Weekend thoughts, part 1: $DWAC is making SPACs great again

The biggest financial news of the week was obviously Trump Media (TMTG) announcing a merger with Digital World (DWAC), a SPAC.

Including earnouts, the deal valued TMTG at $1.7B. With the stock trading for~$100/share the market is currently valuing TMTG at ~$17B (I’m arriving at the number simply by taking the $1.7B EV and multiplying by the premium to trust DWAC is trading at. It’s not precisely correct but it’s close enough). To put that into context, Twitter is valued at ~$50B and Fox (which owns Fox Broadcasting and Fox News) is valued at ~$25B, so if you take DWAC stock at face value and ignored the obvious squeeze / trading sardine dynamics here the market is giving TMTG a real chance at becoming a media giant.

It’s tough to talk anything Trump without bringing politics into it, but I’m going to try to set politics aside for the weekend because I think the TMTG / DWAC deal is absolutely fascinating on a bunch of different angles, and I wanted to discuss them all. (Before I dive in, I’ll note that I hosted a Twitter Space with Elliot Turner and Compund248 the day of deal announce; many of the thoughts in this post were spurred on by that conversation so just wanted to hat tip them and anyone who listened / participated in that space).

My thoughts overall were all over the place, so for ease of reading I’m going to break this post up into three parts.

1. The first part (this one!) will discuss how DWAC could bring some life back to the SPAC market (making the SPAC market great again).

2. The second part will take the DWAC / TMTG deal seriously and discuss some of the (many) weird things attached to the deal as well as some of the operational questions looming for the newco. (Editor’s note: part 2 is now live here)

3. The third part will discuss three companies that I think are clear winners from the deal: Fox, Twitter, and Virtu. (Editor’s note: part 3 is now live here)

So let’s start with the first point. It doubles as the broadest point and a point that I think has been under-covered in the wake for DWAC mania: what DWAC / TMTG means for the SPAC world.

I jokingly started saying “DWAC is making SPACs great again.” But the more I’ve thought about it, the more I think that DWAC could bring some life back into the SPAC market.

I doubt the SPAC market is ever returning to the lofty heights of mid-Feb 2021, when SPACs were IPOing and instantly trading 10% above trust and would routinely double when they announced a deal with just about any company. Since that manic high, the SPAC industry has been in the doldrums: almost every predeal SPAC has traded below trust value, and (with a few exceptions) SPAC deals have been met with a yawn that has seen them continue to trade at or below trust value. That yawn has resulted in massive redemptions for SPACs when it comes time to complete their deal, often leaving them delivering a fraction of the cash that they promised to their target company.

DWAC changes that narrative. The massive pop in DWAC shows that it’s still possible to generate a lot of buzz if the right SPAC acquires the right company / brand. I don’t think it’s any coincidence that you’ve seen name brand / buzzy sponsors like IPOD / IPOF trade up a little bit on the heels of DWAC mania.

So I think DWAC can breathe some life back into the SPAC market and shows that there’s still a chance that the right SPAC deal can grab headlines and send shares flying. I’ve said it many times on this blog, but I continue to view pre-deal SPACs trading below trust as the best risk/reward in the market. In a best case, the market loves whatever deal the SPAC announces and shares skyrocket a la DWAC. In the worst case (and probably base case), the market doesn’t love the deal announcement, or the SPAC never finds a deal, and you liquidate and basically get your money back. Heads, you win, tails, you don’t lose.

But DWAC is also a whole new type of SPAC transaction: TMTG is literally nothing but the promise of a business and a persona merging into a SPAC shell. Yes, we’ve seen early stage companies merge into SPAC shells before, but in general those were pre-revenue companies that at least had some assets (a working prototype or at least the illusion of a working prototype in Nikola’s case, some manufacturing assets, an employee base, etc.). In DWAC’s case, this is literally just a cash shell merging with Donald Trump and saying “we’re going to build the next Twitter.” As far as I can tell, there’s not really an employee base, technology, or anything. It’s just a man, some cash, and a dream.

I wonder if this deal is the start of the “brand” SPAC mergers. Say you’re a media personality with a big following, someone like Dave Portnoy (barstool sports), Joe Rogan, or Bill Simmons. The next time you have a falling out with your parent company or you’re a free agent, why go raise seed money? Why not just announce a deal with a SPAC, and tell your fans “buy this SPAC and help me fund the next stage of my career?” There’s no way any institutional investor would have wrote a check for TMTG at a >$10B valuation, but that’s the value the stock market is giving them. I would bet a lot of money that all of those influencers (Simmons, Portnoy, etc.) would find a significantly lower cost of capital / higher valuation in the equity / SPAC markets than they would in the growth VC market. And the buzz could become a little self fulfilling; think of all the free media influencers would get if they announced SPAC deals and the SPAC went bananas on announcement.

Or think about it if you’re a famous entrepreneur. Let’s say Elon Musk wants to launch a new venture. Yes, he could self fund it, and I’m sure every VC in the world would be desperate to shower him with money. But why not do it through a SPAC? Announce a merger with a SPAC and say “we’re using the money to do X,” with X being whatever industry Elon wants to revolutionize next. I guarantee the SPAC will go bonkers and imply a price multiples higher than any VC would back, it would get Elon’s new company a ton of visibility, and honestly it would be a great recruiting tool for hiring employees to staff the thing up. I’d guess the same would apply to every founder who has moved on from their original company and is looking for new funding. The more cult like and controversial the founder, the better. Honestly, Travis Kalanick (uber), Adam Neumann (wework), and Elizabeth Holmes (theranos) would have a really, really hard time funding a new venture with VC money, but I bet they would find the SPAC markets wide open to backing their next venture (yes, even Elizabeth Holmes; look at all the fans at her trial and tell me she couldn’t raise money in a SPAC).

There’s one other person that could benefit from DWAC’s boom: the Trumps. DWAC’s price is signaling one thing: there are people in the stock market who are desperate to invest in anything tangentially associated with “Trump”. I wouldn’t be surprised if we see a wave of Trump / SPAC deals in the next few months. If you’re a retail SPAC, why not see if Ivanka wants to partner on something? Hunting / Lifestyle SPAC? Call up Don Jr. The list goes on and on, but the economics for a SPAC sponsor will be pretty simple: give a Trump a big piece equity piece, announce a deal with lots of buzzwords and little details, and watch your shares soar.

Anyway, bottom line: I think DWAC could breath a little life back into the SPAC market, particularly the buzzy / more promotional SPACs, and that it could usher in a new era of celebrity / branded / buzzy SPAC deals.

That’s it for part 1. I’ll be posting part 2 (covering some thoughts on DWAC / TMTG in particular) and part 3 (some winners on the heels of the deal) in the near future. (Editor’s note: part 2 is now live here and part 3 is now live here)