Longview Acquisition Corp. II: Follow-Up To Butterfly Network SPAC Trading Within Pennies Of Redemption Value

Summary

• Longview Acquisition Corp. II is the new SPAC from Glenview Capital Management, the sponsor behind the first Longview Acquisition Corp.'s well-received business combination with Butterfly Network.
• Despite this strong track record of recent success, shares of the new Longview Acquisition Corp. II are trading at only a very slight premium to redemption value.
• Longview Acquisition Corp. II fulfills many of the hallmarks of a successful SPAC, raising substantial capital and management that boast significant capital market experience.
• A focus is on healthcare, where Glenview has historically found value, also bodes positively.
• We are in a more difficult environment for SPACs where it is increasingly important to separate the wheat from the chaff.

SPAC Environment

The rotation out of high-multiple growth stocks and more speculative names in general that has taken hold of the market this March has not spared the SPAC asset class. On a recent episode of the Real Vision Daily Briefing, Real Vision’s Jack Farley pointed out that of the 282 SPACs that have gone public over the past 2 years (since March 5th of 2019), 36 were trading at less than the $10 offering price 3 months ago, and on the day the show was recorded, that number had nearly doubled to 64, which is a troubling trend for investors in the space.

Despite this apparent decreased appetite for more speculative and more risk-laden equities, a deluge of new SPACs continue to file to go public on a daily basis. While this change in sentiment does not necessarily mean that the SPAC ‘party’ is over as some cynics have eagerly called for, it does imply that many of these new entries are late to the party and serves to remind investors that it is important to focus on the highest-quality SPACs in this environment. This new scrutiny for the space seems to imply that we may not see some of the stratospheric valuations that some SPACs climbed to last summer, but conversely it also means that investors may be able to start positions in some decent opportunities with less froth.

In what has been called the ‘SPAC-lash’, caused by a combination of the aforementioned risk-off environment and reports of further scrutiny from the SEC for the space, even some higher-quality SPACs from sponsors that have delivered on successful deals were not immune from the selloff. For example, last week Soaring Eagle (SRNG) (SRNGU), from the team behind the DraftKings (DKNG) and Skillz (SKLZ) deals, traded below its $10 per share redemption value, giving investors a chance to invest with limited downside.

Another such SPAC from an experienced team with a recent, high-profile deal under its belt that briefly traded below $10 a share was Longview Acquisition Corp. II (NYSE:LGV) (LGVU), which is now trading at $10.01 at the time of writing. Longview Acquisition Corp. II fulfills many of the hallmarks of a successful SPAC, as outlined by Seeking Alpha's Chris DeMuth Jr. - it has raised substantial capital, its sponsor has significant capital markets experience, and additionally, it is targeting a sector that its management team has valuable expertise in.

Longview Acquisition Corp. II

(Image Source: longviewacquisition.com)

Longview Acquisition Corp. II is the second SPAC from New York City-based hedge fund Glenview Capital Management. Glenview is the sponsor behind the original Longview Acquisition Corp (LGVW), which combined with Butterfly Network (BFLY), a manufacturer of handheld ultrasound equipment, last November. The original Longview launched last summer and its combination with Butterfly Networks was well-received by the market, with shares trading as high as $30 before receding to approximately $18 a share at the time of writing.

Even with the recent selloff, shares are still worth 80% more than when Longview began trading less than a year ago, representing a sizable return for early pre-deal investors. SPACs from sponsors with solid track records like this have often traded as high as 20-40% above redemption value before announcing a deal, so this new environment seems to be giving investors the opportunity for some decent shots on goal at lower risk when SPACs like Longview II trading within a few cents of the $10 redemption value.

As an aside, given that Ark Invest seems to be one of the investment community's favored topics of discussion at the moment, the original Longview Acquisition garnered investment from the Ark Genomic Revolution Multi Sector ETF (ARKG) when it announced its combination with Butterfly Networks. As of its latest filing, the healthcare-focused Ark ETF holds over 4.7 million shares of BFLY.

Offering Details

Longview II sold 60 million units to investors at $10 apiece, with each unit consisting of a Class A share and ⅕ of a warrant. The $600 million raised is fairly large by SPAC standards, and SPAC size is one of the most important predictors of success. In another bullish signal, Glenview upsized this offering from the 50 million units it originally intended to offer.

Unsurprisingly, given Glenview’s focus on the sector and the positive reception for the Butterfly Networks deal, Longview II’s search will place a “particular emphasis” on the healthcare sector, thanks to Glenview’s “deep knowledge and strong investment performance in the sector.” The S1 goes on to detail how “Glenview has demonstrated a strong track record of historical performance, particularly within the healthcare sector.

The annualized return of Glenview’s Healthcare long equity portfolio has outperformed the S&P 500 Healthcare Index from Glenview’s inception on January 1, 2001 to February 28, 2021. We believe that the background and experience of Glenview will allow us to source, identify and execute an attractive transaction for our stockholders.” Glenview also likes healthcare because the “industry provides a large and growing marketplace with favorable macro trends” that “will provide an expansive universe of potential targets.” Additionally, the S1 states that it may also pursue targets in the industrial, consumer, media, and technology/technology services sectors.

It is best to focus on SPACs with experienced management teams with capital market expertise, and Glenview fits that billing. Glenview Capital Management is a hedge fund with approximately $3.6 billion in assets under management as of the end of February. Longview Acquisition Corp. II is led by Glenview’s founder, CEO and portfolio manager Larry Robbins as director, Glenview Partner and Co-President John Rodin as CEO, and Glenview Partner and Co-President Mark Horowitz as CFO. This triumvirate also led the first Longview Acquisition Corp., so right now I would say that this team is ‘1 for 1’ in successful deals.

Risks

The primary risk here is the possibility of the general climate for SPACs further souring as outlined above. Furthermore, while the aforementioned $10 redemption value is a backstop before a business combination is consummated, there is always the risk that the company Longview combines with sinks below that level after the combination, as seen with recent previously high-flying SPACs like XL Fleet (XL), which is now trading below $8.00. Given that many SPACs are combining with pre-profit or even pre-revenue companies, this is a risk that investors must consider.

In conclusion, even amidst the more challenging environment we are currently in for SPACs, Longview Acquisition Corp. II looks like a sensible choice given the asymmetry between its limited downside at the current price of $10.01 (versus the $10 redemption value) and the possibility for considerably more upside down the road when the Glenview team announces a deal.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LGV.U 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.

Investing in SPACs involves substantial risk. This is purely an academic exercise for our internal use and you should NOT invest based on this note. Investing in any equity involves risk. Potential investors should use this article as a starting point for their own research and due diligence. Before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. I am not a registered financial advisor or investment professional. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. This article is for general information purposes only, and should not be relied upon as a formal investment recommendation.