Shift Technologies Inc. Chief Executive George Arison didn’t even know what a SPAC was until last year. Now, his San Francisco-based online marketplace for used cars is hopping aboard the blank-check train on its way to becoming public.
Special-purpose acquisition companies, also known as SPACs or blank-check companies, have been around for decades, but have made a big comeback this year amid the pandemic, thanks to low interest rates and stock-market volatility. Sports-betting operator DraftKings Inc. DKNG, -4.10%, electric-vehicle maker Nikola Corp. NKLA, -3.81%, electric-truck powertrain maker Hyliion Holdings Corp. HYLN, +6.02% and space-flight company Virgin Galactic Holdings Inc. SPCE, +1.00% are among the companies that have gone public via the SPAC route.
SPACs raise money in an initial public offering, then look to buy businesses, usually within a couple of years. When a SPAC finds a business and successfully negotiates the transaction, the two merge and the acquired business becomes publicly traded. Shift is merging with Insurance Acquisition Corp. INSU, -1.89%, and is expected to be listed on the Nasdaq under a new ticker symbol, SFT, soon after the deal is approved by Insurance Acquisition shareholders in a vote Oct. 13. In other such recent deals, shares of the new company traded the day after the merger was approved.
“Public markets were hungry for a business like us,” Arison told MarketWatch in one of a series of interviews as he navigated the process. “Post-COVID in particular, e-commerce was among the winners. A SPAC would allow us to go public sooner.”
The 6-year-old company wanted to seize the moment as going through the process of a traditional initial public offering, with its more involved disclosure rules, would probably have meant having to wait until next year, Arison said. Another advantage of a SPAC is that it allows companies with a valuation of under $1.5 billion to raise more money than in an IPO, he said.
“If you’re a billion-dollar company, you maybe raise $100 million in an IPO vs. $300 million to $500 million in a SPAC,” he said.
The “de-SPAC” process for Shift was made easier because of the lawyers, bankers and analysts the company worked with, Arison said.
“Getting the right help is really critical, and don’t assume you can do this all yourself,” he said. The company chose lawyers (Jenner & Block) and bankers (Wells Fargo) with relevant experience because “SPAC deals are a unique animal,” he said.
Jose Cobos, chief revenue officer of private-equity marketplace Forge Global, said companies are going the SPAC route as opposed to a traditional IPO or direct listing “because of the lower cost when considering banking, legal and accounting fees as well as the ‘pop’ or discount.”
There is also less guessing and anxiety involved. “For a company considering a public listing, the SPAC route provides certainty on both valuation and minimum capital raise at the time the transaction is announced,” said Benjamin Kwasnick, founder of SPAC Research. “In a regular-way IPO, a company won’t know those two things until the night the IPO prices.”
There is plenty of optimism about the online car-buying industry, including among Shift’s competitors: Carvana Co. CVNA said in August when it reported second-quarter earnings that it saw unprecedented demand and expected to set records in revenue and gross profit per unit in the third quarter. Its shares are up 145% so far this year, and have skyrocketed 232% over the past 52 weeks.
Shift focuses on buying and selling low-priced used cars, and would-be buyers can request vehicles be brought to them for test drives. All that is serving the company well, especially during a pandemic, Arison said.
“We sell a different type of inventory than our competitors,” he said. “We sell lots of value cars, older than eight years, with 80,000-plus miles.” Arison said 29% of Shift’s sales fall under that value category, which generally sell for under $10,000.
In its investor presentation, Shift also cited a Capgemini survey that said 46% of U.S. adults surveyed said they planned to use cars more often than public transportation because of COVID-19.
Other Shift competitors include Vroom Inc. VRM, -1.47%, Cars.com Inc. CARS, +2.11% and Amazon.com Inc. AMZN, -0.04% — as well as CarMax KMX, +1.61% and AutoNation Inc. AN, +2.21%, which are huge retailers that also do business online — although those are national companies and Arison stressed that Shift is focusing on the Western region. It buys and sells cars in California (Sacramento, San Francisco and the rest of the Bay Area, San Diego, Los Angeles), Oregon and is expanding to Washington state.
Shift recently raised its third-quarter estimates 10%, to an adjusted gross profit of $3.9 million and adjusted gross profit per unit to $1,334.