Description

Low risk opportunity to make ~50% in 2 weeks. At completion of the business combination (expected 20 Nov) LGC warrants will be exchanged for a combination of cash and warrants, for a combined value of ~$1.00; the warrants are currently trading for $0.66.

I hope to get your mind off the election chaos for a moment with a rather simple write-up. Legacy Acquisition Corp. (LGC) is a spac that has been listed for quite some time. Soon after they announced a business combination with Hong-Kong based Blue Impact, the corona-crisis hit. I don’t know Blue Impact, but my guess is Covid wasn’t good for it’s ‘global marketing’ business. Given the new circumstances and the fact that the business combination was not completed, Legacy terminated the deal. After just a couple of months, Legacy announced a new business combination, this time with Onyx, owner of CarID. It might appear strange that they were able to find another company so soon after breaking-up with Blue Impact, but remember that a spac’s only purpose in life is to search and find a private company to acquire. It is very probable that they already knew Onyx and did their due diligence. Also, one of the reasons spacs are so popular today is that they are very good vehicles to play into hypes and trends. And CarID plays very well into a trend which I’ll explain in a moment.

Every now and then, when a spac announces a business combination, the management teams decide to buy out all the spac-warrants at the closing of the combination, generally to remove future overhang/dilution. Legacy’s intention is to do precisely that: Buy out all warrants for a total consideration of ~$1.00 per warrant, paid out partly in cash and partly in shares. From the (amended) warrant agreement:

“… each outstanding Buyer Public Warrant and each of the 2,912,230 outstanding Buyer Private Placement Warrants not owned by the Buyer Sponsor shall no longer be exercisable to purchase one-half of a share of Buyer Common Stock for $5.75 per half-share (…) and instead shall be converted solely into the right to receive

(i) if, at the Closing, the aggregate gross cash in the Trust Account, plus the aggregate gross proceeds received by Buyer pursuant to a potential private offering, is at least equal to $60,000,000, $0.35 in cash and 0.065 of a share of Buyer Common Stock,

(ii) if, at the Closing, the aggregate gross cash in the Trust Account, plus the aggregate gross proceeds received by Buyer pursuant to a potential private offering, is less than $60,000,000, but at least equal to $44,000,000, $0.25 in cash and 0.075 of a share of Buyer Common Stock, or

(iii) if, at the Closing, the aggregate gross cash in the Trust Account, plus the aggregate gross proceeds received by Buyer pursuant to a potential private offering, is less than $44,000,000, $0.18 in cash and 0.082 of a share of Buyer Common Stock”

It is important to note that no voting on the amendments of the warrant agreement will be required by the holders of public warrants; LGC already entered into support agreements with ~65% of outstanding public warrants to agree to the changes:

“In connection with the signing of the business combination agreement, Legacy entered into warrant holder support agreements (…) with the holders of approximately 19,500,000 (or approximately 65%) of Legacy’s warrants sold as part of the units in its initial public offering, (…) to provide for certain amendments (…) to the Warrant Agreement…  As the Warrant Amendments require the approval by holders of at least 65% of Legacy’s public warrants, the Warrant Holder Support Agreements principally assure the vote in favor of the Warrant Amendments and, therefore, Legacy expects that the Warrant Amendments will be approved.”

Also interesting to note is that as of yesterday, LGC has extended the expiration date of its previously announced tender offer (to purchase up to all of its 6,122,699 outstanding shares a price of $10.5040), and noted in the press release that as of Nov 2 “an aggregate of 666,459 Public Shares were properly tendered and not properly withdrawn”. Given that the tender offer was running for a month and has now been extended for two weeks (Nov 18), I believe the probability of many more shares to be tendered is low. This might give a direction on how much cash will remain in the trust account and so which combination of cash and new shares will be applied.

Assuming option ii), a current LGC price of $10.44 and a warrant price of $0.66, the total consideration (shares and cash) is $1.03, 56% upside to the current price of the warrants.

A question might be why the big difference between implied value and current warrant price. There are several reasons. For starters, given the low liquidity of the stock and particularly the warrants, it is very difficult to arbitrate. Also, not many people are keeping a close eye on this sector. Another reason is that there’s always a possibility that the deal might not go through for whatever reason, though I don’t think that’s very probable; firstly, CarID is a company that is thriving in the ‘Covid-environment’ (more on this below) and secondly, enough votes have already been collected to approve the deal. As such, there won’t be the need to proxy voting. From the information statement:

“As a result of the execution and delivery of the Stockholders’ Written Consents, no further action by our Stockholders is required to approve the Business Combination, and the Company is not soliciting your vote or consent to the approval of the Business Combination. The Company will not call a meeting of Stockholders for purposes of voting on these matters.”

One reason why the business combination could not be closed is if all holders of public shares tender their shares. That would lead to a breach of NYSE regulations w.r.t. number of shares outstanding and number of shareholders in the business combination. We can assume that this is now a negligible risk given that after a month only ~670k shares have been tendered.

Given the impossibility to arbitrate, an obvious risk here is that the deal is part cash, part shares and if the shares tank after receiving them, you will make less than $1. Though this is a possibility given the mechanics around spacs – particularly after the closing of a business combination – I believe it might actually result in more upside. Remember that the deal is to acquire Onyx, owner of CarID. CarID is an online (re)seller of car parts. I have not done a lot of work on CarID as this is not the main point of this thesis, however in my opinion this is a mediocre business at best; generally no differentiating product (offering), relatively easy to replicate (even if they say otherwise), commoditised end-markets with low single-digit growth, competition from Amazon et al – all reasons why this should be a low growth, low margin company trading at an unspectacular valuation.

You can guess what happened this year as a consequence of the corona-crisis. Sales went through the roof, +60% yoy. Interestingly, CarID has one very similar publicly listed peer, Carparts.com (PRTS). Since the beginning of this year, PRTS shares went into hyperspace, up 6x ytd. Furthermore, compared to PRTS, CarID appears to be a better business (though still operating in a mediocre industry). LGC and CarID don’t shy away to directly compare themselves to PRTS in their investor presentation and to mention how much better they are and how much cheaper they will list compared to PRTS:

Now remember, this is not a fantastic business and PRTS’s valuation is extreme at the moment, so you’re comparing CarID to PRTS’s top-of-the-cycle (absurd) valuation. PRTS would make a good short I believe once yoy comps start to become more difficult (there is a recent vic short write-up of PRTS).

However, as many of us are still confined at home for the time being, I’m betting that Q3 and Q4 will be good quarters as well and the comparison with 2019 will continue to be strong. So we have a very good market back-drop, a comparable peer currently trading at a sky-high valuation and we are (partly) getting shares at a much lower valuation compared to this peer. It is not inconceivable to think that CarID shares might trade up after the closing, which might lead to a bit more upside. Though this is not my base case, at least it somewhat protects the downside.

The CarID presentation:

https://www.sec.gov/Archives/edgar/data/1698113/000121390020030957/ea128137ex99-1_legacyacq.htm

The information statement:

https://www.sec.gov/Archives/edgar/data/1698113/000121390020034299/defm14c1020_legacyacqcorp.htm

Catalyst

Closing of business combination (Nov 20)