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New Providence Acquisition Corp. Warrant: Potentially A Post Pandemic Recovery Play (NASDAQ:NPA)

Investment Thesis

The pool of pre deal SPACs that went public in 2019 (2019 vintage) is shrinking by the week as more deals were announced. Our last SPAC writeup covered Silver Spike Acquisition Corp (SSPK) which has the merger deadline on February 21, 2021. Coming up next will be New Providence Acquisition Corp. (NASDAQ:NPA) which expires in March 2021. There are three compelling reasons that NPA warrants (NASDAQ:NPAWW) should be one of 2019 vintage core holdings:

1) Liquidation deadline. NPA has a liquidation deadline on March 31, 2021, so it will have to announce a deal or call for a deadline extension (likely with a LIO teaser) soon.

2) Targeted industry. NPA currently seeks the merger target in the consumer industry which has been significantly impacted by the pandemic outbreak and changing consumer behavior. Now that COVID 19 vaccines will be readily available soon, NPA could potentially be an ideal post pandemic recovery play.

3) Management experience. NPA management and Board members have very extensive experience in beverage and restaurant sectors which is critical for sourcing and structuring the potential deal.

There is likely another X factor in the merger target. Instead of a consumer company, NPA could pivot to other “hotter” industries just like Spartan Energy Acquisition Corp (SPAQ) and Tuscan Holdings Corp (THCB), which hopefully would be a pleasant surprise assuming the target is well received by the market.

The ideal entry point for NPAWW is below $1 per share and we expect a 2-3x upside and 50% downside (in a market selloff). In case of a liquidation, NPAWW will expire worthless.

NPAWW Price Chart

Source: Bloomberg.

SPAC Profile

NPA is a consumer focused SPAC launched in September 2019. As of September 30, 2021, it has $232 million in the trust account and will seek a target with at least $700 million valuation. NPA has a 18-month duration with its liquidation deadline on March 31, 2021.

NPAWW has standard SPAC warrant terms: one warrant one share, 5 year duration, exercise price of $11.50, callable at $18, and a Crescent Term threshold of $9.20.

Targeted Industry

Per its prospectus, NPA is seeking a merger target in the consumer industry. During 2020 the consumer related SPAC deals have been a mixed bag, there is high flyer such as Collier Creek Holdings’s merger with Utz Brands Inc. (UTZ), and there are also unfortunate terminations, such as TGI Fridays and Allegro Merger Corp.

UTZ Price Chart

Source: Bloomberg.

One key factor that played against the consumer industry this year is the sudden COVID 19 outbreak and the subsequent lockdown and social distancing. However, those restaurant chains that are agile and proactive enough to develop strong online and offline strategy (online order, delivery, and takeout etc), such as Wingstop Inc. (WING) and Chipotle Mexican Grill, Inc. (CMG) have outperformed the sector and even broad market by a big margin so far this year (see chart below). There must be also privately owned restaurants or consumer brands that have developed the right strategy/business model during the pandemic and thrived in 2020 as well. Those would be ideal for NPA to target at for a potential merger. With COVID 19 vaccines from Pfizer and Moderna already developed and ready to roll out soon, the potential targets especially the restaurant chains, could be good recovery play for 2021.

Price Chart of WING and CMG vs SPY

Source: Bloomberg.

That said, NPA is not without fierce competition in the consumer battlefield. For example, FAST Acquisition Corp. (FST), also a restaurant focused SPAC, was launched last August with $200 million in the trust account. Both its co-CEOs are former founders of successful restaurant chains. Another example is Tastemaker Acquisition which just filed with SEC early October to launch $200 million SPAC focusing on restaurant sector. The cofounders include the former CEO of Jamba (JMBA) and the current chairman of Red Robin Gourmet Burgers (RRGB). Another potential competitor is Starboard Value Acquisition Corp. (SVAC), launched in September with $360 million in the trust account. Its sponsor Starboard is a famous activist hedge fund that had successful unlocked values in restaurant chains such as Darden Restaurants (DRI) and Papa John’s (PZZA). Though SVAC has no industry preference, it will not be surprising if SVAC eventually targets at a restaurant chain for the merger. All these companies could potentially compete with NPA for the same set of targets and add uncertainties to the merger process.

