Spread & Containment
SPAC Boom Upends Wall Street League Tables, Sparks Best Quarter For Dealmaking Since 1980
SPAC Boom Upends Wall Street League Tables, Sparks Best Quarter For Dealmaking Since 1980
Just as an army of sell-side capital markets analysts are raising their year-end estimates for SPX (now north of 4k) as we head into April, historically
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Just as an army of sell-side capital markets analysts are raising their year-end estimates for SPX (now north of 4k) as we head into April, historically the most bullish month, investment banks like Goldman are already starting to revisit their projections for the SPAC boom dealmaking frenzy (which has seen staggering sums raised on little more than projections in record time).
Thanks to the boom (which has emiserated homebound IBD analysts at Goldman while chagrining the SEC (which is reportedly grilling banks about their deal-marketing tactics while warning individual investors to tread carefully) global dealmaking activity had its strongest start to a year in 4 decades.
According to data from Refinitiv, deals worth $1.3 trillion were struck during the first three months of 2021 through March 30. That's the highest number, by Refinitiv's tally, since at least 1980 - topping even the heady levels seen during the dotcom boom. As valuations on everything from stocks to trading cards and NFTs have skyrocketed over the last year, dealmaking has seen a comparable rebound since the early days of March 2020, when volume suddenly dropped off a cliff, according to the FT.
Source: FT
The US, largely seen as the epicenter of the SPAC boom, though the trend has exploded globally as firms search across industries and geographical zones for strong prospects, generated the largest share of dealmaking volume, which increased 160% in Q12021 vs. Q12020.
Source: FT
SPAC's record 2020 marked a stunning 5x increase from 2019's prior record high, which itself was up 44% from 2018. But in addition to the rising numbers, 2019 and 2020 were the years when SPACs first drew media attention, then started their ascent in the financial press.
In Goldman's view, there are three reasons why 2020 has been the year of the SPAC:
- SPAC sponsors shifted their focus from Value to Growth both in terms of completed acquisitions and new capital raising. Between 2010 and 2019, 53% of SPAC acquisitions were in the Industrials, Financials and Energy sectors while 33% were in Info Tech and Health Care. In contrast, 68% of the de-SPACs completed in 2020 were in the fast-growing Info Tech, Consumer Discretionary and Health Care (mostly in BioPharma) sectors while just 24% were in Industrials, Financials and Energy. Investors are firmly in a growth mindset and SPAC sponsors targeting purchases in growth industries have had success raising capital. Fully 53% of 2020 SPAC IPOs are seeking mergers in Tech, Consumer Discretionary, or Health Care.
- The acceleration in retail trading activity has increased investor appetite for non-traditional and early-stage businesses. SPACs offer an alternative route to the public markets for firms, including those that are early-stage or in businesses that lack many publically-traded comparables such as green tech, sports betting or cannabis. Lockdowns associated with the pandemic have prompted a surge in retail trading and demand for highly-volatile shares in firms with perceived hyper-growth prospects. Anecdotal evidence of heavy retail trading coincided with the de-SPAC purchases of electric vehicle and sports betting firms (e.g. FSR, DKNG).
- SPACs have low opportunity cost for investors when policy rates are near zero. Cash yields next to nothing and under the Fed’s average inflation targeting (AIT) regime, a hike is unlikely during the next three years (the Fed will likely be on hold until 2024). Investors in a SPAC receive a de minimis yield while waiting for the sponsor to identify a potential target and then have a put option to redeem their shares if they do not like the potential acquisition. Of course, there is an opportunity cost of not owning equities given the 16% YTD return of the S&P 500 and our forecast of a 16% return next year. But SPACs can be a cash substitute when fed funds are at the lower bound. The focus on growth industries also means that SPACs are long duration assets that benefit from low long-term interest rates.
As Goldman's Kostin predicted last year, SPAC dealmaking activity has accelerated, with SPACs raised more than $100 billion in the first three months of the year, equivalent to more than 2/3rds of money raised in all US listings, according to Bloomberg.
"The rebound from a year ago is more dramatic than anything we’ve ever seen in M&A recovery - full stop," said Cary Kochman, co-head of global mergers and acquisitions at Citi. "It is just unprecedented."
