IPO).
“The reason why I believe they became so powerful and so popular from the standpoint of the companies, the issuers, is because it was fairly easy, you know – they became popular very quickly and and they also effectively became almost like a blank cheque for many of these companies, or a way for them to take their companies public.
“Whenever you hear the term blank cheque, I mean – that’s obviously something that is going to draw a lot of interest for people seeking capital.
“And from an investor standpoint, you have to essentially trust that people are organised and transparent about what their goals are. But there’s also a lot of suspicion.
“And as soon as some of these SPACs don’t generate the returns of expectations, they are going to cool very quickly to this product. And I think, effectively, that’s what’s happened over the last year.”
SPACs and the media
Taboola was one of the first media companies to get in on the SPAC trend, announcing its plans to go public through blank-cheque company ION Acquisition in January 2021. That merger was completed in June the same year.
In May 2021 it was reported Vice Media was targeting a $3 billion valuation through a merger with the SPAC 7GC & Co Holdings – but it dropped the plans in September, instead raising $85 million from existing investors.
Forbes followed a similar trajectory, announcing its SPAC intentions in August 2021 before cancelling them last month, citing a “deteriorating SPAC market”.
But the most prominent media SPACs story is that of Buzzfeed – both because the company successfully went through with the merger and because of the flotation’s complicated aftermath.
Buzzfeed merged with the blank-cheque company 890 5th Avenue Partners in December 2021, raising only $16 million (£13 million) of the hoped-for $250 million (£200 million).
Investors and executives had been barred from selling their shares for the six months following the flotation – and once that period elapsed, sell they did, causing the share price to drop a further 41%.
It subsequently emerged that some of Buzzfeed’s ex-employees had been able to trade their shares in the newly-public company while others couldn’t, heaping further fuel on a lawsuit by former staff charging the business had botched its flotation.
But it wasn’t just media SPACs having a difficult time. CNBC reported at the end of June that its index tracking the fortunes of SPACs after their mergers was down nearly 50% that year – more than double the decline in the benchmark S&P 500 index over the same period.
Why did the SPACs craze go sour?
Simon Olsen, a partner in Deloitte’s equity capital markets group and a specialist in IPOs and SPACs, told Press Gazette that SPACs weren’t the only things on the market seeing diminished interest.
“The appetite for anything new from investors – IPOs, back transactions, etc. – has definitely diminished from the highs of 2021.
“It was slowing down at the end of 2021, which was partly due to a bit of IPO fatigue, but also due to the early signs of some of the macro factors we’re now seeing played out in full.”
He cited among those factors inflation, interest rates, supply chain problems and the war in Ukraine.
Investors, he said, “want to spend their time focusing on their existing investments, what it all means for them and what they should do with those existing investments. So the appetite for new has disappeared.”
Olsen said he didn’t think we would see the return of the levels of interest in SPACs that persisted from late 2020 to 2021.
“And actually, I don’t think we’ll see that again, full stop.
“What I think we will see with SPACs is them becoming much more professional about it.”
Olsen said he believed that the days “of people in the City who maybe have a couple of million dollars that they want to throw at a SPAC to make some money – or worse, pop stars and sports stars doing SPACs – I think those days are gone.”
With SPACs out, how are media raising money now?
So Jay-Z isn’t likely to be investing in media SPACs anytime soon. What ways are publishers seeking to raise capital instead?
Andrew Evans, a partner in Deloitte’s financial advisory business, emphasised to Press Gazette that “subscription models, generally, in recessions, do badly.”
Some subscription services have already begun to report this, but Evans said: “One of the things that’s interesting with subscriptions is, obviously, you renew on an annual basis.
“And as the economic challenges, the headwinds we’re seeing, means that probably everyone’s got ‘til the end of December, if you’re on a calendar subscription period – and so you might see it start to come through a bit later.”
Combined with advertisers “really starting to question how they get value” and inflation hiking costs, Evans said he wouldn’t be surprised “if you had some quite substantial cost cutting, even just to stand still” among media businesses.
But there were still traits investors might be looking for that news media could offer.
Evans said: “What does the market want to see from these types of businesses? Maybe it isn’t growth at all cost, and maybe it’s about profitable growth, and maybe it’s [something] like cash generation.”
Olsen said that if one looks “at what has been successful in SPAC deals, I think there’s much less speculation. That is not inconsistent with wider IPOs – people have had a flight to quality, so they want to see businesses that are growing profitably.
“They want to see businesses that have cash generation, they want to seek businesses that have a proven track record, have a proven model and a proven product that is being sold to customers, etcetera.”
Moody’s SVP Begley identified three areas that were still open to media businesses looking to raise cash: “Strategic investors, if there are any; private equity investors, which are much more open to not being strategic, but they tend to look for industries that have cash flow but low valuations and they tend to want to lever them up to use their returns, so that is usually negative for credit.
“And then asset sales… like real estate and other things [that] are not as productive as they once were. There’s a lot of capital assets that they can monetise and put that capital to work so it does generate more profits for the company or possibly, de-leverage the company, and in doing so de-risk the company from a financial standpoint.”
Paramount Global (then named ViacomCBS) sold its CBS Studio Center lot for $1.85 billion in November last year. Further from the news media industry, book publisher Houghton Mifflin sold its trade book publishing division to HarperCollins in March 2021.
Begley said in many cases such assets may “have been around the company a long time and they’re physical assets that no longer are necessary in the digital world as much. And so they’re disposing of them.”
Looking ahead
CNBC reported last month that US media executives seemed reasonably confident about weathering a possible recession. It cited Buzzfeed chief executive Jonah Peretti, for example, who said the company had built “an agile, diversified business model”.
Justin B Smith, the former Bloomberg Media executive now launching a new outlet to be named Semafor, told CNBC: “The media industry is in better shape than it was a decade ago. Strategies are more sensible. Digital adoption is more ubiquitous. Models are clearer. Revenue streams are more diverse.”
Asked what he thought of that, Deloitte’s Evans told Press Gazette: “I think most businesses have right-sized their cost base [during] COVID, as you would expect. However, a lot of those were sort of pumped up by cheap money, or indeed free money from local government, in whatever jurisdiction they’re in.
“Businesses are definitely a lot leaner. And there has been a huge increase in demand… But it really depends on the strength of your balance sheet. And that’s on a case by case basis. And every company is different.”
More specifically, Olsen said: “I think we will see corporate transactions, M&A disposals, buying new technology, selling old technology, carving out nonprofits. I think, oddly, that will continue, notwithstanding the fact we’re probably heading into domestic recession.”
Evans said he foresaw consolidation – but emphasised that, “if you’re talking about news publishers, there’s clearly restrictions generally on a geographical basis from regulators about who can own and operate that.”
He was, more broadly, less confident than the media executives CNBC spoke with.
“I imagine there will be winners and losers as there are through volatile times. I don’t know if… all media companies are feeling positive.
“I think some will be, and I think some won’t. And I think you know, back to Simon’s point, markets are really interested in profitable growth and cash generation, perhaps more so than they were 12-18 months ago.”
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