TheChek News Flow

This was a very 2022-like week, with the metaverse and crypto leading the way. A year ago, that would have been hard to believe. However, here we are, as a large gaming company looking to build its own metaverse raised billions of dollars, while a crypto company raised millions from large traditional financial institutions as a soap opera swirled around it.

1. Epic Games, $2B, gaming: The metaverse is going to be epic—at least that is what both Sony and KIRKBI—the family-owned holding and investment company behind The LEGO Group—are betting on. Both invested $1 billion into North Carolina-based Epic Games, valuing the gaming giant at $31.5 billion. The deal comes just a week after Epic announced a partnership with LEGO to develop a “family-friendly” metaverse for kids, and the company said the new cash will “advance the company’s vision to build the metaverse.” Founded in 1991, the Fortnite creator has raised more than $7 billion to date, according to Crunchbase data.

2. Circle Internet Financial, $400M, crypto: Crypto may be a lot of things, but boring isn’t one of them. Take Boston-based Circle, for instance. In February, the company—an issuer of U.S. digital coin, a type of stablecoin—announced it terminated its previously announced merger agreement with special-purpose acquisition company Concord Acquisition Corp., but had agreed to new terms that doubled the company’s valuation to $9 billion. That was not surprising as USDC’s circulation has more than doubled since the original deal was announced and has now reached more than $50 billion, according to Circle. But then the company went out and raised another $400 million from big names like BlackRock and Fidelity Management and Research this week. The new SPAC deal was expected to close in December, but could extend to the end of January 2023. While it’s likely Circle would like to access that money in the SPAC deal, let’s wait and see what happens.

3. (tied) Newfront Insurance, $200M, insurtech: Seven months ago, Newfront, ABD Insurance and Financial Services merged to form a $1.35 billion brokerage. It seems that merger went well, because this week the firm closed a $200 million Series D led by Goldman Sachs Asset Management’s Growth Equity business and B Capital at a $2.2 billion valuation. The brokerage is trying to modernize the insurance stack through AI and data-analytics.

3. (tied) Salsify, $200M, e-commerce: We all buy more things online than ever before, and folks that make tools to help retailers improve their e-commerce capabilities are reaping the benefits. Boston-based Salsify was the latest ecommerce software developer to raise a big round, closing a $200 million Series F led by TPG. It follows others this year in the space such as Austin-based Cart.com and Lehi, Utah-based Route in raising big rounds. Salsify—which generated over $110 million in annual recurring revenue in 2021—helps brands customize product information that shows up at online retailers, while also helping retailers more quickly access targeted product information.

5. Pax8, $185M, cloud: While it’s easy for large enterprises to manage their cloud operations, for small and medium-sized businesses it can be much harder. That’s where Denver-based Pax8 comes in. The company, through its thousands of managed services partners, helps simplify the IT process for smaller companies. That business model has made the company a unicorn, as Pax 8 raised $185 million in new equity capital led by new investor SoftBank Vision Fund 2 at a $1.7 billion valuation. Founded in 2012, the company has now raised more than $350 million, according to Crunchbase data.

6. Genies, $150M, internet: Los Angeles-based Genies, which helps people create their own avatar ecosystems, closed a $150 million Series C round led by Silver Lake at a $1 billion valuation. Founded in 2017, the company has now raised more than $200 million, according to Crunchbase data.

7. Be Biopharma, $130 million, biotech: Cambridge, Massachusetts-based Be Biopharma, which is developing B cells as medicines, closed a $130 million Series B led by ARCH Venture Partners. Founded in 2020, the company said it has now raised more than $180 million.

8. Observe.AI, $125M, call center: San Francisco-based Observe.AI, an AI-powered call-center platform, raised a $125 million Series C funding led by SoftBank Vision Fund 2. Founded in 2017, the company said it has now raised $213 million.

9. Filevine, $108M, legal tech: Salt Lake City, Utah-based legal work platform Filevine closed a $108 million Series D led by StepStone Group. Founded in 2014, the company—whose SaaS platform allows law firms to manage documents and collaborate—has now raised more than $225 million, according to Crunchbase data.