Management and Board Profile

NPA has a three member management team and three independent directors. The following table summarizes their specific industry expertise and track record based on their most recent senior positions in a publicly traded company or a M&A transaction with a private company. All the information here is based on publicly available information.

Name/Position

Experience

Track Record

Alexander Coleman

Chairman

Capital market

Beverage

Cannabis

TILT Holdings

Big Red

Gary Smith

CEO

Beverage

Big Red

James Bradley

CFO

Beverage

Accounting

Big Red

Rick Mazer

Independent Director

Restaurant

Food

NA

Daniel Ginsberg

Independent Director

Restaurant

Skincare

Beverage

Potbelly Corporation

Timothy Gannon

Independent Director

Restaurant

OSI Restaurant Partners (Outback Steakhouse)

Source: Bloomberg and company filings.

NPA team obviously has extensive operating and deal making experience in beverage and restaurant sectors. It should also be fair to assume they have the necessary network in the industry and investment banks to source, screen and structure deals for the SPAC.

One more observation worth mentioning is that the management team Alex, Gary and James had worked together at Big Red for about a decade before selling the business to Keurig Dr Pepper. This is certainly a plus and far better than a newly formed team in terms of chemistry and efficiency.

On the minus side, none of the team members has prior SPAC experience and the available track record info is quite limited to make a judgement. Here are some available info:

1) Alexander Coleman served as CEO of TILT Holdings, a Canada listed cannabis company, from Dec 2018 to June 2019 (see chart below) and the stock was down during the period. In another M&A transaction, he and the team sold Big Red to Keurig Dr Pepper in 2018 for $200 million according to a CNBC article. However, there is no public information regarding the return generated from that transaction. It would be too simplistic to draw a conclusion on the track record just based on these two deals. Mr. Coleman used to be a co-Head and Managing Partner of Citicorp Venture Capital, Citi’s New York based leveraged buyout fund. It would be helpful to have the fund performance under his tenure and/or the returns on the specific companies he had invested in during the period.

TILT Holdings Price Chart Dec 2018-June 2019

Source: Bloomberg.

2) Daniel Ginsberg, the independent director, has served as Chairman of Potbelly Corporation (PBPB) from 2014 to June 2020. The chart below shows the stock performance of PBPB during that period of time.

Price chart of Potbelly

Source: Bloomberg.

3) The track record of Timothy Gannon, another independent director, is a bright spot. He is a co-founder of Outback Steakhouse and its operating company OSI Restaurant Partners. OSI Restaurant Partners Inc went public in 1991. In November 2006, the owners group agreed to $3 billion buyout deal from private equity firms Bain Capital and Catterton Partners. The stock price went from $3 to $41, up 13.7x in 15 years (see chart below).

OSI Restaurant Partners Inc. Price Chart

Source: Bloomberg.

Key Risks

The management team and Board members do not have prior SPAC experience and publicly available track records are limited. This could at least partially mitigated by their ample industry experience and deal making expertise. NPA will have to compete with other SPACs focusing on the same industry which may make the business combination a more difficult and protracted process. If NPA could not complete its business combination by the liquidation deadline, it will be liquidated and the warrants will expire worthless.

Conclusion

NPA would have to make a deal announcement soon as its liquidation deadline is only 4 months away on March 31, 2021. It is seeking a merger target in the consumer industry which could be a timely post pandemic play given the positive development of COVID-19 vaccine. NPAWW could potentially have 2-3x upside but could also expire worthless if the SPAC is liquidated without complete a deal on time.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NPAWW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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