23andMe’s IPO and other SPACs to watch

Biotech firm 23andMe has been tipped as the next big IPO to float via a Special Purchase Acquisition Company (SPAC). The SPAC in question is Richard Branson’s VG Acquisition Corp [VGAC], which has backing from his Virgin Group.

Since October, VG Acquisition has raised $509m to buy consumer-based companies and expand the Virgin Group's US portfolio.

Reports are that VG Acquisition will merge with 23andMe, with the deal potentially set to be confirmed in the next few weeks. If it goes ahead, 23andMe could be priced at as much as $4bn. VG Acquisition's share price jumped 18% following the announcement.

With SPACs becoming more common in 2021, is 23andMe one to consider?

 

What does 23andMe do?

23andMe is a leader in direct-to-consumer DNA testing. After years of growing revenues, 23andMe had to reduce their staff by 100 in January 2020, following a decline in DNA test sales. Now the firm is planning to use its genetic research database — the largest in the world — to explore drug discovery.

So far, it has licensed a drug developed in-house to another firm, and is collaborating with GlaxoSmithKline [GSK], which has a $300m stake in 23andMe.

  

The company also recently made headlines with an online tool that tells someone their risk of contracting a severe case of coronavirus.

 

What is a SPAC?

A SPAC is a company with no commercial goals other than to raise money through an IPO in order to buy another company. Also known as a “blank cheque” company, these vehicles are often set up by Wall Street professionals

The most successful of these so far is arguably Virgin Galactic [SPCE], which went public by merging with Social Capital Hedosophia — a SPAC setup by Facebook [FB] executive Chamath Palihapitiya.

Virgin Galactic, which promises to take space tourists on quite literally out-of-this-world trips, has seen its share price soar over 400% since listing.

Another high-profile example is Draftkings [DKNG]. The fantasy sports and sports betting company completed a $3.3bn merger with SPAC Diamond Eagle last year. Since listing in August, Draftking's share price has gained 513%, giving it a market cap of $23.55bn.

  

Is 2021 the year of the SPAC?

2020 was a record-breaking year for SPACs. Circa $64bn was raised through these vehicles, coming close to the $67bn raised through traditional IPOs.

Upcoming SPACs include Butterfly-Network, an ultrasound outfit backed by Bill Gates, and possibly WeWork.

Investors might remember that WeWork's much-hyped IPO in 2019 imploded over concerns regarding founder Adam Neumann's business style.

In what amounts to something of a turnaround, a source told Reuters that WeWork has met with several blank cheque firms recently, although they cautioned that a deal could fall apart.

“We have SPACs approaching us on a weekly basis” - WeWork executive chairman Marcelo Claure

 

“We have SPACs approaching us on a weekly basis,” WeWork executive chairman Marcelo Claure commented at a conference held by Bloomberg.

Digital publishers Vice Media, Vox Media, and Buzzfeed have also held talks about going public via a SPAC.

 

Where next?

One drawback of a SPAC is that investors don't know what the funds raised will eventually be used to buy — hence the “blank cheque” idea. The money goes into an interest-bearing account until a company is found. Once the acquisition takes place, investors then get the choice of getting their money back plus interest, or swapping it for shares in the company.

Being able to identify what a SPAC is eyeing up helps investors weigh up the opportunity, and potentially get in on the ground floor of an up-and-coming company.