Share Dilution

Black Rifle Coffee Company valuation distorting tight float (NYSE: BRCC)

zim286/iStock via Getty Images

Black Rifle Coffee Company (NYSE: BRCC) recently de-SPAC’d, and performed extremely well. The business includes Direct-To-Consumer (“DTC”) coffee sales, wholesale coffee and merchandise (Ready-To-Drink (“RTD”)), and their new Outpost segment with real outlets Brick-and-Mortar. for coffee and equipment.

Wholesale DTC Outposts

DCFC verticals (IR board BRCC)

At the current share price of $26 and with pro forma 191.4 million shares outstanding, BRCC is valued at $5.0 billion, less net cash of $203 million, for an EV of $4.8 billion. In addition, there are 17.8 million warrants (BRCC.WS) with strikes of $11.50 which have a net dilutive impact of 6.4 million shares ($154 million – more below). ). Finally, 21.2 million shares vested for pre-SPAC owners and founders based on share price performance:

Listing of BRCC share structure after consolidation

BRCC shareholding structure (IR board BRCC)

the $15 tranche acquired in Marchand the Slice of $20 acquired on 4/5. These additional shares, at $26, represent approximately $509 million of additional EV. According to their SPAC projections, Black Rifle expects the following:

DCCO Financial Projections

CCRB projections (IR board BRCC)

After Fourth quarter results have been published, BRCC has raised its forecast for fiscal year 22 from $311.4 million in revenue to… $315 million. This, against an EV of approximately $5.4 billion if the warrants are exercised at their full value. Based on earnings callthis revenue increase seems more related to price increases to combat inflationary pressures than to further sales growth.

Black Rifle made a valiant pre-merger effort to appear reasonably valued at $10/share against a forecast of $187 million in FY23E gross profit and $430 million in FY2EE revenue, but the update below suggests now that they are vastly overvalued compared to their peers (~29.1x gross profit and 12.6x revenue):

BRCC Assessment Compositions

BRCC Assessment Compositions (IR board BRCC)

Black Rifle Coffee has a very loyal customer base, but does that justify a valuation of over $5 billion for a coffee company that doesn’t even plan to earn 1/10and of that amount of income next year? To make the comparison even more shocking, consider the price action for some of the peers identified since January 5and date used above:

Comparison between the performance of the BRCC and its peers

Comparison between the performance of the BRCC and its peers (Looking for Alpha)

Comparison valuations are compressing even as Black Rifle’s stock price soars into the stratosphere.

Checking analysts’ estimates, even their targets suggest $916 million in revenue and $163 million in EBITDA by 2026 (5.9x revenue and 33.4x EBITDA):

CCRB projections

CCRB projections (TIKR.com)

So what explains the recent price action? I believe the complicated capitalization structure and tight float of BRCC, which is about to unravel quickly, may leave shareholders dazed.

Structure of the CCRB

Structure of the CCRB (ROCC Prospectus)

Ownership of DCCB

Pro-forma ownership of DCCB (DCFC 10-K)

DCFC De-SPAC Structure

Structure of BRCC De-SPAC shares (DCFC 8-K)

At closing, there were only ~27.6 million shares free-floating, of which approximately 20 million were controlled by the sponsor (SilverBox) and approximately 1.8 million were controlled by Citadel. In other words, the free float was tightly constrained to only ~$60M worth of shares at de-SPAC, versus the implied valuation of $2B at that time. So why is it time to bet against Black Rifle’s stock price?

  • Low-float trading is coming to an end as the warrants were redeemable andD notices of redemption have been delivered to holders after the conditions have been satisfied. If they are not exercised, they will be redeemeded for only $0.10/money order in May, although the exercise cannot begin until their registration is deemed effective. Maybe there is a chance that they will be redeemed before the S1 becomes effective? The warrants are attractive in that the value delivered to the holder will be equal to the excess of the VWAP over the following (non-previous) 10 days and will not exceed 0.361/share per warrant. This translates to approximately 6.4 million cashless dilution shares at current prices. From the PR of 4/4:

“Payment upon exercise of the warrants will be made on a ‘cashless’ basis in which the exercising holder will receive a number of Class A common shares to be determined in accordance with the terms of the warrant agreement and based on the date of redemption and the volume-weighted average price of the Class A common stock for the ten (10) trading days immediately following the date on which notice of redemption is sent to registered holders of the Warrants. outstanding subscription.”

  • The shares of the PIPE, Backstop and Forward Purchase agreements (30 million shares) have not been locked-up, but remain unsaleable until the S1 filed on March 15and is deemed effective (along with the Warrants).

Once those 30 million shares and the warrant shares are sold, the public float will increase significantly, which will likely leave many holders looking to capitalize on high prices in case DCBC faces the sub-$10 fate that so many SPACs have succumbed. Without clear valuation support above $10 and fears over slowing DTC core business growth, these fears may be justified.

Risks/Other Considerations

  • Due to low free float and a lack of stocks available to borrow, price action can be very volatile. Price action to date suggests that going long or short on this stock could quickly backfire.

  • Important management red flags have been alleged in this post which are worthy of consideration.

  • DTC growth is slowing rapidly (SPAC forecasts for single-digit growth in 2023). An investment in BRCC becomes a bet on their deployment of Outposts in the years to come as a key growth engine.

  • This is an actual quote from the Q4 conference call:

…We currently have three editors in the field in Ukraine providing real-time news for Coffee or Die, the only coffee company in the world to provide real-time news from the field with veteran war correspondents.

Conclusion

I don’t think Black Rifle Coffee Company is a bad business, revenue growth of 20-30% per year with a gross margin of around 40% is a great business model. However, the combination of stratospheric valuation and strong technical selling on the horizon does not make me want to hold the stock just yet. I am closely monitoring the timing of the entry into force of PIPE, Warrants and Backstop stocks, which should more than quadruple the current public float. In the event that these stocks are about to start trading, I can take a short position via put options.