Two of the hottest names in finance lately are bitcoin and special purpose acquisition companies (SPACs). SPACs have replaced much of the traditional initial public offering transactions which is historically how companies have gone public. Intercontinental Exchange (NYSE:ICE) recently tapped this method in order to place a public value on one of its subsidiaries. Here is what you need to know.
Intercontinental Exchange recently announced that it will take its Bakkt subsidiary public via a SPAC transaction. SPACs have been all the rage for taking companies public lately. In this transaction, Intercontinental Exchange will merge Bakkt with VPC Impact Acquisition Holdings (NASDAQ: VIH), a SPAC sponsored by Victory Park Capital.
An impressive financial conglomerate
Intercontinental Exchange is known primarily for its holding in the New York Stock Exchange. The company also owns Euronext, the biggest stock exchange in Europe, along with the Commodity Exchange. Intercontinental Exchange has also been investing heavily in the mortgage space, most recently with its purchase of mortgage software company Ellie Mae. The mortgage arm also owns the Mortgage Electronic Registration System (MERS) which is a centralized electronic repository of servicing and title information.
A new marketplace for digital assets
Bakkt is an integrated platform that allows individuals and institutions to transact in digital assets, especially cryptocurrencies. According to the company's website, "Bakkt unlocks the $1.2+ trillion of digital assets that is currently held in cryptocurrencies, rewards and loyalty points, gaming assets and merchant stored value."
The platform also permits trading of other assets such as loyalty and rewards points. The subsidiary also operates a custody solution for bitcoin futures and other derivatives based on bitcoin. Bakkt intends to launch other services in the future. After the transaction, ICE will retain a 65% economic interest in Bakkt, and have a minority voting interest.
This is clearly a case of striking while the iron is hot. Bitcoin has been on a tear for the past, rising almost fourfold since September.
Why is ICE doing this? When companies have a subsidiary that they feel is not being reflected in the stock price, spin-offs are a way to force the market to place a value on it. This was a favorite technique during the late '90s internet bubble, when old companies tried to raise their share prices by spinning off their nascent internet arms. When companies like Yahoo! used to trade on metrics like price-to-pageview ratios, established companies hoped to boost their price-to-earnings ratios by using similar financial alchemy. It usually didn't work.
Bakkt is in the really early stages
Intercontinental Exchange sees the value of the Bakkt at something like $2.1 billion including any debt and cash. Bakkt is really an early-stage company, with revenue of only $9 million and expenses of $39 million. For the first quarter, Intercontinental Exchange sees Bakkt contributing $7 million in revenue and expenses of $25 million. Investors in the new company should recognize that it will take some time before Bakkt generates any meaningful earnings. The big benefit of Bakkt is that it gives investors a chance to gain some exposure to bitcoin via a tradeable stock with a reputable sponsor.
Is Bakkt a buy? It certainly is hard to see the company as anything other than a highly speculative trade, similar to bitcoin. As bitcoin becomes a more mainstream medium of exchange, there will certainly be a need for bitcoin services. As far as Intercontinental Exchange, Bakkt will probably remain a small part of its financial results. There are plenty of reasons to recommend ICE to begin with, starting with its holding of the New York Stock Exchange and its mortgage business. However, investors hoping to see any sort of meaningful multiple expansion due to the Bakkt listing will probably be disappointed.