Target Company: Opendoor Labs Market Cap: $816 million On Sept. 15, Social Capital SPAC, run by venture investor Chamath Palihapitiya said it would merge with Opendoor Labs. Opendoor is an online real estate firm backed by SoftBank (OTCMKTS:SFTBY). Opendoor buys up properties, fixes them and then resells them. It started losing money from the pandemic, and decided to raise capital by going public with this SPAC deal. The $4.8 billion enterprise value transaction will provide $1 billion to Opendoor, which made $4.7 billion in revenue last year. Opendoor sold over 18,000 homes through its online portal in 2019. I must say that reviewing the transaction details is very interesting. For one, both Opendoor and Social Capital provided separate slide presentations, which is rare. Second, the Social Capital presentation is very simple — just one line per page. I found that quite effective. Third, the deal economics are pretty sound. The post-closing combined entity will end up with $1.5 billion in cash and securities on the balance sheet. This implies that the equity value is $2.5 billion, at $10 per share. Page 44 of the slide presentation shows how the deal is undervalued. For example, the final fully diluted number of shares outstanding after the merger will be 630.7. The company says at $10 per share the market cap will be $6.307 billion. Since there will be $1.539 billion in cash on the balance sheet, this is subtracted from the equity value to net a $4.768 billion enterprise value. And since the company made $4.7 billion in revenue in 2019, this puts its valuation at a cheap 1 times EV-to-sales valuation. Moreover, estimated sales for 2023 will be 9.8 billion, so it is at 0.5 times 2023 sales. But IPOB has already risen to $15.89 as of Sept. 24, up 58.9% from its $10 IPO and where the deal is priced. Therefore, the implied equity value is now $10.02 billion, and the implied enterprise value is $8.482 billion. So it is not as cheap. But is still implies a low 0.87 times 2023 sales. Moreover, the warrants (NASDAQ:IPOB.WT) now look very interesting, since they are in-the-money. Their exercise price is $11.50, but they trade for $4.75 per warrant. That implies that they are only 6.4% higher than the intrinsic value. But once the deal closes, the warrants offer a huge upside. You can read more about how in-the-money SPAC warrants work for announced mergers in my previous article on this subject. However, that is not to say the whole “iBuying” of real estate is not without its critics. The Wall Street Journal reviewed this SPAC deal skeptically on Sept. 16. The author, Lauren Forman, pointed out that the financials show that Opendoor will not make money even on an EBITDA basis until 2023. Moreover, Opendoor is following its competitors Zillow (NASDAQ:Z) and Redfin (NASDAQ:RDFN) in their business model of sales of services and related products. On that note, Forman says that faith in the iBuying business model “may be a little too blind” for investors. However, she simply doesn’t get the value proposition here. Zillow trades for $23 billion in market cap. Analysts forecast just $4.89 billion in revenue next year. But Opendoor already made $4.7 billion in 2019 and will make $9.8 billion in 2023. That implies IPOB / Opendoor should trade at least 118% higher than today’s price. Zillow’s market cap of $21.8 billion divided by Opendoor’s implied market cap of $10.02 billion (see above) is 118% higher. But Opendoor should be equal since it has similar revenue. Therefore, look for this stock to double before or after the deal closes.
2020-10-13