10. Natural Fiber Welding, $85M, manufacturing: Peoria, Illinois-based materials manufacturer Natural Fiber Welding closed a $85 million funding round led by Evolution VC Partners. Founded in 2015, the company has raised more than $155 million, according to Crunchbase.

When it comes to the market, there are many differences thus far between the early part of this year and last—perhaps none more pronounced than the dearth of companies going public.

Taking that point a step further is the slowdown in special-purpose acquisition companies, or SPACs. While all the rage the past two years, both SPACs going public and those finding a target to merge with are on the decline—and newly proposed rule changes by the Securities and Exchange Commission regarding blank-check firms could further affect the market, according to those in the industry.

“I don’t want to say it will kill it,” said David Ni, a partner at law firm Sidley. “But it could be a body blow.”

The proposed changes that came from the SEC late last month weren’t unexpected to many in the industry. Just last summer, the agency charged companies and people tied to the proposed merger between SPAC Stable Road Acquisition and space company Momentus with fraud after the deal’s value was slashed.

In general, the commission and Chairman Gary Gensler have been rather public about scrutinizing blank-check companies more closely. “My first response was that I’m not surprised. The SEC has been looking at this for about 15 months,” said Jared Kelly, partner at Lowenstein Sandler.

However, what makes the SEC’s proposal a bit more unexpected is that it comes as the SPAC market has already cooled dramatically. Only 57 SPACs have gone public so far this year. Last year saw more than 600 SPACs go public for the entire year and nearly 250 in 2020, according to SPACInsider. The traditional IPO market has also slowed to a drip, as has the number of targets going public via SPACs.

The plethora of new rule changes may not help.

One of the main proposed changes involves the projections many SPACs make as part of the de-SPACing—when a SPAC vehicle acquires its target company—process. The merged entity can offer projections that go well past a year—even five or six years—and often show growth at an astronomical rate.

“Including projections and forecasts is something that makes SPACs appealing compared to traditional IPOs,” Kelly said.

The SEC proposal includes the removal of the safe harbor for forward-looking statements. In the merger and deSPAC context, a safe harbor protection gives issuers some amount of comfort concerning projections as long as proper due diligence was performed and qualifying language is included to make clear that any projections are based on assumptions and qualifications after such diligence, Kelly said.

The safe harbor does not apply to traditional IPOs, he added.

“The elimination of the safe harbor is the one (proposed change) that could have the largest effect” on the SPAC market, Ni said.

How far that liability extends—possibly to accountants or lawyers involved in the deal—is another concern some have about the proposed rule changes, although Kelly is not sure he completely sees that concern.

“I’m not sure that’s how I read it,” Kelly said. “I think the SEC just wants the disclosure to be vetted by disinterested parties, similar to a traditional IPO.”

The added liability is very similar to what underwriters face in a typical S-1 filing for a traditional IPO, and some see that as an intentional move by the commission.

“I think it’s a case of the SEC trying to bring SPACs and (traditional) IPOs closer together,” said Joshua DuClos, partner at Sidley. “But these things are very different.”

Although many companies consider SPACs as a vehicle to go public, a merger with one is actually an M&A deal, DuClos points out. In addition, a SPAC transaction does not have the same restraints as a traditional IPO, and even has the option for investors to get their money back if they do not like the proposed deal.

While the removal of the safe harbor protection could mean more lawsuits and potentially larger liability for parties involved in the deSPAC, Kelly points out it is not uncommon for public M&A and deSPAC deals to often face lawsuits already—the proposed changes would just increase the ability for plaintiffs to make additional claims in deSPAC transactions.

While liability issues and the safe harbor removal are seen as the keys to the proposed changes, there are other significant changes. The proposed rules also include new “fairness” disclosure requirements; certain disclosure is required regarding the fairness of the deSPAC transaction to target shareholders and unaffiliated shareholders of the SPAC.

The effective result is that a fairness opinion will be included with every deSPAC deal. Previously, such opinions were included in limited circumstances, such as when there were conflicts of interest between the SPAC principals and the deSPAC target.