With Treasury yields continuing their steady creep higher, with the 2% threshold - the level at which JPM and others believe the equity market might stand up and take notice - looming on the horizon, investment banks have also just wrapped up what's believed to have been their most lucrative quarter in 20 years, as they generated a total $37 billion in fees. Of course, the collapse of Greensill and Archegos is expected to represent a major hit to the bottom lines of a couple of banks. But there's plenty of padding to absorb the hits.
And as SPACs target bigger and bigger targets (with the help of institutional capital), the boom is expected to continue, at least in the near term.
In February, Tesla rival Lucid Motors said it would go public in a $24 billion merger with one of the blank-check companies (as SPACs are often called) controlled by Michael Klein, a veteran dealmaker who has become a major player in the SPAC boom. This month online broker eToro announced a $10 billion transaction to go public with a SPAC set up by banking tycoon Betsy Cohen. Another banker claimed this is the biggest banks have ever been. "It’s the busiest I’ve ever known it," said Farah O’Brien, a private equity and M&A partner at Latham & Watkins. "There’s a ton of capital that is desperately trying to find a home. I wouldn’t say there’s caution in the market at all."
SPACs were once considered kind of shady on Wall Street, meaning that the top-tier banks largely avoided the business until recently. Because of this, many banks have to quickly build out their expertise in a previously niche market.
With this in mind, perhaps it's no surprise that the SPAC boom has upended Wall Street's dealmaking league tables. Cantor Fitzgerald LP, long one of the top SPAC underwriters, has been the biggest beneficiary of the boom and ended the first quarter as the No. 10 adviser on IPOs globally. The boutique, which hasn’t seen a ranking this high for any full year in the past decade, took home an astounding 99% of this year’s deal credit from blank-check work, according to data compiled by Bloomberg show. Without the SPAC deals, Cantor would be 155 places lower, according to Bloomberg.
On the flip side, Switzerland’s UBS and four Asian investment banks (China International Capital Corp., Citic Securities Co., China Securities Co. and Sinolink Securities) all dropped out of the global top 10.
After raising money from investors, SPACs have 2 years to find and finish a deal to take a private company public in a process known as the reverse-IPO. If they can't close a deal in time, the money must be given back. Some have pointed out that this scramble for expeditious deals has left few quality pickings for vehicles just coming to market.
As investors around the world try to parse the risks associated with this latest boom (according to some, it has been seemingly designed to enrich big-name fund sponsors while saddling retail investors with big losses), the FT reminded readers of the true roots of this controversial new trend: "the dealmaking revival is among the consequences of a Federal Reserve stimulus package in April, which included $2.3 trillion in loans and support for the $1.2 trillion junk bond market." That, coupled with the Fed's unrelenting balance sheet expansion and interest rates expected to remain on hold through 2023, have generated massive profits for the wealthy and institutional investors, who are now taking profits at the expense of the reinvigorated retail trading army.
Spread & Containment
Oregon Schools Eliminate Proficiency Requirements In Math & English For Students
Oregon Schools Eliminate Proficiency Requirements In Math & English For Students
Authored by Jonathan Turley,
Two years ago, we discussed how…
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Two years ago, we discussed how Oregon schools solved declining scores by eliminating their requirements that graduates actually attain levels of proficiency in basic subjects like math and English.
In 2021, the changes were portrayed as just a temporary measure due to the pandemic.
However, the state just extended it five more years. It declared that such proficiency tests are unfair to students of color.
So, rather than give these students the level of education needed to excel in the modern workplace, schools will now process them out with degrees and call it social progress.
Public schools across the country continue to fail inner city children and appear to be be giving up on reversing this trend.
In Baltimore, a survey found that forty percent of schools did not have a single student proficient in math. Rather than reverse that trend, the schools are just waiving the tests and graduating the students.
What is so frustrating is reading about failing school systems waiving proficiency and claiming that it is better for minority students.
American education faces the perfect storm.
Despite record expenditures on public schools, we are still effectively abandoning students, particularly minority students, in teaching the basic subjects needed to succeed in life.
We will then graduate the students by removing testing barriers for graduation. Then some may go to colleges and universities that have eliminated standardized testing for admission. At every stage in their education, they have been pushed through by educators without objective proof that they are minimally educated. That certainly guarantees high graduation rates or improved diversity admissions. However, these students are still left at a sub-proficient state as they enter an increasingly competitive job market and economy. Any failures will come down the road when they will be asked to write, read, or add by someone who is looking for actual work product. They will then be outside of the educational system and any failures will not be attributed to public educators.
