Eric’s Top 3 SPAC Targets – Digitization

SPAC Insider contributor Eric Weidemann this week compiled his three favorite SPAC targets in the consumer digitization space. We look at why they are compelling and why each could be a fit for a blank-check merger.

Better.com

Buying a house remains one of the last major consumer transactions that has not yet been majorly disrupted by digital and ecommerce trends. While we can order just about anything with a few clicks on our phone, buying a home is still a multi-month, analog process in most cases.

Part of that is because buying a house is just necessarily more complicated and paperwork-intensive than ordering a pizza. But, it’s also because millennials are just now getting to the housing market in force, and they’re bringing their buying preferences with them.

Millennials became the largest generation in the workforce in 2016 and became the largest US generation by population overall in 2019, according to Pew Research. And, although the millennials lagged behind previous generations in homeownership, they have now caught up and represent the largest cohort of homebuyers, according to the National Association of Realtors.

SPACs have found a number of ways to buy into this trend with several examples in just the past month including LF Capital’s (NASDAQ:LFAC) announced combination with starter home-builder LandSea Homes, Social Capital II’s (NYSE:IPOB) pending merger with digital home marketplace OpenDoor and Gores Holdings IV’s just-announced mega deal with United Wholesale Mortgage (UWM).

Online mortgage startup Better.com presents another entry-point into the digitization of homebuying. It has raised $254 million to date, according to Crunchbase, and is reportedly in talks with investors to pull in another $100 million in a round that would value it at $4 billion.

While OpenDoor aims to replace real estate agents and UWM works to bring efficiency and consolidate wholesale mortgage markets, Better.com offers a streamlined mortgage process directly to the consumer.

It achieved a valuation of $720 million last year, but it just experienced a growth spurt by coasting a wave of refinancings this spring spurred by low interest rates, according to The Information. That report noted that its current fundraising efforts could serve as a pre-IPO push so a SPAC team would have to move fast.

Deliveroo

In the war for market share among food delivery apps, Deliveroo occupies an interesting space. For one, it is not currently active in the US, but instead holds significant market share in the UK and Western Europe. But, it has been courted by major US-based players as that space has seen significant consolidation of late.

Uber was reportedly courting the company in 2018 in a deal that would have valued it at just under $2 billion, but this was never consummated. Instead, Deliveroo announced in May 2019 it would sell a 16% stake in the company to Amazon for $575 million, but this deal was immediately held up by UK regulators on anti-trust grounds.

The authorities gave their full approval to this investment last month, but noted that any attempt by Amazon to increase its stake could draw renewed scrutiny. Given that the UK is Deliveroo’s primary market, this would seem to nix the startup’s most seamless exit in a full sale to Amazon.

Meanwhile, Uber acquired food delivery app Postmates for $2.6 billion in July to add volume to Uber Eats, and European food delivery giant Just Eats acquired US-based Grubhub for $7.3 billion in June.

With major players still digesting their last deals and many approaching market share thresholds that could perturb regulators, Deliveroo may see the public markets as its best path forward.

The delays from Amazon’s funding reportedly put financial strain on Deliveroo as it has maintained the high burn rate typical of a unicorn, and a SPAC combination could strike several of its nagging birds with one stone. In addition to providing upfront cash, a US listing would provide a liquidity event for the eight-year-old company’s venture investors as well as Amazon, which could potentially give the company some added geographical expansion flexibility by reducing its stake through the public markets.

The pandemic has leveled a hit against food delivery apps that is not expected to relent just yet, with overall sales expected to contract by 4.85%, according to a study by Technavio. It predicts this market will not normalize until 3Q21, but will present strong value in the recovery, growing at a CAGR of 7% across 2020-2024.

Udemy

Another digitization trend being hastened by the pandemic is that of remote learning.

In many ways, COVID-19 was the perfect storm for higher education institutions forced to weigh the tradeoffs of student health and shuttering campus, knowing they would then have to deal with sunk costs from decades of pouring money into on-campus amenities. Universities faced the risk of litigation with either path.

And, as with remote working, now that resources have been allocated towards hybrid options of both remote and in-person learning in higher-ed and public schools, students are beginning to ask why this flexibility wasn’t available in the first place.

Many in academia now expect a permanent move towards instruction that is more personalized and customizable. In other words, some of the economy’s oldest and most analog institutions will be pressured to provide features commonly associated with digital platforms. And, in the internet age, if the legacy institutions fail to deliver on those options, internet-based disruptors will be there to fill in the gap.

Online learning platform Udemy reported that enrollment in its courses spiked 425% at the beginning of the US lockdowns with business and government customers increasing their usage 80% and Udemy instructors created 55% more new courses.

It has raised $223 million to date, according to Crunchbase, most recently receiving a $2 billion valuation in a $50 million Series E in a February. Udemy was reportedly already back at the well this summer, hoping to seize on its surge in demand and run an additional round that would achieve a valuation of about $3 billion.

As with Better.com and Deliveroo, a wide range of SPACs could potentially target Udemy. Twenty-four SPACs currently searching for a target name consumer technology, digitization or TMT as their areas of focus in addition to many teams with a broad focus that could see value in the space.

However, Udemy could be a particularly good fit for one (NYSE:AONE), which has prioritized targets that democratize open-source knowledge and Software Acquisition II (NASDAQ:SAII), whose team recently agreed to combine Software I (NASDAQ:SAQN) with documentary and educational media streaming service CuriosityStream.