Carson Block of Muddy Waters Capital LLC made his name as a short seller targeting obscure Chinese companies. His latest critical report locks horns with some of the cream of the U.S. financial and business establishment, while taking aim at their beloved new fad: the special purpose acquisition company, or SPAC.
Block contends that MultiPlans business has been in decline for several years and could be about to lose its biggest health-insurer client, UnitedHealth Group Inc., which accounts for 35% of its revenues. UnitedHealth is developing a similar analytics tool in-house.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.
SPACs have raised about $60 billion in North America this year but investors have become more circumspect lately about companies that go public this way. The IPOX SPAC index, a benchmark for this type of equity finance, has declined 12% since a September peak.
Klein is in the process of raising a fifth SPAC and has formed a high-caliber brain trust, called Archimedes Advisors, to consult with and help source deal opportunities. Among these advisors are Jony Ive, Apples ex-chief designer, and Alan Mulally, former chief executive officer of Ford Motor Co. They both have a financial interest in the success of the SPACs, according to a disclosure.
At least Klein is subject to a performance hurdle on his one-third portion of the founder shares, as well as a chunk of the share warrants. Theyll only vest if the stock rises above $12.50 for 40 trading days during the next four years. Currently the stock is at about half that level, so hes got work to do. The sponsor shares are also locked up until 2022.
Its not clear whether Block will win the argument that MultiPlans shares and debt are significantly overvalued. His assertion that SPAC sponsors extract excessive fees is worth a hearing, though.
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Kleins former employer Citi helped advise on the MultiPlan deal,MultiPlans stock-market performance is probably more of a worry than the investors potential rewards. A comprehensive rebuttal to Block from Klein,Emerson Collective.At this stage,curated by Post editors and delivered every morning.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.plus the competition among SPACs to strike deals,could lead to poor returns. Coming soon after the short-seller takedown of another SPAC-backed company,MultiPlans shares are now more than 35% below the price at which Kleins third SPAC purchased them.(1) Klein told an investor call hed spoken to executives representing 65% of Multiplans revenue base who told him Multiplan was critical to their operations.This time around.
In fairness, MultiPlan is (unlike Nikola) a long-established business, with almost $1 billion in annual revenue although its sales have declined since 2017.
The Churchill deal valued MultiPlan at $11 billion, including its borrowings, and was one of the largest ever involving a SPAC. MultiPlans previous owner, private equity firm Hellman & Friedman, has kept a big stake in the business. H&F was just the latest in a string of private equity firms to own the company.
MultiPlan delivered a long rebuttal of Blocks claims on a Thursday investor call, arguing that its UnitedHealth relationship is expanding and that the latters Naviguard health-care analytics product is no substitute for MultiPlans. It also denied using creative accounting to conceal deteriorating performance. Its shares didnt recover, however, extending their decline this week to 28%.
It would be surprising if Klein had failed to do sufficient diligence on MultiPlan, as Block alleges, because hes known the company for years. Klein advised Warren Buffetts Berkshire Hathaway on a potential bid for MultiPlan several years back, he told investors recently (Buffett didnt bite).(1)
Carson Block, founder and director of Muddy Waters LLC, right, looks on following a Bloomberg Television interview in Zurich, Switzerland, on Tuesday, Sept. 13, 2016. Block said European investors arent doing their homework in regards to digging into financial statements. (Photographer: Bloomberg/Bloomberg)
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The SPAC sponsors Kleins firm, various financial partners and the brain trust received 27.5 million MultiPlan shares, worth $172 million at current prices, effectively for free. Their total holdings could almost double if warrants to purchase further stock become exercisable.
In the great present-day money grab known as SPAC promotion, egregious mistakes will be made, Block wrote in his typical take-no-prisoners style. A business model that incentivizes promoters to do something anything with other peoples money is bound to lead to significant value destruction on occasion.