If we truly care for these students, we cannot rig the system to just kick them down the road toward failure. It is like declaring patients healthy by just looking at them and sending them on their way. We have the ability to measure proficiency and we have the moral obligation to face our own failures in helping these kids achieve it.
Oregon board members said proficiency is now unnecessary and harmed minority students since higher rates of students of color failed to reach these levels, The Oregonian reported. The question is how the board is defining what is necessary. If any of these students hope to escape cycles of poverty, they have to be able to do better than the status quo. These boards are condemning them to the same endless cycle.
These proficiency standards were developed by academics to establish what they viewed as the education needed to excel in our society. Now, the boards are simply downgraded to meet their own lack of academic performance. State Sen. Michael Dembrow told the Oregon Capital Chronicle insists “I think there’s an assumption here that teachers are just graduating students, who don’t have the necessary competencies and I don’t know what the justification is for that.”
The point is that these students do not need to meet some low level of competence in order to be able to aspire to more than menial or low-level positions.
The move in Oregon occurs at the same time as a national effort to eliminate standardized testing and scores on every level of our educational system. For example, the University of California system joined the “test-blind” movement and said it would end the use of the SAT and ACT in its admissions decisions. The move followed a decision of California voters not to lift the long ban on affirmative action in education under state law. Many have decried standardized testing as vehicles for white supremacy.
University of California President Janet Napolitano sought to eliminate standardized testing by assembling the Standardized Testing Task Force in 2019. Many people expected the task force to recommend the cessation of standardized testing. However, the Task Force surprised many (most notably Napolitano herself) by releasing a final report that concluded that standardized testing was not just reliable, but that “at UC, test scores are currently better predictors of first-year GPA than high school grade point average (HSGPA), and about as good at predicting first-year retention, [University] GPA, and graduation.” It even found that “test scores are predictive for all demographic groups and disciplines … In fact, test scores are better predictors of success for students who are Underrepresented Minority Students (URMs), who are first generation, or whose families are low-income.”
Despite those conclusions, Napolitano simply announced a cessation of the use of such scores in admissions.
I previously wrote how some teachers and administrators are rapidly killing public education.
Many of us have advocated for public education for decades. I sent my children to public schools, and I still hope we can turn this around without wholesale voucher systems. Yet teachers and boards are killing the institution of public education by treating children and parents more like captives than consumers.
As public schools continue to produce abysmal scores, particularly for minority students, board and union officials have called for lowering or suspending proficiency standards or declared meritocracy to be a form of “white supremacy.” Gifted and talented programs are being eliminated in the name of “equity.”
Once parents have a choice, these teachers lose a virtual monopoly over many families, and these districts could lose billions in states like Florida.
This is precisely why school systems like the Seattle public schools are facing budget shortfalls as families vote with their feet. These families want a return to the educational mission that once defined our schools.
The lowering of these standards reflect a lack of proficiency in public education. Rather than meet the standard previously set for success in society, Oregon will now codify pandemic measures to allow students to graduate with lower levels of math, English, and science knowledge. The people of Oregon are clearly not going to stop this trend and they are entitled to set school policy. Just don’t claim it is good for these students.
International
Revenge travel is coming to an end, says industry CEO — a recession will replace it
The CEO of Intercontinental Hotels Group says that the world has moved beyond revenge travel–even China.
