Over the past year, I have written about several companies that came about listing through blank check companies known as special purpose acquisition corporations, or SPACs. Those include Repay Holdings Corporation (NASDAQ:RPAY), Akerna Corp. (NASDAQ:KERN) and The Peck Company Holdings, Inc. (NASDAQ:PECK). KERN was the most famous of the three as I discussed how its rise to $70 led to an extremely high arbitrage scenario between the stock and its publicly-traded warrants (NASDAQ:KERNW). It ended with the stock heading back down and the warrants moving up temporarily as the arbitrage gap closed once all shares and warrants were registered, and the arbitrage could be acted on. KERN continued to sink, and the warrants proved to eventually be a losing proposition as well for those investors who held them beyond the closing of the intrinsic value gap. Though, both KERN and KERNW have provided good trading opportunities since then.
Vivint Smart Home, Inc. (NYSE:VVNT) is the latest SPAC listing that has warrants trading below their intrinsic value. Like the other SPAC listings, VVNT has warrants (VVNT-WS) with an $11.50 strike price and a five-year time to expiry, subject to a 30-day acceleration clause if the stock price maintains $18.00. While the long time to expiry provides cheap leveraged upside on the stock, the fact that they trade below their intrinsic value leads to an arbitrage opportunity in the near term, regardless of the expiry date.
VVNT-WS should be trading at the stock price less $11.50. VVNT closed Wednesday at $14.11, so the warrants have an intrinsic value of $2.61. But VVNT-WS closed at $1.91, presenting a $0.70 arbitrage opportunity for anyone who can go long the warrants and short the stock. The registration of the warrants and shares will happen within 30 days of the business combination, so investors can expect the warrants to become exercisable in about two weeks. The arbitrage gap will close by that time, and that could come through the stock price decreasing, the warrant price increasing or a combination of the two.
I’m optimistic that VVNT’s trading will be more stable than with a volatile SPAC like KERN. This will lead to a superior profit opportunity by buying the warrants below intrinsic value. VVNT has a much larger float with a more established business than the other SPACs that I have previously analyzed. Vivint is a provider of smart home and security services across North America. Its Q3 2019 financials show that it has over 1.5 million subscribers, with subscriber growth having picked up over the last two quarters. ARPU has steadily increased, which has led to monthly revenue surpassing $100 million in September.
Source: VVNT’s Q3 2019 financial release
The nature of VVNT’s subscriber business model means that revenue will steadily grow with each quarter as long as the ARPU remains robust and the subscriber base grows. The biggest concern would be the increasing attrition rate as new subscribers would need to outpace those who leave, and obtaining new subscribers is more expensive than servicing existing ones.
VVNT is substantially EBITDA positive with the trailing 12-month EBITDA being $612.7 million. Heavy depreciation and interest expenses have resulted in a net loss of $307 million for the first nine months of 2019:
That interest expense comes from the considerable debt on the balance sheet. There are over $4 billion in liabilities, most of them in the form of $3.2 billion in long-term notes and a credit facility and $643 million in current liabilities. There are $154.7 million shares outstanding and 17.4 million warrants, leading to a fully diluted market cap of $2.4 billion. Adding the net debt on top of that and the enterprise value approaches $6 billion. Given the over $600 million in TTM EBITDA and how that is expected to steadily grow, an EBITDA multiple of 10x is a reasonable valuation. The current revenue run-rate based on September’s $100 million a month leads to $1.2 billion annually. This implies a reasonable revenue multiple of 5x.
Evercore agrees that VVNT has upside based on fundamentals as it initiated a buy rating with an $18 target this week. Although Evercore is not a household name, its analyst Amit Daryanani has a 5-star rating on TipRanks.
Given that the numbers and near-term business upside support an increase to VVNT’s current price, I have purchased warrants without a short on the stock to try to take advantage of the arbitrage in the coming weeks. I anticipate that I will make money on this trade in two ways. First, the closing of the intrinsic value gap will push up the warrant price. Second, an increase in the stock price will add further value to the warrants. For those who disagree with my bullish assessment of VVNT, the arbitrage opportunity still exists.
Disclosure: I am/we are long VVNT. 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.
Additional disclosure: I am long Vivint through the VVNT-WS warrants.