The proposed changes are now in a 60-day comment period, which is expected to end in late May. They could be approved within two months after that period ends. However, while many expect the commission to enact some of the proposals, they also expect some changes in what was released in March.

SEC Commissioner Hester Peirce already has dissented.

“I think most of the rules are generally fair,” Kelly said. “Some, notably the underwriter liability, go a little too far, but I expect some scaling back in the final rules.”

Kelly thinks the SEC would like to get rules in place by the fourth quarter. There are currently more than 600 SPACs looking for targets, and many are running up against their redemption walls in the fourth quarter of this year and first quarter of next year and are looking for targets.

“They want to get this done before a big wave of deSPAC activity hits,” Kelly said.

What the SEC will decide is anyone’s guess, but SPAC activity seems on the decline—likely brought about by underperformance on the public market and investors being able to find yield elsewhere amidst rising interest rates—and significant rule changes could hamper it more.

However, those in the industry seem to think the final approved changes likely will be toned down from late March.

“If approved as is, you’ll see very few SPACs in the future. … but I think the SEC wants to regulate the product more—it does not want to kill the market,” Kelly said.

- In fairness to the Twitter board, this might be more of a concern about other potential bidders vs just me

Toughest challenge yet for multi-party administration as analysts fear fresh election on horizon

Israeli prime minister Naftali Bennett’s ten-month-old coalition government is facing its stiffest challenge to date under the combined pressures of a wave of attacks and the shock loss of its parliamentary majority.

Fourteen people have been killed in a spate of Palestinian attacks inside Israeli cities, the most recent in Tel Aviv on April 7, a day after a key lawmaker from Bennett’s own party defected to the opposition, erasing the government’s slim one-seat majority. At the weekend, tensions flared after Palestinians and Israeli police clashed around Jerusalem’s al-Aqsa mosque, Islam’s third-holiest site.

The violence and political crisis are unrelated, but both underscore the challenges the fragile Israeli coalition faces as it battles to hold together, with the real prospect, according to analysts, of snap elections in the near future.

The Bennett-led government unseated long-serving premier Benjamin Netanyahu last June after four successive and largely inconclusive elections between 2019 and 2021.

The coalition comprises eight factions spanning rightwing religious nationalists, pro-peace leftists, centrists and, for the first time in Israeli history, an independent Arab-Israeli Islamist party.

Idit Silman, the coalition whip from Bennett’s rightwing Yamina faction, quit the government this month, declaring that she could “no longer lend a hand to the government’s actions” and to the “damage to . . . Israel’s Jewish character”. As a pretext she cited a recent religious controversy over a court decision allowing unleavened bread into hospitals during the upcoming Passover holiday.

In a string of interviews earlier this month, Bennett blamed Netanyahu and other nationalist politicians and activists for applying “inhuman” pressure on Silman and her family, ultimately leading her to break with the party.

“[Netanyahu’s] proxies simply surrounded her with a megaphone for nine months, they would curse her in front of her children, [call her a] ‘crook, a traitor’ [and] harsher words . . . those people sent people to her children’s teachers to [get them to] speak out against the children at school,” Bennett alleged.

Netanyahu has urged more rightwing legislators to follow Silman’s lead and “come home” and for the Bennett-led government to “go home . . . because you’re weak — weak on Iran, weak on terror”.

Adding to Bennett’s woes, Israel is contending with the most serious escalation in attacks for about six years. The shooting attack in Tel Aviv was the fourth attack in three weeks.

According to Israeli security officials, the escalation is mainly being undertaken by “lone wolves” or small cells with no formal affiliation to established militant groups. The first three attackers were Israeli Palestinians with previous ideological ties to Isis, while the latter two, including the perpetrator of the Tel Aviv attack, were Palestinians from the northern occupied West Bank with only the most tenuous organisational affiliation. All were killed at the scene or subsequently by responding security forces or armed civilians.

“We do not see a direct connection between the attacks in the past few weeks, meaning that there is no one guiding hand to these attacks . . . these are different kinds of terror activities that are happening,” a senior Israeli military official said.

