Just when I was ready to swear off special purpose acquisition companies, they pull me back in with an intriguing deal: Mudrick Capital Acquisition Corp II ( MUDS) is bringing Topps public.
I grew up collecting baseball cards. In fact, my first job was at a collectibles store. I raked in a whopping $1 per hour in cash and $2 in store credit. In truth, it was $3 store credit per hour, because I never walked with any cash. So, maybe the Topps names is nostalgia for me, but it intrigues me on the NFT side.
The name has been on my NFT radar since it worked with CurrencyWorks ( CWRK) on a Garbage Pail Kids NFT offering in 2020 that sold out $100,000 worth of offerings in a little over a day. Today, that deal would last maybe 15 minutes.
This is the perfect market for Topps to re-emerge on the public scene; however, let's start with the one flag on the deal. The entirety of the cash in the SPAC trust along with the PIPE -- private investment in public equity -- offering are going to Topps selling shareholders.
Not a single penny will flow into the company. I'd be less concerned if the company didn't have $194 million in debt against its $50 million cash position, but this deal should have wiped out the debt. If I'm an analyst, I'm hammering the company on this issue. Given the recent challenges for companies coming public in this manner, this is a concern. It makes it appear as though insiders are simply cashing out via public bag-holders and doing nothing to improve the balance sheet with the transaction.
The counter to this is there should be less pressure when the merger is done, and insider shares are unlocked. Heck, the market cap is only $1.17 billion and $500 million-plus of insider shares were sold. That will put half the stock with an average entry price around $10.15. In theory, that creates a stronger base.
Having Michael Eisner, former decades-long CEO of Disney ( DIS) , as chairman is a huge plus. There's no more licensed brand in the world than Disney. Topps carries some strong brands. The baseball card is iconic. Physical cards drive 55% of the company's revenue. Only 6% is drawn digitally at the moment. That's because a whopping 35% comes from its confectionery division. This is actually a nice diversification offering in terms of revenue draw. It should not be impacted if the collectables market tails off.
Topps is expected to generate $567 million in revenue this year, growing to $777 million by 2022. That will take earnings before interest, taxes, depreciation, and amortization, from $92 million to $115 million over the same time-period. Those are strong and consistent numbers, especially compared to the number of pre-revenue companies we've seen come public over the past six months. It's this type of EBITDA that allows a company to hold debt with less concern.
Growth can come via many angles: international expansion, new licenses, experience events and expanding into blockchain. We can assume non-fungible tokens will be a targeted growth pathway moving forward. To be successful, NFTs will need a community around the particular offerings. Topps is already building, and it has seen 50% compound annual growth rate in its daily active users.
Despite the only seller flag, which sounds as though it involves a long-time holder simply unwinding, there is a lot to like here. There's not many pure collectible and NFT names above the $1 billion market. Maybe we can't call Topps pure, given the confectionery component, but that's a plus not minus in my opinion. This looks to be a name worth owning.
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