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Related: Delta adds a route U.S. tourists have been begging for
Last year, travel insurance company Allianz Partners projected that travel to Europe would soar 600% over 2021. “The pandemic made people realize you can't take travel for granted and many Americans are eager to visit Europe this summer,” Daniel Durazo, director of external communications at Allianz Partners USA, said in an April 2022 statement.'Last stage of pent-up demand'
The Summer of '23 was also pretty strong, according to a survey by the Federal Reserve Bank of New York, which found that almost a third, or 32.8%, of all U.S. households took a vacation between May and August, up from 28.5% in August 2022 and a record high in data going back to 2015. However, it looks like the revenge travel upswing is coming to an end. The Federal Reserve's Beige Book said in September that consumer spending on tourism was stronger than expected, "surging during what most contacts considered the last stage of pent-up demand for leisure travel from the pandemic era." Elie Maalouf also thinks that the revenge travel dish has gone cold. The CEO of Intercontinental Hotels Group (IHG) - Get Free Report said in an interview with CNBC that he believes pent-up demand is over. "People started traveling really by the end of 2020 as restrictions started to lift,” he said. “So we’re really past revenge travel — even in China.” Intercontinental Hotel Group operates hotels under several brand names, including Regent, Crowne Plaza, Holiday Inn Club Vacations, and Candlewood Suites. The company’s latest quarterly update showed travel demand remained strong during the close of the summer travel season. “We think we’re in a sustainable place,” Maalouf said. “Our bookings for groups and meetings going into 2024 and beyond are the strongest we’ve seen in a very long time.”Average room rates increase
IHG’s third quarter trading update showed the company’s revenue per available room — or “revpar” — was up 10.5% compared to third quarter 2022, and nearly 13% higher compared with the third quarter of 2019, which was before the pandemic. This is despite a 3% drop in revpar, compared to 2019, in large cities in Greater China, which are more dependent on international travelers. Maalouf said that lack of “airlift,” or flight capacity, into China is below 50% of prepandemic levels, which is affecting travel recovery in cities like Beijing, Shanghai, Guangzhou and Shenzhen. “But if you look at the country as a whole, travel — which is mostly domestic in China — it’s recovered well above 2019,” he said, adding that more than 80% of IHG’s business in China is in mid-sized to smaller cities. Occupancy levels in the third quarter at IHG hotels was 72% — just 1% shy of pre-pandemic levels, according to the quarterly update. But average room rates have jumped well above 2019 levels — up nearly 6% in Greater China, 15% in the Americas, and 24% in Europe, Middle East, and Africa (EMEA) and Asia. But rising rates are barely keeping up with inflation, said Maalouf. “Room rates have not really exceeded inflation in any of our markets,” he said. “I think people’s willingness to travel is exhibited by the fact they’re willing to pay.” Get investment guidance from trusted portfolio managers without the management fees. Sign up for Action Alerts PLUS now. fed federal reserve lockdown pandemic covid-19 recovery consumer spending africa europe chinaSpread & Containment
How Novo Nordisk’s Rybelsus went from pandemic washout to blockbuster amid the GLP-1 boom
Novo Nordisk’s Rybelsus pill was long expected to be a hit out of the gate.
The Danish drugmaker cashed in a priority review voucher in early 2019 for…
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Novo Nordisk’s Rybelsus pill was long expected to be a hit out of the gate.
The Danish drugmaker cashed in a priority review voucher in early 2019 for what would be the first oral GLP-1, primed by positive studies showing reduced blood sugar in patients with type 2 diabetes. Analysts and company insiders anticipated blockbuster status for the oral version of semaglutide, with peak sales expected to hit up to $5 billion — and potentially follow the trajectory of its sibling injectable Ozempic, which reached $1.6 billion in sales in less than two years.
“We have another monumental event with the world’s first oral GLP-1,” commercial strategy chief Camilla Sylvest said in November 2019. “This is not just a compressed pill. This is a pill that has a clinical profile to compete and [that has] the oral administration to compete. It’s an unbelievable opportunity for us.”
But then health officials declared the Covid-19 pandemic in March 2020, and everything changed. Novo’s sales reps couldn’t do in-person meetings. No commercial advertising shoots were allowed. Patients scrapped going to the doctor for elective purposes. As Novo’s launch plans crumbled, so did the promise of Rybelsus.
Three and a half years later, amid a frenzy of all things GLP-1, Rybelsus has come back to life — albeit slowly, and with skepticism over its efficacy for weight loss compared to injectables.
There’s fresh enthusiasm for other oral GLP-1s in development, and Ozempic, approved for type 2 diabetes, is now a household name. That’s in part because people have been taking Ozempic — and more recently, Rybelsus — off-label for weight loss amid shortages of Wegovy, the injectable version of semaglutide approved for obesity. But there are also concerns about tolerability in a market that’s increasingly crowded.
The pandemic disruptor
Back in late 2019 and early 2020, everything was going as planned for Rybelsus. The FDA approved the pill in 3 mg, 7 mg and 14 mg doses. Novo had expanded its manufacturing facilities in North Carolina, and it was working on plans for a broad direct-to-consumer ad campaign, including mainstream TV commercials.
The company was so confident that it priced Rybelsus on par with Ozempic at about $770 per month, to the surprise of some analysts at the time. The commercial strategy was to market its GLP-1 drugs side-by-side, positioning Ozempic as the first and preferred injectable for type 2 diabetes and Rybelsus as the first and preferred oral medication, Sylvest and then-chief scientific officer Mads Krogsgaard Thomsen said in an investor call, according to AlphaSense transcripts.