Bennett has vowed to go “on the offensive”, flooding city streets with police officers, doubling the number of Israeli army battalions in the West Bank, and launching a succession of arrest operations primarily into the West Bank city of Jenin and its adjacent refugee camp. Israeli officials claim to have thwarted an additional dozen attacks.

At least 16 Palestinians have been killed in the ensuing clashes over the past two weeks by Israeli forces across the West Bank, according to Palestinian health officials and Btselem, an Israeli human rights group.

At the same time, Israeli officials have stressed that they are allowing economic, civilian and religious life to continue as usual in most of the West Bank and Jerusalem — especially in the midst of the Muslim holy month of Ramadan, historically a period of heightened tensions.

Nevertheless, clashes erupted on Friday, the eve of the Jewish Passover holiday, between Palestinian worshippers and Israeli security forces at Jerusalem’s al-Aqsa mosque. At least 150 Palestinians were reported injured and more than 300 detained. 

Palestinian Authority officials blasted what they called Israel’s “brutal assault”, while militant group Hamas warned that “Israel will bear responsibility for the outcome”. Similar clashes at the site last year during Ramadan precipitated the 11-day conflict between Israel and Hamas in the Gaza Strip. The Arab-Israeli Ra’am party, a key coalition ally of the Bennett government, also condemned the actions of the Israeli police.

Yair Lapid, Israel’s foreign minister, said he supported the security forces and decried the “unacceptable riots,” adding that “Israel is committed to freedom of worship for people of all faiths in Jerusalem”. 

A touchstone of religious and political tensions, the al-Aqsa mosque compound is referred to in Jewish tradition as the Temple Mount, site of the biblical Jewish temple. Smaller scale clashes resumed on Sunday morning, with Israeli security forces clearing the compound of Palestinian demonstrators as dozens of Israeli ultranationalists visited the grounds.

The precarious security situation has fed into the political crisis, analysts say, making Bennett’s position, and that of his government, even more tenuous.

“The terror attacks increase nationalist fervour, which in turn increase pressure on [the government] from the right, and that creates internal tensions between the rightwing and leftwing parts of the coalition,” said Tal Shalev, senior political correspondent for Walla News.

“Bennett is trying to project ‘business as usual’, but the overriding sentiment in nearly every arena is that he’s losing control. He’s definitely lost control over his own party,” Shalev added. After Silman’s decision to quit, at least two Yamina backbenchers issued their own ultimatums to the premier in an effort to shift government policy rightward.

The loss of a parliamentary majority will not in itself topple the government, analysts stress. The Netanyahu-led opposition does not hold a majority either just yet and is awaiting further possible defections, and any move to dissolve parliament and trigger new elections will have to await the return of parliament from a holiday recess next month.

Bennett’s government, which he has in the past termed a “political accident”, may be able to limp along, although its long-term prospects are now severely in doubt. “Even the optimists are talking in terms of a few weeks to a few months,” Shalev said.

US first-quarter earnings season also clouded by pandemic hangover and supply chain disruptions

The biggest US companies are expected to post a slowdown in earnings growth when they reveal their first-quarter results in the coming weeks as raging inflation and the war in Ukraine weigh on profits.

Earnings announcements from companies listed on the S&P 500 index are set to pick up steam over the next two weeks, with groups representing 70 per cent of the blue-chip index’s market value reporting by the end of April, according to data compiled by Goldman Sachs.

Analysts expect groups listed on the S&P 500 to report average year-on-year earnings per share growth of 5.2 per cent, taking into account companies that have already reported and estimates for those that have not, FactSet data show.

That would mark a sharp pullback from the 32 per cent growth rate in the fourth quarter of 2021 and represent the most sluggish pace since the final three months of 2020.

S&P 500 companies’ revenues are projected to rise 10.9 per cent, led by the energy, materials and real estate sectors. However, Goldman noted that profit margins are expected to contract 0.05 percentage points to 11.8 per cent.

“If the expectations are realised, [the] first quarter of 2022 would be the only quarter in the last 30 years with contracting net margins amid double-digit sales growth except for in 2008 and the fourth quarter of 2011,” the Wall Street bank said.

