Where’s the FaZe Clan SPAC?

As the stock market worsens, experts and insiders feel the most popular esports team won't go public after all.

It’s been seven months since FaZe Clan made a huge promise: It would be the first gaming organization to flirt with a $1 billion valuation, and it would do so by merging with a blank corporation and going public in Q1 2022. Yet here we are, more than halfway through Q2, and its special acquisition corporation (SPAC) partner has not called for a vote to approve the merger.

So will this merger happen?

On April 29, Sports Business Journal reported that the deal “may be dead in the water” and went so far as to report that FaZe Clan could face bankruptcy. That last part seems hyperbolic, but it doesn’t sound far-fetched that at this time—with the stock market in a downturn and lofty revenue multiples—that FaZe may not go public after all.

For many critics behind the scenes, FaZe’s business model represents a bygone era of entertainment. With its influencer, whom it effectively sells sponsors against, the company is troublingly similar to that of a multi-channel network (MCN). Once a necessary part of the creator ecosystem, MCNs stood between creators and platforms, mostly YouTube, vetting the quality of the content and offering preferential revenue cuts and additional resources to creators. 

MCNs were once big business—with companies such as Disney acquiring MCN forerunner Maker Studios for $500 million in 2014. But as YouTube invested more time into directly building its relationships with creators, and those creators retained major entertainment agencies, the need for the middleman was eliminated. 

FaZe also often draws parallels to the talent agencies themselves, even though it isn’t one, nor is it licensed to be. Former FaZe player Turner “Tfue” Tenney sued the organization in May 2019, alleging it withheld massive sums of his earnings and illegally acted as a talent agency without a California license. FaZe later countersued, and the two settled both suits in August 2020

Still, the core of FaZe’s business is its ability to attract and retain talent and to lure brand sponsors and partners to pad its bottom line. It doesn’t hold any significant intellectual property or fixed assets. Its value is driven by subjective brand power, and in a bearish stock market it’s hard to see it going live at all, much less at a 19-times-revenue, $970 million valuation. 

“They would've had no problem going public at that near-$1-billion valuation in late 2020 or early 2021,” Roundhill Investments vice president of research Mario Stefanidis told The Jacob Wolf Report on Tuesday. “Now you're really not seeing a growth stock with a double-digit revenue multiple. So to say, ‘FaZe is going to go public at a 19-times-revenue multiple.’ Early last year, I would've said that's no problem, like it's normal. But now it's almost like crazy talk. That's how much things have changed.”

Since its abysmal amended filing in April—which saw it report a loss of nearly $10 million more than projected in 2021—the company has announced a series of major partnerships, but it’s unclear if those will be enough to save its SPAC merger. 

FaZe lost long-time sponsor GFUEL on May 4, replacing it with Ghost Energy, a much smaller and lesser-known brand in the energy drink and supplement space. It also signed a deal with Doordash and launched a new show on Twitch, entitled “FaZe1: The Warehouse.” The company’s Twitch channel has seen fewer than 2 million live views and an average of fewer than 3,000 concurrent viewers in the past 30 days, according to Streams Charts

Despite the shortcomings, management of the B. Riley Principal Corporation running the SPAC expressed confidence that it will move forward with the merger as listed in the April filing. Amid an economic decline and a looming recession, Stefanidis and the market are less confident.

“People don't care how fast your top line is growing right now,” Stefanidis said. “It's all about how much you're bringing in income, and for companies that are not profitable right now, they're just going to have a really hard time continuing to operate.

“I don't think bankruptcy is in the cards for them. There is some price that they would get bought out before that happened, probably by another team, but for them to go public, it's going to be pretty difficult.”

FaZe has until February 2023 to complete the merger, or the SPAC will have to return the funds to its shareholders. The stock closed at $9.83 on Tuesday, 17 cents below its opening price in February 2021 and $1.60 less than its peak the day FaZe announced its intent to merge. 

If the deal doesn’t move forward, or shareholders vote against the merger in the next nine months, this won’t be the first SPAC to fail. In Q1 2022, only 16 SPAC mergers closed, down from 50 in Q4 2021, according to a study by law firm White & Case released in May. As of February, six companies failed to SPAC, on pace for a quarter record, according to a Bloomberg report.

Since the April filing revealed financial concerns, FaZe’s top brass has stayed quiet. When contacted via email by The Jacob Wolf Report on Tuesday, spokesperson Chelsey Northern did not respond to questions about the status of the SPAC or the company’s timeline to call the vote. The nine-month clock is running. How FaZe responds will be crucial for the esports industry.

Raven’s Big Vote

On Monday, the game industry got a first: Employees of a major game publisher voted to form a union. 

A vote among quality assurance staff at Activision Blizzard subsidiary Raven Software was 19-3 in favor of unionizing and creating the Game Workers Alliance. It’s the first union in the gaming industry and comes on the heels of a series of workers’ rights issues at Activision Blizzard, including two lawsuits by the California Department of Fair Employment and Housing and the Equal Employment Opportunity Commission

Ahead of the vote, Activision Blizzard took a series of measures to avoid the workers unionizing and has yet to confirm that it will recognize the union. 

In February, Activision Blizzard vice president of quality assurance Christian Arends said in a company Slack message (which an employee leaked on Twitter) that unionizing “could hurt our ability to continue creating great games.” In April, the National Labor Relations Board denied Activision Blizzard’s objection to recognize the union if the vote succeeded, according to The Washington Post

Yet Microsoft—which will acquire Activision Blizzard in summer 2023 if it doesn’t encounter U.S. government pushback—told Axios in March that it will recognize the Games Workers Alliance if Activision Blizzard does so. That further illustrates how the success of the Microsoft acquisition is crucial to correcting the toxic culture that exists at Activision Blizzard.

Weekly Reads:

Since we were off on Friday, I wanted to share a few good reads from the gaming industry.