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Muddy Waters Takes on Michael Klein, and SPACs

Chris Bryant
·5 min read

(Bloomberg Opinion) -- Carson Block of Muddy Waters Capital LLC made his name as a short seller targeting obscure Chinese companies. His latest critical report locks horns with some of the cream of the U.S. financial and business establishment, while taking aim at their beloved new fad: the special purpose acquisition company, or SPAC.

This is shaping up to be quite the fight.

Block launched a short attack this week on MultiPlan Corp. The U.S. health-insurance data analytics company went public last month after merging with Churchill Capital Corp. III, one of former Citigroup rainmaker Michael Klein’s four listed SPACs.

It’s not clear whether Block will win the argument that MultiPlan’s shares and debt are significantly overvalued. His assertion that SPAC sponsors extract excessive fees is worth a hearing, though.

The Churchill deal valued MultiPlan at $11 billion, including its borrowings, and was one of the largest ever involving a SPAC. MultiPlan’s previous owner, private equity firm Hellman & Friedman, has kept a big stake in the business. H&F was just the latest in a string of private equity firms to own the company.

Block contends that MultiPlan’s business has been in decline for several years and could be about to lose its biggest health-insurer client, UnitedHealth Group Inc., which accounts for 35% of its revenues. UnitedHealth is developing a similar analytics tool in-house.

“In the great present-day money grab known as SPAC promotion, egregious mistakes will be made,” Block wrote in his typical take-no-prisoners style. “A business model that incentivizes promoters to do something — anything — with other people’s money is bound to lead to significant value destruction on occasion.”

MultiPlan delivered a long rebuttal of Block’s claims on a Thursday investor call, arguing that its UnitedHealth relationship is expanding and that the latter’s Naviguard health-care analytics product is no substitute for MultiPlan’s. It also denied using creative accounting to conceal deteriorating performance. Its shares didn’t recover, however, extending their decline this week to 28%.

SPACs have raised about $60 billion in North America this year but investors have become more circumspect lately about companies that go public this way. The IPOX SPAC index, a benchmark for this type of equity finance, has declined 12% since a September peak.

I’ve written before about how the pressure for SPACs to deploy investors’ money, plus the competition among SPACs to strike deals, could lead to poor returns. Coming soon after the short-seller takedown of another SPAC-backed company, hydrogen truck group Nikola Corp., it’s no wonder MultiPlan investors have been unsettled.

In fairness, MultiPlan is (unlike Nikola) a long-established business, with almost $1 billion in annual revenue — although its sales have declined since 2017.

Klein has raised more than $4 billion from investors for his various SPACs, putting him in the upper echelons of SPAC sponsors. Tech billionaire Michael Dell and Saudi Arabia’s wealth fund have invested in the MultiPlan transaction, according to the prospectus, while Laurene Powell Jobs, the widow of Apple Inc. founder Steve Jobs, is a partner of the Churchill sponsor via her venture capital and philanthropic organization, Emerson Collective.

Klein is in the process of raising a fifth SPAC and has formed a high-caliber brain trust, called Archimedes Advisors, to consult with and help source deal opportunities. Among these advisors are Jony Ive, Apple’s ex-chief designer, and Alan Mulally, former chief executive officer of Ford Motor Co. They both have a financial interest in the success of the SPACs, according to a disclosure.

Those involved in Klein’s first SPAC, which acquired scientific-data company Clarivate Analytics in 2019, have almost trebled their money (not including any return from share warrants). In contrast, MultiPlan’s shares are now more than 35% below the price at which Klein’s third SPAC purchased them.

It would be surprising if Klein had failed to do sufficient diligence on MultiPlan, as Block alleges, because he’s known the company for years. Klein advised Warren Buffett’s Berkshire Hathaway on a potential bid for MultiPlan several years back, he told investors recently (Buffett didn’t bite).(1)

This time around, Klein’s former employer Citi helped advise on the MultiPlan deal, along with Klein’s own boutique investment firm, M. Klein & Company. His advisory firm was paid about $30 million for advising on the transaction, about half of which was paid in MultiPlan stock (and is subject to vesting conditions) and another $8 million was donated to charity, according to the prospectus.

The SPAC sponsors — Klein’s firm, various financial partners and the brain trust — received 27.5 million MultiPlan shares, worth $172 million at current prices, effectively for free. Their total holdings could almost double if warrants to purchase further stock become exercisable.

At least Klein is subject to a performance hurdle on his one-third portion of the founder shares, as well as a chunk of the share warrants. They’ll only vest if the stock rises above $12.50 for 40 trading days during the next four years. Currently the stock is at about half that level, so he’s got work to do. The sponsor shares are also locked up until 2022.

At this stage, MultiPlan’s stock-market performance is probably more of a worry than the investors’ potential rewards. A comprehensive rebuttal to Block from Klein, who’s a MultiPlan director but didn’t take part in the investor call, would be a good place to start making amends to his powerful friends.

(1) Klein told an investor call he’d spoken to executives representing 65% of Multiplan’s revenue base who told him Multiplan was critical to their operations.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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