Description

Description

Silver Crest Acquisition Corp (SLCR) is a special purpose acquisition company (SPAC) that on August 13, 2021 announced a merger with Tims China, which holds the exclusive master franchise rights for Tim Hortons in China and currently operates 410 stores (well behind Starbucks’ 5,500) with ambitions to grow to 2,750 by 2026 (48% CAGR).  While the stock itself is interesting, we believe the real opportunity lies in SLCR warrants (SLCRW) which at 40 cents trade with an implied volatility of under 5% (underlying stock SLCR at $9.83, strike at $11.50, expiration 3/31/28).  If the warrants traded at the peer average of 12% implied vol, the price would be $1.15 for nearly 3X upside.  If the underlying stock price rose to $12, the warrants would trade at $2.60 with a 12% implied vol for 6.5X upside.  We believe that the risk/reward here is extremely attractive.

SLCRW Black Scholes Pricing Model

Source: Bloomberg

On average, the warrant implied volatility of US-listed SPACs with an announced deal is currently around 12%. If we apply this number in the pricing model, SLCRW would trade at $1.15 per share, representing 2.9X upside.  We’d also note that in general, SPAC warrants have gotten cheap, and a more typical implied volatility for an announced deal is at least 20%, which would equate to a $1.90 price for SLCRW, or 4.8X upside.

What’s even more interesting is that SLCRW trades at or below a number of warrants attached to SPACs that have terminated their mergers in the last 4 months, as shown in the table below.

Source: Bloomberg.

Among the SPACs with announced deals, arguably the best comp is Danny Meyer’s USHG Acquisition Corp (HUGS) which in November 2021 announced a potential investment in Panera’s upcoming IPO.  HUGS/WS trades at $1.17 with an implied vol of 9%.  

Source: Bloomberg.

Another reference point is Black Rifle Coffee Company (BRCC) which was officially listed via a merger with SPAC SilverBox Engaged Merger Corp on February 10, 2022.  The warrants now trade at about $4.10 with the underlying stock well in the money ($19.77 vs $11.50 strike)

Source: Bloomberg.

Clearly this latter case is a home run scenario, but it would not be a stretch to see SLCRW trade above $1.00 on deal completion.  

After the DeSPAC, the warrant price in theory should be driven by the target company’s fundamentals rather than the SPAC technical. Tims China and BRCC share a lot of similarities, e.g.

1)      Core business (coffee)

2)      Deal size (BRCC $1.7 billion and Tims China $1.4 billion)

3)      Projected revenue in 2023 (BRCC $430 million vs Tims China $440 million)

4)      High growth rate (BRCC revenue CAGR from 2019-2021 was 67% while Tims China’s was 274%).   BRCC’s projected revenue CAGR from 2021-2023 is 37% while Tims China’s is 103%.

BRCC’s market cap has more than doubled to $3.9 billion and again, BRCC’s warrants trade at $4.10 per share. Tims China has similar, if not better, business fundamentals (more detail later) than BRCC.

BRCC investor presentation link https://d1io3yog0oux5.cloudfront.net/_b544beab142f579cc31d45fdbac20d18/blackriflecoffee/db/2216/20694/pdf/Project+Operator+Analyst+Day+Presentation_%281.18.22%29.pdf]

Tims China presentation link https://d1io3yog0oux5.cloudfront.net/_7f87f56d5338706ebdd962a5c96cc649/slcr/db/1911/17527/pdf/Project+Maple+III+MP+2021.10.10.pdf]

DeSPAC Overhang Is Gone

SLCR first announced the deal to merge with Tims China in August 2021. On March 9, 2022, the two sides announced amended deal terms and a financing arrangement that significantly reduces the uncertainty around shareholder’ approval, highlights are as follows:

1. Combined financing package ($244.5 million in total) that would cover Tims China’s five year growth plan. The package includes $50 million convertible notes (announced late last year), $94.5 million PIPE and a $100 million equity facility. This does not include any unredeemed cash from the SLCR trust account. Currently SLCR has over $345 million cash in its trust account, and assuming SLCR has 80% redemption in the shareholder vote, there will be $69 million left which will be added to the financing package.

2. The minimum cash requirement for closing the deal is removed. This makes sense given the size of the financing package described in 1).

3. Slashing the deal valuation by 17% to $1.4 billion.

4. Extend the Termination Date of the merger agreement to June 30, 2022 to leave ample time for SEC to review the revised deal terms.

With these new amendments, the proposed merger is almost guaranteed to close successfully even if SLCR suffers a very high redemption rate.  In other words, there is no longer any significant uncertainty related to shareholder approval. 

https://www.silvercrestacq.com/ir-library/sec-filings/content/0001104659-22-031790/0001104659-22-031790.pdf]

Tims China is a Very Solid Target

Unlike the majority of SPAC deals, SLCR’s merger target Tims China is fundamentally very solid for the following reasons.

