Investing in any special purpose acquisition company, or SPAC, that hasn't yet identified a target to take public is essentially a bet on management. That's why Fool.com contributor Matt Frankel, CFP, thinks Simon Property Group Acquisition Holdings (SPGS.U +0.00%) could be worth a look. In this Fool Live video clip, recorded on March 1, Frankel and Industry Focus host Jason Moser discuss why the SPAC's sponsor Simon Property Group (SPG 0.52%) has a talent for allocating capital and could leverage its scale and expertise to deliver value for its shareholders.
Jason Moser: OK well, let's talk about one that doesn't have anything in the hopper right now, but it sounds like they are on the hunt at least. Simon Property Acquisition -- the ticker there today is SPGS. I've heard you talking a lot about Simon before on our show here, Matt, I know that you're a big fan of Simon Property Group. Tell us a little bit about Simon Property Acquisition, what do you think they may be looking?
Matt Frankel: Simon Property Group, the leading mall operator in the world, recently completed a SPAC IPO because it's 2021. Why not? [laughs] Why are so many of these companies like Simon issuing SPACs? The answer is the economics are fantastic if it works out.
Moser: Sure.
Frankel: Simon's only real contribution to this deal is I think they paid about $5 million to buy warrants in the SPAC that are essentially options. If the deal works out, Simon will own 20% of the SPAC shares for free, essentially. Plus will have about 5 million warrants to buy more stock if it does well, for contribution of $5 million. If a SPAC does well, if they can find a target that the market really receives well, Simon can make hundreds of millions, if not billions of dollars, for very little risk. Great economics. They recently went public, $10 IPO price. Like most SPACs, what they're going to acquire is very vague at this point. SPACs usually before they have a deal, they'll issue a registration statement, it will say what they're targeting. They are targeting -- let me get this right -- a disruptive retail, hospitality, entertainment, or real estate business. That could be almost anything. [laughs] They are vague on purpose because it gives them a lot of options.
Moser: Sure.
Frankel: They don't want to limit themselves to say, we're going to acquire a fintech provider that focuses on the real estate industry, because that's a very narrow scope. They give themselves options. I like this one. We don't know what they're buying yet. Simon has a fantastic track record when it comes to capital allocation, especially recently. If you've been to a Simon mall, they're a class in their own. Simon has invested heavily in its properties in ways that are keeping them full no matter what e-commerce is doing. You know that Simon's base rent actually went up in 2020, which is pretty remarkable for a mall.
Moser: It really is.
Frankel: They're adding things like entertainment venues, hotels. They have a partnership with Marriott (MAR 0.83%) to put hotels in some of their malls. The mall in Baltimore has a medieval times in it, that attracts people there. There's a casino attached to that mall Maryland Live is in that mall. It's stuffed it's going to keep people coming to malls regardless of what the e-commerce is doing. Recently, Simon has done a great job of making smart acquisitions. They bought J.C. Penney out of bankruptcy. They bought Forever 21 out of bankruptcy. Their return on Forever 21 so far has been about half of what they paid for it. In less than a year. Their share of the profits that's generated since they brought it out of bankruptcy has been about half of their cost basis. That's a pretty impressive investment. They bought Aeropostale a few years ago, and they say that's been a very profitable investment. They have a good track record of acquiring struggling retail businesses at a great value. Now, they're not limiting themselves to a struggling retail business, which I think is why they wanted to do this so they can really branch out. I mean, as a mall operator, they really can't make a great shareholder case to acquire, say, a fintech provider. But as a stand-alone SPAC, they could certainly make that case. They want to give themselves a little more options to put their great track record to work. Like I said, a SPAC is a bet on management. David Simon, the CEO of Simon Property Group, is the SPAC's Chairman. Eli Simon, his son is the SPAC's CEO and when you look at SPAC, look deeper into the board members. If you're not totally sold on the management, it includes the CFO of a company called Rent the Runway, which my wife absolutely loves.
Moser: My wife likes that one too.
Frankel: Their CFO is one of the Simon Property Acquisitions board members, as well as the founder of a company called Graduate Hotels. We have a Graduate Hotel in Colombia down here. It's an up and coming really trendy hotel chain. They might be targeting something on the hospitality side. The board members can usually give you some clues as to where they might be looking. I like this one. It's still a risk, they have two years to find their target. They just recently went public within the past month, the SPAC was created. It's still trading for pretty close to its IPO price of $10 a unit.
