Description

Freedom Acquisition Holdings (FRH - $9.50) is the largest and highest quality SPAC raised to date.  There are 64.8mm basic shares outstanding, 52.8mm were sold for $10 per unit in the December 2006 IPO.  The balance is held by the principals with a sprinkling to 3 outside directors.  Net proceeds in escrow are $518.7mm representing better than 96% escrow coverage if no acceptable acquisition materializes.  This is in treasuries yielding 5.2%.  The principals, Martin Franklin and Nick Berggruen, will buy 5mm more units for $50mm when a transaction is closing, so there will then be 69.8mm basic shares.

For each share there is a warrant (FRH/WS, $1.66).  Plus, to put “skin in the game,” the principals bought 4.5mm warrants at $1 each, which they will forfeit to the escrow if there is no deal.  So there are 69.3mm warrants outstanding and 5mm more to be issued for value when a transaction is closing. 

The warrants are $7.50 strike, callable at $14.25.  At $1.66, they are at 37 cents (22%) below parity and about 50-60% of theoretical value, depending on assumptions.  However, there is the usual SPAC contingency that they will be worthless if there is no approved deal by June 2008 (subject to 6 month extension in certain circumstances).  So, they should jump substantially when there is a deal. 

My point here is that the warrants (and the stock for that matter) represent a uniquely favorable risk/reward, primarily because this is not your ordinary SPAC.  Consider the following:

1.         The principals.  Martin Franklin has an outstanding track record buying control of businesses and using them as a platform for creating larger companies.  After making a killing with Benson Eyecare in the 1990s, he got control of Alltrista, a floundering spinoff of junk from Ball Corp.  Franklin reinvented the company as Jarden (JAH) around its one decent business (Ball jars) and added through acquisition other niche consumer products with brand value and high market share such as Diamond Matches, Bicycle playing cards and the vestiges of Sunbeam Corp.  EBITDA has grown over ten-fold since Franklin took over and the multiple has expanded greatly.  See this business week article:  http://www.businessweek.com/magazine/content/04_48/b3910099.htm

Nicholas Berggruen is also a well-connected guy with a long career of value creation in the fund of funds industry (Alpha Management sold to Safra bank) and in private equity ventures that have created more than 500mm of equity value.  They are 50-50% partners in FRH. 

2.      Not your ordinary SPAC.  SPACs are a gimmicky financing technique that attract non-fundamental investors who try to game the terms of the offering and make arbitrage profits.  They are also subject to having their business plan blocked by someone like Baupost who has forced the liquidation of escrow for profit.  So why is FRH different?  First, Franklin needs a public currency to execute on his M.O. of acquiring companies directly from business owners without any bankers involved.  He is a unique exit alternative for certain owners, in a way like Buffett.  Second, this offering was large and well placed with many substantial investors who know Franklin, not the usual SPAC flippers.  These investors are a potential source of additional financing if the principals find a sufficiently large deal.  (Recall the SPAC that acquired Jamba Juice and did a high-quality pre-acquisition round of financing before the stock and warrants flew.)

3.      Skin in the game.  These are serious guys with sterling reputations who put $4.5mm of their own money at risk along with warrant holders and are committed to add $50 million of their own money in the business combination.  Investment bankers would lose 17mm in deferred IPO fees as well if no deal happens.  It is the largest SPAC ever.  The chances of no deal materializing are particularly small, making the warrants an exceptional opportunity.   

4.      Platform appeal.  The downfall of the typical SPAC is likely to be that they have the clock running, so they overpay for a one-off acquisition which is then destined to trade at 70% of PMV as all the shareholders now want liquidity.  The opposite is likely to happen with FRH.  Once an acquisition is announced, it is most likely to be a platform for a series of related acquisitions on the way to creating a sizeable public company.  Given the success of Jarden, I believe there will be many investors interested in backing this new concept and it could get a very forward-looking valuation. 

So in a nutshell, these warrants have a downside risk that I’m very comfortable taking and near-term upside potential in the 100-300% range.  A really unique risk reward.  Stay tuned…

Catalyst