Description

Investment Thesis:

• My pitch here is very simple - I think the warrants for Churchill Capital II, which is going to consist of the business Skillsoft, have a very attractive asymmetric reward. The SPAC deal has not yet closed, so CCX is still trading close to trust value at $10 per share. The warrants, currently trading for $1.25, will be in the money should the stock get to $12.75 ($11.50 strike + price today), not a big lift. For the sake of argument, the upside to this trade would be a warrant price of  $6.50, since the warrants are callable when the stock trades over $18 for about 30 trading days ($18 - 11.50), so that’s a potential return of 5.2x, and the warrants are 5 years, so you have plenty of time to wait. 

• Skillsoft (et al) is a good business. It has high recurring revenue, corporate B2B clients, good EBIT margins, high operating leverage, high EBITDA to FCF conversion. 

• In-class instruction was down, but the company was able to get upside from virtual teachings. 

• I’m playing this as part of a larger basket of SPAC warrants I believe are mispriced. I don’t have to be the best analyst on all of them. But I’m looking for key signposts where I can earn good risk adjusted returns and I can see the potential for 5x here

Brief Business Overview

• Skillsoft focuses on corporate eLearning; currently serving 70% Fortune 100 companies, with overall almost 100% of its revenue from sticky corporate customers. 

Way to play a SPAC warrant trade on a post-bankrupt equity

• Coming out of bankruptcy the company was able to shed approximately $2 billion of sponsor debt - leaving it with . The company took a hit from COVID, and used the crisis as an opportunity to right-size their balance sheet. 

Summary Financials

• Since announcing the deal in 2020, the company has revised their est. for last year to Recurring revenue of $310-315M, and adjusted EBITDA of $158-$163 for 2020

• You can make your haircuts to management estimates, but the valuation here is not demanding. It is trading at about 2.2x 2022 revenue, 7.6 adj. EBITDA for 22, and 5.6x equity to levered FCF two years out. These are big discounts to other e-learning and corporate learning companies which trade at higher multiples. Again, this is a trade. 

Upcoming Catalysts

• The deal is expected to close sometime before the end of Q2 of this year. It has been delayed a few months before, but I’m not particularly concerned there is a risk this doesn’t happen. 

• After closing, given the size of the business I fully expect analysts to pick up research coverage, and eventually turn bullish on the name. I believe this stock is under the radar because the deal hasn’t closed and the company does not operate in some sexy, or over-hyped area where we are seeing bubbles in the markets. 

Catalyst

Deal CLose