SPAC Frenzy

Delta Asset Management |

Periodically, a new investment vehicle emerges with great fanfare and momentum that quickly attracts the attention of investors and capital. The most recent phenomenon is known as a Special Purpose Acquisition Company or SPAC. A SPAC is created by a sponsor (industry executive(s), private equity firm(s), hedge fund(s), etc.) who puts in seed money and purchases shares for a de minimis amount.

SPACs are actually shell companies with no business operations, products or services. Their purpose is to raise a blind pool of money through an initial public offering (IPO). After the IPO, the SPAC’s sponsor then will search for and merge with a private company in need of capital. The sponsors have a limited amount of time to find a suitable deal, typically within two years of the IPO. Otherwise, the SPAC is liquidated, and the funds are returned to the investors. 

The concept has been wildly popular and is growing exponentially. Although figures vary according to the source, Dealogic states that in 2019 SPACs raised over $15 billion in 72 transactions and grew to $83 billion by the end of 2020. In just the first two months of this year, 189 SPACs listed on the major stock exchanges, which if annualized would imply more than 1,000 SPACs being launched this year.

It's Raining Biotech SPACs!Year-to-date, SPACs account for roughly 70% of all initial public offerings, up from 20% two years ago. Traditional (non-SPAC) IPOs also have had impressive levels of activity this year. An IPO is the first time a company offers its shares of capital stock to the public. Under federal security laws, a company may not lawfully offer to sell shares unless the transaction has been registered with the SEC or an exemption applies.

What is the difference between a SPAC and a regular IPO? Both are ways for a company to raise capital. SPACs are a faster, but not necessarily cheaper, method to go public. With a SPAC, the investor initially does not know what company he or she will wind up owning and is essentially trusting the sponsor to find the right company and pay the right price.  In an improvement over previous versions of SPACs, known as blank check companies, investors can get out of the deal and get their money back once the target company is identified. With an IPO, the investor at least will know the company and have some disclosures at the time of investment. In either case, however, the operating history as a public company is non-existent. Oftentimes management is new; and the initial price is determined by bankers, not investors.

High stock market valuations, low borrowing costs and the rising number of SPACs are contributing to an increase in asset prices.

The popularity of both approaches indicates that there is a considerable amount of money chasing deals. These transactions are facing stiff competition from other deal makers such as chief financial officers of existing public companies and private equity funds. Executives through mid-February this year have struck 1,270 deals involving U.S. companies versus 1,665 during the same period in 2020. What is particularly unsettling is that buyers are shelling out three times more for these acquisitions even though the number of transactions is less. High stock market valuations, low borrowing costs and the rising number of SPACs are contributing to an increase in already elevated asset prices. Of particular concern with SPACs is the possibility that some sponsors may stretch for acquisitions rather than hand money back to investors.


Our investment discipline at Delta is to avoid investments where we are unable to identify a long-term economic or intrinsic value. We do not wish to pass judgment on the efficacy of other approaches. Our emphasis is on preservation of capital and in so doing we attempt to quantify what something is worth so we can make buy and sell decisions based on its value. We view securities as not just pieces of paper but rather ownership or claims (in the case of debt) on real businesses. This approach requires fundamentals and research to determine the economic value of an asset. With this methodology comes the recognition that attractive long-term value is realized when there is an appropriate divergence between the value and current market price.    

March 31, 2021


Company Comments

Comments follow regarding common stocks of interest to clients with stock portfolios managed by Delta Asset Management. This commentary is not a recommendation to purchase or sell but a summary of Delta’s review during the quarter.


25 Years Later, Microsoft Unveils A Revamped Corporate Logo | TechCrunch


Microsoft Corporation  { MSFT }

Founded in 1975, Microsoft is the world’s largest independent software developer. The company is experiencing a renaissance under the leadership of Satya Nadella. He is the third CEO in the company’s history. Since becoming CEO in February 2014, Microsoft has quickly emerged as one of the most important cloud computing firms in the world, having doubled its market share in the public cloud space over the past few years. Corporate America continues to adapt to the cloud’s efficiencies. Azure, the firm’s cloud offering, has established itself as the No. 2 player in the space behind Amazon. 