1)      Well recognized brand. Tim Hortons is one of the brands owned and managed by QSR. Both QSR and Tim Hortons are world renowned brands.

2)      Biggest addressable market in the world. Tims China’s targeted market is China, which is the largest and fastest growing coffee market in the world.  Per Deloitte & Touche, consumption of coffee per capita per year is just 9 cups in Mainland China vs 280 in Japan, 330 in the US and 370 in South Korea.  

3)      Well tested and experienced management team. About half of the senior management team is from Burger King China, another joint venture between QSR and Cartesian. The store count of Burger King China accomplished 19x growth between 2012 and 2020.

4)      Best in class digital capabilities. Tims China has one of the best digital platforms that covers functions such as customer acquisition, engagement, loyalty program, mobile ordering and supply chain. In addition, Tencent is one of its investors and will direct significant volume from Wechat and other Tencent platforms to Tims China.

The Deal Is Supported by All Star Shareholders

Tims China is essentially a joint venture between Restaurant Brands International (QSR) and Cartesian Capital Group and owns the exclusive master franchise right of Tim Hortons in China (including Hong Kong and Macau).

QSR is one of the largest quick service restaurant chains in the world. Besides its stellar operating performance, it also gained its reputation as a value play of 3G Capital, the world famous private equity firm. Pershing Square is also a long time investor in the company.

Cartesian is a New York based private equity firm with over $3 billion in AUM. It has invested in over 60 companies in 40 different countries. Tims China is not the first time Cartesian and QSR worked together. They have teamed up together before to found and successfully grow a similar joint venture in China for another QSR brand Burger King which now has over 1,300 stores in more than 150 cities in China.

Silver Crest Capital is the sponsor for the SPAC. Its Chairman Leon Meng is also the founder and CEO of Ascendant Capital Partners, a China focused private equity firm. Leon is a well respected investment banker turned investor. His fund has adopted a hand on advisory approach to enhance value of its portfolio companies. Tims China will certainly benefit from this. Prior to founding Ascendant, Leon was Head of D.E Shaw Asia Office and before that Co Head of investment banking of JP Morgan Hong Kong.

Other investors in the deal worth mentioning are

1. Sequoia Capital China, the largest and the most successful VC fund in China

2. Tencent, the avid tech giant in China that is good at empowering its portfolio companies with both online/offline volume and cross selling opportunities

3. Shaolin Capital, a Miami based hedge fund founded and managed by David Puritz, former Portfolio Manager of Blue Mountain’s convertible investments

Valuation

Revenue at Tims China is expected to compound from 2021 to 2026 at a 63% CAGR, and EBITDA margins are expected to grow from 5.5% in 2021 to 19.2% in 2026 for a EBITDA CAGR of 109%.  Per the revised deal terms announced March 9, 2022, the implied EV is $1.4B is 3.2X CY23 revenue of $440M.  BRCC has a $3.7B EV and is targeting CY23 revenue of $430M for a multiple of 8.6X.  BRCC is focused on the far more mature US coffee market and its CY21-CY23E revenue CAGR is 37% vs Tims China’s 103%.  Another US coffee company, Dutch Bros Inc (BROS) that listed via the more traditional IPO route on September 14, 2021, has a EV of $10.6B and $950M in CY23E revenue for a multiple of 11.2X.  Revenue is expected to grow at a CAGR of 38% from CY21 to CY23, similar to BRCC.  

Key Risks

1)      Political risk in China. This risk exists but is fairly limited in the case of Tims China. Tims China is not in the business sectors targeted by the government crackdown, such as high tech and education. The coffee market is highly fragmented in China with little antitrust concerns. In terms of data security, Tims China will set up a separate company to safeguard data safety in compliance of China’s new data security regulation.

2)      Recession. It is highly likely that the global economy will enter into a recession due to rising interest rates, rising inflation and geopolitical conflicts. China is not immune from this recessionary pressure. However, China is in a different cycle from the US, is still in interest rate cutting mode with a GDP growth target of 5.5%. In other words, China is currently in a better position than the US as China still has tools, e.g. cutting interest rates to pump money into the economy. Tims China should be in a good position to benefit from this.

Catalyst

• Deal completion by June 30, 2022.  The warrants are trading as if this deal won't go through or the price will correct upon deal completion.  We think the deal is a near certainty, and the valuation discount on the underlying stock is so compelling that even if the redemption rate is high, the stock can trade well north of par post deal.

• China has been shifting its stance as the economy hits a soft patch amidst covid lockdowns, and the China State Council is apparently easing its regulatory crackdown on technology companies, providing new support for property developers and boosting the broader economy - any further moves by the government to stimulate the economy could provide support for Chinese consumer stocks.