Trouble in travel SPAC-Land or just choppy seas?

SPACs (Special Purpose Acquisition Companies) have become a useful mechanism for travel agencies to go public.

Rather than the regulatory hurdles that many brands have to navigate to secure a traditional initial public offering, SPACs offer an alternative route through the creation of front companies without any operations of their own but with the option of merging with another organization.

The combined entity (front company + brand), greater than the sum of its individual parts, then becomes a publicly traded entity. Everyone wins!

Not so simple, as we see now.

When deciding to go public, many travel companies have weighed the pros and cons of a traditional IPO versus a SPAC.

For private travel companies, a SPAC can provide a faster way to go public compared to a traditional IPO, which can make it easier to capitalize on rapid market trends.

Additionally, since SPACs aren’t subject to the same scrutiny when it comes to forward-looking statements, the model may make it easier for founders to paint a pretty picture of the future.

And while price uncertainty is a given with a traditional IPO, a SPAC offers the target company greater control over valuation. For sponsors (the creators or founders of the SPAC) and initial funders, a SPAC can be a lucrative proposition.

Sponsors can often make millions in the IPO, typically receiving 20% ​​of the shares of the post-merger target, known as the “sponsor sponsor”.

In 2020 and 2021, surging interest has led to a flood of SPACs entering the market due to challenges with traditional IPOs, an abundance of startups seeking capital and investors greedy.

The rapid growth has attracted backers ranging from well-known investors such as Thayer Ventures, Altimeter Capital and Lakestar, to celebrities such as JayZ and Martha Stewart.

Travel agencies considering a SPAC should carefully consider sponsors, investors, and the overall deal. At the positive end of the spectrum are sponsors with deep industry expertise who are committed to the long-term success of the companies they are merging with.

These SPACs include teams that continue to play a role in the development of the business after the IPO, often bringing expert members to the board and maintaining a vested interest in future performance. At the other end of the spectrum are sponsors with little industry expertise whose interest in the SPAC market is purely financial, with the IPO itself serving as the endgame.

Reality bites on the journey

In 2021, there were signs that the SPAC market was not as healthy as claimed.

In 2022, warning signs are flashing bright orange. A CNBC analysis of SPAC research data in September 2021 showed that 97% of pre-merger SPAC deals were trading below the typical target price of $10. In many cases, share prices fell further after the merger.

Reimbursement rates exploded in the first quarter of 2022, climbing over 90% in February, against only 10% the previous year. Complicating the challenges, PIPE investments, which can save a deal amid high redemptions, dry up.

Recent travel SPACs have weathered this turbulent market with varying results.

Many have been subject to falling or erratic stock prices and exorbitant redemption rates and some have abandoned their mergers altogether.

  • Grab: Ridehailing giant Grab has merged with Altimeter Growth Corp. in December 2021 and its shares fell more than 20% on its opening day. The deal included a $4 billion PIPE led by Altimeter Capital Management and shareholder buyouts were just 0.02%. However, Grab’s stock plunged after a dismal performance in 4Q21, currently trading at just over $3 per share. The turn of fortunes has prompted some investors to cry foul, and several US law firms have announced investigations into the company’s business practices.
  • HotelPlanner/Reservations.com: The two companies were planning a $688 million merger with Astrea Acquisition Corp. However, the deal was canceled in February 2022, joining a series of other canceled deals so far in 2022.
  • Inspirato: Inspirato’s public debut in February 2022 followed a merger with Thayer Ventures. With a buyback rate over 98%, the reduction in shares outstanding made the stock particularly volatile, hitting over $100 per share on the third day of trading before the fall. The stock is currently trading at over $6.50 per share. Despite the high repayment rate, the deal included a PIPE of over $100 million.
  • Vacasa: Vacasa went public through a merger with TPG Pace Solutions in December 2021, saw its stock price drop below $10 on opening day and the stock is currently trading below $8 per share . However, Vacasa CEO Matt Roberts cites many positives of the deal, indicating that the structure of the deal is key for travel companies considering a SPAC. “With our transaction, there were no guarantees, minimal promotion of sponsors and high quality shareholders in the SPAC as well as in the PIPE and the forward purchase agreement plus, with no selling shareholders, all proceeds went to the balance sheet.”
  • Sonder: Sonder merged with Gores Metropoulos II in January 2022, with a 96% reimbursement rate. The deal included PIPE investments totaling $310 million. On its opening day, Sonder’s stock price fell and is currently trading at less than $5 per share. In its first earnings call, the company reported 2021 revenue up 101% from 2020.

For travel companies still considering a SPAC as a potential IPO route over a traditional IPO, the recent market turmoil is likely to give pause and deservedly so. While SPACs offer potential benefits, a range of factors weigh in favor of a wait-and-see approach.

Expected interest rate hikes by the Federal Reserve, continued inflation, sky-high repayment rates and falling PIPE investments all increase uncertainty.

After the heady SPAC market surge of 2020, the ensuing comeback is a good reminder that going public is hard, whether through SPACs or traditional IPOs. However, while regulatory and voluntary changes are likely to alter the SPAC plan in the years to come, SPACs in one form or another will likely be part of the long-term mix.

* This article is an edited version of a report by Phocuswright, The Spectacular Rise (and Fall?) of SPACs In Travel, which is available here for subscribers.