Microsoft is the only large cloud provider that also sells a multitude of software programs hosted on the cloud, which provides differentiation for Azure to exploit. These products include Windows operating systems for personal computers, Office business solution applications, video games and its online search offering, Bing. In addition to its software offerings, Microsoft designs and sells hardware, including the Xbox 360 entertainment and gaming console and assorted PC hardware products.

Microsoft has quickly emerged as one of the most important cloud computing firms in the world, having doubled its market share in the public cloud space over the past few years.

Office, Microsoft’s productivity software, has been reinvigorated by the launch of a cloud-based, subscription version known as Office 365. Around 1.2 billion workers use Office, or Office 365 accessed through Azure. For mature businesses, such as Windows and Office, the company is moving from a transaction model to a subscription model, extending the lives of these businesses, expanding the market and setting the stage for a stronger recurring revenue structure. Updates and software fixes will be easier, and there will be a higher capture of revenue as leakage from piracy is reduced. Microsoft’s transformation to a cloud-based software company should allow it to lower its distribution costs and focus on its strengths: serving enterprise (business) customers. 


Microsoft’s cloud business does face diverse competition from companies such as Amazon, Google and Oracle as well as software-centric companies such as Salesforce and VMware, Inc. As such, the company must continue to innovate even as it prolongs the life of its legacy products. Nearly one third of the company’s workforce of 131,000 is dedicated to research and development (R&D). The company continually adds capabilities to its cloud offering. Microsoft spends 13% of revenue on R&D. It is acquisitive and does not shy away from making occasional large acquisitions. Its largest acquisition was acquiring LinkedIn for $26.2 billion in 2016. The company believes the professional social network can open new platforms for Office and Dynamics, its enterprise software for reporting and control. 

In the past, several of Microsoft’s investments (Bing, Nokia and Zune) have been outside of the company’s core. Though we do not doubt the company’s ability to invest its way to a viable business, the amount of capital committed in these efforts made a compensatory return more challenging. The company has a solid balance sheet with a robust cash and short-term investment balance of $138 billion as of 1st quarter 2021. 

We anticipate that Microsoft will continue to develop and acquire a wide range of technologies and products, some of which will be outside of its core, and will experience relatively lower long-term returns on capital. Nonetheless, our valuation model indicates that at its present stock price, Microsoft offers a potential of almost 6.2% annual rate of return.

Enbridge Inc.  { ENB }

Following the successful merger with Spectra Energy Corp in 2017, Enbridge, a Canadian company, is now North America’s largest energy infrastructure company with strategic pipelines transporting crude oil, natural gas and liquids. Enbridge’s Mainline system moves two-thirds of all crude oil exports from Canada and approximately 25% of North American crude oil. Canada’s oil sands supply is landlocked and separated from most of its refining markets by long distances and relies on pipelines for transport. Western Canada production is projected to exceed pipeline capacity, making the company’s Mainline system and its access to various North American refining markets more valuable. In gas transmission, ENB owns more than 30,000 miles of natural gas transmission pipelines and transports approximately 20% of all natural gas consumed in the U.S. 

ENB has amassed a high-quality backlog of pipeline, renewable power and midstream projects totaling $16 billion in secured growth projects through 2023.

ENB assets are well positioned in the North American pipeline industry – which possesses burdensome regulatory requirements, elusive right of way easements, lengthy development cycles and significant funding requirements – all of which raise high barriers for anyone outside incumbent operators to construct additional pipeline capacity. Moreover, ENB has amassed a high-quality backlog of pipeline, renewable power and midstream projects totaling $16 billion in secured growth projects through 2023. Management expects 5% to 7% long-term annual distributable cash flow per share growth.


Generally, Enbridge will not pursue expansion opportunities without securing contracted capacity. The company is insulated from direct commodity price exposure as approximately 95% of cash flow is underpinned by long-term (10 to 20 years), fee-based contracts. However, the cyclical supply and demand nature of commodities and related pricing can have an indirect impact on the business as shippers may continue to accelerate or delay certain projects. 

In addition to pipelines, the company operates a diverse energy portfolio as a distributor and operator of alternative energy. Enbridge owns and operates Canada’s largest natural gas retail distribution company and provides distribution services in Ontario, Quebec, New Brunswick and New York State. Enbridge is also Canada’s second largest wind and solar power generator. Beginning with its first investment in a wind farm in 2002, Enbridge committed $5.4 billion toward wind, solar, geothermal power transmission and a host of other emerging technology projects. The segment accounts for a small but growing contribution to the company’s consolidated earnings. The diversified generation portfolio largely focuses on wind (91% of current net generating capacity) but also encompasses other renewable sources.

