How the man behind the Apple Store presided over a Spac disaster


More than a decade after his time in Silicon Valley, Ron Johnson is still quick to recall his time at Apple and name his famous mentor.

“I learned from a lot, but the most powerful lessons I learned came from my work at Apple with Steve Jobs,” he said last year. “He taught me that when you deliver the highest quality you can imagine, you’ll have a great business forever.”

Snapped up in 2000 by the co-founder of Apple after a successful run at discount retailer Target, Johnson is widely credited with developing the concept of the Apple Store, the gadget maker’s hyper-successful retail gambit.

But Johnson’s latest attempt to recapture its previous retail magic has turned into a debacle emblematic of the broader rise and collapse of special-purpose acquisition companies.

Enjoy Technology was valued at $1.1 billion when it went public through a Spac in October, attracting investors with a vision of “commerce from home”, which offered busy consumers the opportunity to experience a similar experience to an Apple Store in their living room.

Now, just eight months after its shares began trading, that lofty valuation has been all but wiped out. Instead of becoming the next Apple or even Airbnb or Uber — other disruptors Johnson has singled out as inspirations — Enjoy rushed to file for Chapter 11 bankruptcy on Thursday.

Johnson had once boasted that “Enjoy’s mobile store can do everything you can do in a store, only better”. Now the retailer is down to just $1 million in cash and has asked the US federal court hearing the case to approve a $55 million loan so it can pay the payroll this week. its 1,700 employees.

Enjoy hastily filed for Chapter 11 bankruptcy on Thursday. There were 700 mobile stores – essentially vans that were rolled out to customers after they ordered a gadget © Michael Oneal

For the former Apple executive, the collapse of bankruptcy dashed hopes Enjoy would offer the buyout after a disastrous stint at JCPenney, where Johnson was installed in 2011 by activist investor Bill Ackman to reinvent the big America’s Midtown store.

Enjoy’s dizzying crash from public listing to bankruptcy is not unique. The retailer joined a growing list of companies that signed up through Spacs and are now on the brink of insolvency. Last month, carmaker Electric Last Mile Solutions also filed for bankruptcy, just a year after going public at a $1.4 billion valuation.

The Spacs market exploded in 2020 and 2021 as legions of day-traders and other mainstream investors began to take their chances on more speculative companies. These “blank check” vehicles, which raise funds through an initial public offering and use the money to seek out a private company to merge with, offered an attractive alternative to energy-hungry start-ups that would struggle to register through the most rigorous traditional IPO process.

But few have managed to live up to the hype of their bold proponents. According to data from Spac Research, less than 10% of companies that have listed through Spacs since January 2020 are trading at or above their IPO price.

And with funding for speculative start-ups rapidly drying up, Enjoy is unlikely to be the last of the recent Spac wave to file for bankruptcy.

Top notch funders

Ordinary investors in Enjoy shares, who are now facing near wipeouts, could be forgiven for taking comfort in the company’s illustrious backers.

Since Johnson founded the retailer in 2014, Enjoy has raised $400 million in venture capital, according to PitchBook data, from Silicon Valley stalwarts such as Andreessen Horowitz and Kleiner Perkins.

Marquee Raine Acquisition Corporation – the Spac vehicle that took the company public – was also led by two blue chip investors.

Joe Ricketts, whose family owns the Chicago Cubs, and Raine Group, the investment bank, raised $375 million in December 2020 as the Spac market heats up. Raine’s clients include SoftBank and he recently managed the Chelsea Football Club auction in which the Ricketts were bidders.

In March 2021, Marquee Raine and Enjoy announced a deal valuing the company at $1.1 billion. The transaction was expected to raise $450 million in fresh cash, including proceeds from Spac’s IPO, as well as $80 million from institutional investors.

While Marquee Raine initially told investors she would likely merge with a company in the sports or entertainment industry, her supporters argued the opportunity was too compelling to pass up.

“We believe Enjoy is one of the most innovative and transformative consumer and technology companies we have seen,” Raine’s Brett Varsov said at the time of the merger announcement. “Ron has built a great team, the business continues to grow and perform incredibly well, and the future opportunities are immense.”

The presentation to investors of the operation trumpeted the great ambitions of Enjoy. While the company only generated $60 million in revenue in 2020, Johnson projected revenue to exceed $1 billion in 2025, accompanied by an operating profit margin of 30%.

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Enjoy had 2,000 employees and 700 mobile stores – essentially vans that were deployed to customers after they ordered a gadget, usually an iPhone. While its main partners were large telecommunications companies – AT&T in the US, BT in the UK and Rogers Communications in Canada – Enjoy said it would eventually enter other end markets with a collective size of more than a billion dollars, including luxury goods, fitness and cars. .

According to Johnson, Enjoy’s powerful back-end technology was the secret to its success. “Powered by machine learning and analytics, Enjoy’s proprietary algorithm and technology optimizes the customer experience in real time to track inventory and improve efficiency,” he explained. last year.

While the slides said Enjoy was “in a category of one”, Marquee Raine also touted peers such as Uber, Peloton and Carvana to support its $1 billion valuation.

Perfect storm

Yet as the merger neared its fall 2021 closing date, the giddy enthusiasm for Spacs began to wane.

While the overall stock market remained strong, Spac investors were slowly becoming more selective. Buyout rates – the amount of money drawn by Spac shareholders when voting on a deal – had soared to around 60% by the time Enjoy and Marquee Raine closed the deal.

Of the $375 million raised by the Marquee Raine vehicle, less than $60 million remained after Spac shareholders exercised their redemption right.

Marquee Raine had agreed to a so-called “backstop” arrangement, where the Ricketts family and Johnson agreed to fill part of the cash hole from buyouts. According to securities filings, the pair raised $56 million of their own money to help close the deal.

Enjoy’s first earnings call in November offered a hint of what would become the company’s downfall.

“Unfortunately, the supply of key smartphones was significantly lower than expected during the fourth quarter and will negatively impact our fourth quarter financial results,” explained Johnson, who reported quarterly revenue below 20 million dollars and an operating loss of over $40 million.

Some doubted the underlying economics of the company would ever work.

“Enjoy takes two of the costliest aspects of customer engagement – high-end last-mile delivery and customer consultation – and delivers them in a way that’s free to the customer,” said Terry Esper, professor of logistics in The Ohio. State University. “It just seems too expensive to offer on a large scale.”

Enjoy missed its 2021 revenue target of $109 million by 25%, just months after reiterating it still believed it was achievable. The results at the start of 2022 have only deteriorated. By the end of March, the company’s cash had fallen to just $37 million, and at the time of the bankruptcy filing was virtually zero. As its business collapsed, Enjoy lost two successive CFOs, while adding two board members specializing in financial hardship situations.

In court documents, Enjoy said it faced a perfect storm of economic and market headwinds: High redemptions by Spac investors limited its available cash balance, then the supply chain crisis and shortages. of labor prevented him from achieving his sales targets.

Enjoy is now set to be taken over by Asurion – an electronics insurance and repair services provider headquartered away from Silicon Valley in Nashville, Tennessee – after it provided a $55 million loan. dollars to help keep the lights on at the company during its bankruptcy.

As part of the bankruptcy, a $10 million loan that Johnson personally made to Enjoy earlier this year is expected to be stripped of its security over the company’s assets. It marks a crushing end for a retail maven who was once famous for reinventing the American shopping experience.

Johnson, Ricketts and Raine declined to comment.


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