Mads Krogsgaard Thomsen“With our two recent GLP-1 products, Ozempic and Rybelsus, we want to redefine type 2 diabetes treatment,” Novo wrote in its 2019 annual report. “We are at the forefront of innovation in the GLP-1 class and orally administered delivery devices and are pursuing several therapeutic opportunities with semaglutide.”
But then came Covid, and Novo had to switch gears from the splashy DTC ad campaign to animated work with an upbeat soundtrack that eventually debuted in the autumn of 2020. For the first six months of that year, Rybelsus brought in just $92 million.
By 2022, however, it rang up sales of $1.7 billion, more than twice its 2021 total, likely fueled by the demand for semaglutide sibling brand Wegovy, which was approved to treat obesity in mid-2021. Novo is reporting Q3 sales next week, with Rybelsus likely on track to top $2 billion in sales this year. Novo declined comment for this story, citing its quiet period ahead of its Q3 earnings release.
Off-label for weight loss
As Wegovy took off and supplies waned, clinicians used their off-label prescribing power to redirect desperate obesity and overweight patients to Ozempic.
Some physicians turned to Rybelsus. Tracking off-label prescribing is difficult, but data show that there were 157,500 Medicaid prescriptions for Rybelsus for weight loss in 2022. In the same year, Wegovy had 30,100 Medicaid prescriptions for weight loss, while Eli Lilly’s type 2 diabetes treatment Mounjaro had 30,700, according to a KFF analysis in August. Ozempic was the lead seller among Medicaid populations, at more than 978,000 prescriptions.
That said, Rybelsus does not seem to be as effective at weight loss as the other approved GLP-1s.
Diana ThiaraDiana Thiara, medical director of the University of California, San Francisco’s weight management program, calls the new GLP-1 meds in general “amazing,” citing an example of a patient taken off a lung transplant list after losing weight and improving lung function. But she also acknowledges the social trends driving low-dose oral uptake by “people so desperate to lose weight.”
“I have one patient who can’t even use our MyChart electronic health communications, but tells me about what Reddit says,” she said. “Reddit and TikTok people say stuff, but that’s not really what the evidence shows right now.”
Rybelsus’ current highest dose is equivalent to Ozempic’s lowest dose, though some experts say the lower doses can still help patients lose weight.
“The lower doses, based on my experience, are effective for weight loss,” said Kristin Baier, clinical director at Calibrate, a telehealth weight loss startup founded in 2020. “When used along with lifestyle changes, we have seen patients achieve up to 20% weight loss on the lower doses of oral semaglutide.”
The future of oral GLP-1 weight loss drugs
Novo is currently testing higher doses at 25 mg and 50 mg doses of Rybelsus in the Pioneer Plus (with type 2 patients) and Oasis (with people with overweight or obesity) trials against the 14 mg currently approved by the FDA. The results, published this spring and summer, show up to 15% bodyweight loss, which is on par with Ozempic and Wegovy.
Clinicians are also encouraged by differentiated competing oral candidates, like Pfizer’s danuglipron and Lilly’s orforglipron, both in Phase II trials. The candidates are non-peptide GLP-1s and can be taken with food. Rybelsus is directed to be taken on an empty stomach with small sips of water and a wait time of 30 minutes before other medications or food.
“With Novo Nordisk expected to file for the higher dose approval, I believe there’s going to be an uptake that hopefully would help with some of the manufacturing supply issues we see [with injectable semaglutides],” said Weight Watchers medical director Spencer Nadolsky. “It will be nice to have the larger dose option when it’s available.”
Yet, it’s not all upside on the weight loss front for Rybelsus.
“It’s equivalent to a pretty low dose of Ozempic. So in terms of weight loss, we don’t see much weight loss in terms of the average person at that dose of Rybelsus,” Thiara said.
She also has some concerns about the higher doses and gastrointestinal issues and tolerability.
“People just seem to have more side effects with oral Rybelsus than they do with the equivalent Ozempic dose,” Thiara said, adding that she does think it will be approved. “But head-to-head right now, with no supply chain issues and if 50 milligrams was on the market and I had a patient who was open to anything injectable or oral, I would probably skew towards injectable.”
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