LF Capital Acquisition Corp. Warrants: Potentially Significant Upside By September 22, 2020

Investment Thesis

LF Capital Acquisition Corp. (LFAC) is a special purpose acquisition company (SPAC) with its focus on the financial services and fintech industries. The SPAC is managed by a team of highly experienced executives and has a liquidation deadline of September 22, 2020. LFAC warrants (LFACW) are mispriced currently at $0.96 which represents a great entry point with potentially 2x-4x upside upon a deal announcement.

LFAC’s management team has extensive experience and a solid track record in the global banking industry. Its Chairman Baudouin Prot was previously BNP Paribas’ CEO from 2003-2011 and then Chairman from 2011-2014. During his tenure, BNP Paribas doubled its revenues from €18B to €39B and tripled its shareholders’ equity from €25.7B to €77.1B. Mr. Prot currently also serves as an Independent Director for multinational companies such as French utility company Veolia Environment, S.A. and French luxury goods company Kering SA, which owns brands including Gucci and Yves Saint Laurent.

LFAC’s CEO Philippe De Backer was the former global head of the Financial Services practice at Bain & Company and Chairman of digital banking platform Clearly. He specialized in the development of digital banking strategies throughout the world, including the development of the initial ING Direct strategy. The team not only brings industry expertise, but also a broad network of resources to help source and identify the potential target, more importantly to manage and improve the target to command a premium valuation after the business combination.

The price of LFACW does not fully reflect these positive fundamentals. Relative to other comparable SPACs with liquidation deadline in September, such as Hennessy Capital Acquisition Corp. IV (HCACW) and CF Finance Acquisition Corp (CFFAW), LFACW is trading at a significant discount (see table below). Both CFFA and LFAC focus on the financial services industry with the liquidation deadlines just 5 days apart, but CFFAW trades 153% higher than LFACW which should not be sustainable. On a relative value basis, LFACW might generate more upside upon a deal announcement which could happen at any moment over the next two months.

Warrant	Price*	Liquidation Deadline
HCACW	$1.74	September 5, 2020
CFFAW	$2.43	September 17, 2020
LFACW	$0.96	September 22, 2020

Source: Bloomberg. *Price as of July 10, 2020.

Price Chart: LFACW vs. HCACW vs. CFFAW as of July 10, 2020

Source: Bloomberg and company filings.

LFAC Profile

LFAC is a special purpose acquisition company (SPAC) that raised $158 million through its initial public offering and a private placement on June 22, 2018. The deadline to complete a business combination originally was set on June 22, 2020. On June 16, 2020, LFAC held its shareholder vote to extend the deadline by three months to September 22 so that LFAC could have enough time to source and complete a deal. As part of the shareholder vote, 13.5% of shareholders decided to redeem their shares for cash which reduced the amount in the Trust Account slightly to $142 million.

LFAC has standard SPAC warrant terms, summarized as follows:

1) The warrant strike price is $11.50 and one warrant is entitled to buy one underlying common share.

2) The warrants are potentially redeemable in a cash or cashless transaction if the LFAC share price is above $18 for 20 days out of 30 trading days.

3) The warrants will expire five years after the completion of a business combination or earlier upon redemption or liquidation.

As shown in the Bloomberg Black-Scholes warrant valuation worksheet below, the warrants at $0.96 with the underlying at $10.75, an $11.50 strike price and an expiry of 6/27/23 have an implied volatility of about 17%, which is pretty reasonable. Once a deal is struck, these tend to trade into the 25-30% range. The Black-Scholes fair valuation would be 60-100% higher if you plug in a 25-30% implied vol.

LFAC is currently searching for a target in the commercial banking industry, including legacy community banks, or in the financial technology industry. The U.S. commercial banking industry is going through a perfect storm due to a host of challenges:

1) Interest rates are at historic lows which is hurting the banks’ bread and butter business.

2) Credit fundamentals of both consumer and corporate borrowers are deteriorating due to COVID 19 which is leading to higher defaults and loan losses.

3) The aggressive policy responses by the Fed inflated the prices across all asset classes and created an unprecedented disparity between price and reality.

Unlike the general market indices, the challenges in the sector are well captured in the trajectory of the SPDR S&P Regional Banking ETF (KRE), a good proxy of regional or community banks that LFAC is targeting in the private market. After the general market bottomed in late March, the S&P 500 Index (SPY) bounced back quickly and recouped most of its losses while KRE’s response has been quite muted so far (see chart below).

This could potentially create an excellent opportunity and timing for LFAC which is equipped with ample capital, management expertise and strategic insight. As stated in its SEC filings, LFAC’s management team is currently searching for a community bank target with a relationship-oriented business model and room to improve. LFAC will enable, not replace, the platform through the application of new disruptive fintech and acceleration of digital transformation of the existing eco system.

Price Chart of KRE vs. SPY as of July 10, 2020

Source: Bloomberg.

Key Risks

1) If LFAC is not able to complete a business combination by the deadline, the SPAC will be liquidated and its warrants will be worthless.

2) SPAC warrants are often not as liquid as underlying common shares, warrant investors could be exposed to liquidity risk, especially in the volatile market environment.

3) Business combination with a commercial bank may require additional regulatory scrutiny and approval, which will potentially make it more difficult for LFAC to complete the merger.

Conclusion

LFAC is a financial services-focused SPAC with a liquidation deadline of September 22, 2020. The SPAC is managed by a very strong executive team and could announce a deal at any time over the next two months. LFAC warrants are currently mispriced relative to its comparable SPACs and could have 2x-4x upside upon a deal announcement.

Disclosure: I am/we are long LFACW. 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.