The firm’s challenges include garnering multiple jurisdictional approvals for one of its major capital investments, the Line 3 Replacement project. After a 43-month regulatory review, the Minnesota Public Utilities Commission granted its approval. It has received regulatory approval in all jurisdictions and construction is under way in Minnesota. It was originally targeted for completion in the 2nd half of 2020; however, permitting delays in Minnesota, COVID-19 and winter weather have delayed the project by one year. The project is expected to be in-service by the end of 2021.

Regulated assets are subject to economic and political regulation risk by which regulators and other government entities may change or reject proposed or existing projects including permits and regulatory approvals for new projects. Enbridge’s long-term thesis hinges on the ability to secure additional growth projects that drive earnings and dividend growth. 

With Enbridge positioned to benefit from growing oil sands supply with its Mainline system and increasing demand for natural gas, the company is positioned to generate significant free cash flow, allowing the company to grow its dividends and fund pipeline expansions and investments toward renewable energy. Based on these assumptions, our valuation model indicates a long-term average annual return of 11%.


The 3M Company  { MMM }

3M is a diversified global technology innovator and marketer of a wide variety of products. With more than 90,000 employees, 3M produces over 55,000 products including abrasives, adhesives, personal protection, dental, electronic materials and healthcare products. Roughly 90% of its revenues are consumable products, which creates recurring revenue streams. 3M’s unusual product and geographic breadth shields it against overreliance on any market. The company’s products are available for purchase in over 200 countries.

3M has consistently reported best-in-class operating margins over the past 20 years. The company’s premium margin is largely attributable to its scale, vertically integrated operations, lean manufacturing processes and differentiated brands. 

Despite COVID-19 disruption during the year, 3M managed to exit 2020 with flat revenue and strong growth momentum as end markets have begun to stabilize and recover. This revenue stability speaks to the broad product offerings as well as its broad industry customer base.  Going forward, the company is well positioned to benefit from several themes, including personal safety and hygiene, data centers, healthcare, water and air quality, aging populations, industrialization in emerging markets, electrification, alternative energy and infrastructure upgrades. 3M has consistently reported best-in-class operating margins over the past 20 years.  The company’s premium profit margin is largely attributable to its scale, vertically integrated operations, lean manufacturing processes and differentiated brands. 


3M’s culture of innovation has carved a moat around its businesses. Strengthening its innovative roots, the company has increased research and development (R&D) spending as a percent of sales to 6% versus the median 3% for many industrial companies. The company positions its R&D and capital expenditure spending with a long-term focus. Over time, 3M has been able to develop not only improvements in products currently being sold but also create entirely new product areas. The company’s vertical integration amplifies its R&D spending. Although 3M sells thousands of products to wide-ranging end markets, the firm cites only a few dozen technology pillars that support its vast array of offerings, thus creating significant economies of scale. 3M’s products spring from four main technological competencies: abrasives, adhesives, filters and coatings. Innovation in any one of these four categories drives new product development across all of 3M’s operating segments. We expect this practice will continue to protect profit margins through higher priced new product introductions.

The company does face challenges. Though 3M has adequate long-term growth prospects and good market positions in most end markets, it is tied to cyclical industries in all its business lines. Revenue and profitability will weaken during a recessionary period. In addition, as 3M products mature, heavy R&D efforts toward continuous innovation that commands premium pricing and return on investment can become more difficult. The company’s chemical manufacturing processes have led to environmental lawsuits and may continue to do so with unknown liabilities. 

With strong consumer brands, a track record of innovation and low-cost manufacturing, 3M has competitive advantages over smaller industry players. Given these advantages and our assumptions of low single-digit revenue growth and 21% operating margins, we believe 3M’s present stock price offers the potential for an average annual long-term rate of return of 7%.