“Similar to the current macro environment, those periods were marked by relatively high inflation and sharp increases in crude oil prices.”

Inflation is expected to be a headwind for companies. Of the first 26 S&P 500 companies that reported results, FactSet said nearly two-thirds had cited labour costs and shortages as weighing on results.

Pandemic-related expenses and supply chain disruptions were also noted as negative contributors.

The energy sector is expected to lead the S&P 500 as surging oil prices boost revenue and earnings. The industry is forecast to report earnings growth of 255 per cent, while revenue is predicted to rise nearly 45 per cent compared with a year earlier, bolstered by a sharp rise in crude prices.

Oil prices have been volatile following Russia’s invasion of Ukraine on February 24.

Brent crude, the international oil benchmark, surged to nearly $140 a barrel last month, only to give up some of those gains after the US said it would release emergency reserves. More Covid-19 lockdowns in China have raised the prospect of weakening oil demand.

US banks kicked off corporate reporting season last week. JPMorgan Chase, Citigroup, Goldman Sachs and Morgan Stanley all reported declines in profits as dealmaking activity slowed and lenders bolstered their provisions for potential credit losses because of the economic uncertainty caused by the conflict in eastern Europe.

UK petrochemicals group says regions such as US more attractive

Petrochemicals group Ineos has warned that British manufacturing is coming under threat from competing regions such as the US because of its higher energy costs.

Britain’s largest privately owned company said European chemical producers were suffering from gas prices that had hit seven times the levels paid by competitors in the US, where abundant shale supplies have fuelled a petrochemicals renaissance.

“It doesn’t take long before people cotton on and say we should produce [chemicals] in the Middle East and the US and import it into the UK,” said Tom Crotty, director at Ineos. “The longer [high energy costs] go on, the more risk you have to those assets and industry.”

Higher natural gas prices for heavy industries such as chemicals, steel and glass have prompted Ineos to renew its push for the UK government to consider fracking to bolster domestic energy supplies.

Ineos, owned by Jim Ratcliffe, has a sprawling business spanning petrochemicals, refineries and oil and gas production, as well as consumer brands and sport. It runs the Grangemouth refinery and petrochemicals complex in Scotland, while it has invested £250mn to develop the extraction of UK shale gas to replace dwindling supplies from the North Sea.

Most European crackers — industrial facilities that break down hydrocarbons into chemicals — use naphtha, an oil-derived feedstock that has risen in price by as much as 35 per cent since the invasion of Ukraine. About 44 per cent of Europe’s naphtha imports came from Russia last year, according to Ajay Parmar, senior oil market analyst at ICIS, a commodity data business.

Ineos’s strategy has been to shift its petrochemical plants in western Europe towards feedstocks of ethane, made from natural gas, which Crotty said it was still able to secure cheaply from the US.

Even so, the soaring energy costs to process it into ethylene, the building block for a vast range of chemicals and plastics, were limiting operations, with output down roughly 10 per cent, added Crotty.

“From an overall Ineos perspective, our petrochemical businesses are being really hard hit,” he said.

Crotty estimated that 1.2mn tonnes of annual ethylene production would shut down as a result of higher energy costs. ICIS estimates that Europe produces about 21mn tonnes of ethylene a year.

“The risk is really there that if you’re Airbus buying carbon fibre products for making aircraft or Mercedes-Benz buying bumpers for cars, you are price sensitive and won’t be willing to pay a premium for local production,” he said.

Energy has doubled from about 10-12 per cent of total costs for European crackers to about a quarter since the end of last year, ICIS estimates.

Last year Ineos generated more than €2bn net profit on €18.8bn revenues.

Crotty argued that unless measures were taken to improve energy security, including allowing Ineos to drill at a test fracking site, then the UK and European petrochemicals industry could undergo “fundamental changes” in the next three to five years.

The UK government in 2019 banned fracking in England because of safety concerns, but recently promised a scientific review into the controversial shale gas extraction technique as Europe races to reduce its reliance on imports of hydrocarbons from Russia.