Is Equinox a good target for Chamath Palihapitiya's Social Capital SPAC?

This article was originally published on Opto - Invest in the Next Big Idea.

Negotiations between Palihapitiya's Social Capital Hedosophia Holdings Corp. VI SPAC and Equinox, which also owns SoulCycle, are ongoing, and a merger might not actually take place. People close to the deal suggest the combined entity could be worth more than $7.5bn, as reported by Bloomberg.

A potential merger between Equinox and a special purpose acquisition company has been bubbling for a couple of months. Back in March, Sportico reported that the fitness company was in talks with at least 12 SPACs.

How have investors reacted to the Equinox SPAC rumours?

Investors seem unsure, with Social Capital's share price dipping on the announcement. Obvious headwinds include the pandemic and a general shift to exercise at home -- see Peloton's [PTON] bumper first-quarter earnings.

Before the pandemic, Equinox was on the up, with circa 350,000 members, and annual memberships starting at $2200. This added up to over $1bn in revenue each year. Equinox had also managed to secure funding from Silver Lake investors for 50 more locations and the development of an online fitness app.

SoulCycle, its boutique spin cycle acquisition picked up in 2011, runs exclusive classes with punters paying top dollar to cycle in a dark room.

However, the SoulCycle acquisition also loaded Equinox with debt, which it struggled to pay back once the pandemic bit The fitness company had to request stays of execution from lender HPS Partners before reaching a financial agreement on SoulCycle's $265m credit facility in February.

Commenting on the latest developments, CNBC Squawk on the Street's John Faber said that Equinox is targeting a value 22x 2023's estimated EBITDA of $320m. 

Faber describes Equinox's business as having been "crushed" by last year's events. Equinox lost $350m in 2020, as the pandemic shuttered gyms. Many members were able freeze memberships, while gym staff were also furloughed, putting finances under pressure.

"They need money. They've got [as] one person characterised it a 'pretty funky' capital structure," said Faber.

Equinox is looking for PIPE investment of $2bn, according to Faber, who also referenced the company's debt pile in his report.

Where next?

A merger with Palihapitiya's Social Capital will go a long way in helping Equinox clear the debt and get back on a firmer financial footing. Palihapitiya was also behind taking Virgin Galactic [SPCE] public via a SPAC in 2019, kicking off the current SPAC boom.

However, a forecasted target of 22x is toppy considering last year's losses. More generally, SPACs have come under fire for filling investor presentations with lofty projections, with the SEC warning against companies making enticing but misleading statements in these materials.

Such scrutiny and the general move away from growth stocks has seen SPACs crater since their peak at the start of the year. The Next Gen SPAC ETF [SPAK] is down circa 10% this month, while the initial Bloomberg report on Equinox did not do much for Social Capital's share price.

Whether this is a good deal depends on white-collar workers returning to the gym in their droves -- especially at the higher-end luxury market where Equinox operates. Some may prefer to stick with their expensive Peloton bikes.

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