Tim Frost
Tim Frost

FROST: Finance Offers Opportunities

Twf Photo IWILMETTE, Ill. — The past year has presented challenges never foreseen regarding the business plans of most entities with many operations coming to a standstill.

The financing side of the business world has been a different story, however. This month we will look at the expansive growth of the equity markets and how they impact the sports and entertainment industries.

The live-event business was shuttered for many months. It is slowly returning with streamlined activities, but public health concern remains at the forefront. The increasing availability of vaccines as the year progresses points to a stronger second half of the year.

Event revenue is typically the largest source of income for most facilities. Ticket sales, suite rental, concessions and sponsorship are dependent on spectators. Without people at the track or concert venues, dollars will not flow.

Early season indicators point to smaller crowds at the races, reflective of size adjusted capacities outlined by public health and governmental officials. Fans are still cautious about attending events but are becoming more comfortable with social distancing, wearing face masks and other safety measures.

During the slowdown, businesses were able to supplement their operations through various governmental initiatives, including Paycheck Protection Programs, Economic Injury Disaster Loans and others.

Various stock market indices posted record gains as they reflected the outlook for a future rebound. More impressively, they made up lost ground and then some, even after the rapid decline that the market experienced at the start of the pandemic.

A unique trend started to strengthen the market by midyear, the use of a “blank check” shell corporation designed to take companies public without enduring the traditional IPO process.

These entities are called special purpose acquisition companies or SPACs. They are created to pool funds in order to finance a merger or acquisition within a set timeframe.

Different industries are using SPACs, primarily segments of the market where taking companies public is difficult and access to capital is scarce. SPACs also provide another option for sellers, as well as an efficient way for private companies to tap public equity markets. Sports and entertainment fit this description because they do not meet traditional lending criteria or ratings metrics.

Investors are pouring money into SPACs in record numbers, betting that management has the ability to succeed. There are unique combinations of experienced finance and hedge fund managers combining with influential athletes and entertainers to partner on sports-related SPACs.

Raising money has not been difficult for most SPACs. Investors are looking to park money and the allure of sports and entertainment is appealing. SPECS generally include a two-year timeline to spend the money or return it to the investors.

The next step for SPAC is to identify acquisition opportunities. They represent a new type of invest­ment vehicle and are shaking up the traditional ownership structure of sports and entertainment properties.

There is debate as to whether there are enough privately held sports entities that present opportunities to become suitable public companies. Chasing acquisitions may raise prices and bad deals may result.

Motorsports is a desirable part of the SPAC and reverse-merger public company listing landscape.

Back in 2007, HD Acquisition Partners entered into an agreement to acquire the National Hot Rod Ass’n. The plans were to utilize a SPAC to publicly list the entity. Shareholders did not approve the transaction and funds were returned to investors.

Recently, Motorsports Games, part of the Motorsports Network, went public through a reverse merger.  The share price rose at the offering and remains above its offering price. Management indicated that it plans to explore opportunities with video games, esports competitions and content development for race fans and gamers around the globe.

NASCAR, which merged with International Speedway Corp., and Speedway Motorsports went private about 18 months ago. There is the possibility the France and Smith families explore the SPAC process.  This would allow them to access liquidity as their operations have been challenged. The public — private — public — lifecycle is not uncommon in business finance.

Will SPACs remain part of the sports finance landscape? Only time will tell. Asset prices continue to rise, and capital must be creative to participate.

The goals are similar — investors want positive returns and owners and fans want championships.