Pin by artTRISTAN on Photos For Edits | Walt disney logo, Disney logo, Walt  disney picturesThe Walt Disney Company  { DIS }

The Walt Disney Company is a global, diversified entertainment company with operations spanning theme parks, broadcast and cable television, movie production, consumer products and new online video streaming services. The company owns some of the world’s most valuable media brands including ABC, Disney, ESPN, Lucasfilm (Star Wars), Marvel and Pixar. Disney’s broad media and entertainment breadth provides diversified distribution channels for the company’s creative content. Over the last several years, Disney has focused on three key strategic priorities: creating high-quality content for the entire family, making that content more engaging and accessible through the use of technology, and growing its brands and businesses in markets around the world. 

In February 2020, Robert Iger stepped aside as CEO and was replaced by the company’s head of parks and resorts, Bob Chapek. Iger will stay on as executive Chairman, overseeing the firm’s creative endeavors through the end of 2021, when his contract expires.

Over the last several years, Disney has focused on three key strategic priorities: creating high-quality content for the entire family, making that content more engaging and accessible through the use of technology and growing its brands and businesses in markets around the world.

The COVID-19 pandemic resulting in a new stay-at-home paradigm has helped drive viewers to the Disney+ video streaming service, making it a viable player in the first year of its launch. The service was a success even before the pandemic. The lockdown restrictions and the resulting change in viewing behavior have only increased the use of the service, such that Disney+ reached its fiscal year 2024 subscriber goal this year.


As stated before, Disney has built an incredible collection of some of the world’s best media brands: ABC, Disney, ESPN, Lucasfilm (Star Wars), Marvel and Pixar. The strength of these brands is solidly in place and will continue to provide Disney with opportunities to create high-quality content and experiences for years to come. The company has been extremely adept at using brands and creative content to generate revenue and profitability through multiple sales channels. Disney estimates that it owns five of the top six character franchises, based on merchandise and consumer sales.

Sports are Disney’s major content edge. As consumer viewing options grow (via the internet and mobile media) and become more fragmented – and as viewing preferences change – “must see” live sports provide ESPN with an advantage over its traditional cable distributors and advertisers. Disney’s ESPN brand profits from the highest affiliate fees per subscriber of any cable channel and generates revenue from advertisers interested in reaching adults ages 18 to 49, a key advertising demographic that watches more sports and less scripted television than other groups. These recurring, high margin cable affiliate fees provide profit stability in most economic backdrops. 

Pre-pandemic, Disney’s theme parks and cruise lines contributed approximately 30% of operating income. In addition to the wholly owned domestic parks – Disneyland and Disney World – the company has partial ownership and management contracts to operate several international parks in France, Hong Kong, Tokyo and now China. Disney has invested heavily in the past few years, adding new attractions, new resorts and new cruise ships as well as park expansions and upgrades. Disney theme parks are one-of-a-kind destinations that have competition but nothing with the scale, magnitude, uniqueness or relevance for the entire family of the Disney experience. There is early evidence there will be a healthy rebound in park attendance once the parks are fully reopened. Parks that are now partially opened have maintained their pre-COVID-19 pricing, and reservation slots sell out quickly indicating pent-up demand.

Disney does face long-term challenges. The cost of sports programming rights continues to rise sharply, and ESPN pays handsomely to acquire major sports contracts. ESPN has been able to defray some of the costs by charging ever-increasing affiliate fees to cable operators. With such high fees, angst is growing among viewers, cable operators and program competitors. If ESPN cannot continue to pass along sports rights costs to cable operators, its profit margins will erode; however, profit erosion would be gradual due to the company’s long-term contracts with both major sports leagues and cable operators. The high value of sports also has created additional competition for ESPN. All major broadcasters, such as FOX and NBC, and the major sports leagues themselves have increased their investments in sports programming. More competition for viewers is likely to drive up the overall operating costs to broadcast sporting events over time.

Disney’s proven ability to develop entertainment icons with increased consumer opportunities includes merchandising royalties, positive cable pricing, theme park expansion, new film and TV online streaming services. Our valuation model suggests that the company’s stock is priced to generate a long-term average annual rate of return of approximately 7%.


Dated: March 31, 2021

Specific securities were included for illustrative purposes based upon a summary of our review during the most recent quarter. Individual portfolios will vary in their holdings over time in relation to others. Information on other individual holdings is available upon request. The information contained herein has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Any projections are hypothetical in nature, do not reflect actual investment results and are not a guarantee of future results and are based upon certain assumptions subject to change as well as market conditions. Actual results may also vary to a material degree due to external factors beyond the scope and control of the projections and assumptions.