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SPACtrac Report โ€“ Capstar Special Acquisition Corp: Updated Valuation; Still Ready to Go

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Published: Tuesday, November 11, 2021

Capstar Special Acquisition Corp: Updated Valuation Still Ready to Go

Gregory Aurand, Senior Research Analyst, Healthcare Services & Medical Devices, Noble Capital Markets, Inc.

Refer to end of report for Analyst Certification & Disclosures

Updated acquisition terms. Gelesis, Inc. will be brought public when they merge with publicly traded Capstar Special Acquisition Corp. (CPSR). The combination value was revised at the agreement of both companies. See Stock Overview and Valuation section in this report for updated details. The deal is expected to close late November or early December with an approximate $756 million enterprise value transaction.

No change in fundamentals. The revision in valuation consideration for the merged company does not change the fundamental projected outlook. Please see our initiation SPACtrac Report dated November 9, 2021.

An approved FDA product targeting a large population with global opportunities. The overweight and obese are at epidemic levels in the U.S. and are a growing crisis globally. Plenity is a novel FDA approved weight management aid that has an addressable market of 150 million in the U.S. alone. The initial focus will be the U.S. market but Plenity also has CE Mark enabling it to be marketed in Europe and other markets. In addition, the company has a strategic partnership to commercialize Plenity in China with potential milestones and royalties. Outside U.S. revenues are expected to contribute 30% of 2023 revenues.

Manufacturing coming on-line for full launch. Gelesis conducted a highly successful beta launch this past year. With lines of manufacturing coming on-line in late 2021 and 2022, the company is prepared to meet initial and future demand with scalable capacity. Given expected demand, the company looks to be EBITDA positive in 2023.

Valuation looks very attractive. At current levels, and based on the new enterprise value, shares trade about 1.7x Enterprise Value to 2023 guided Revenues, a substantial 50% discount to the Health & Wellness Consumer and DTC peers. If the shares were to trade in-line with the median of its peers, the revised target value would be $18 per share. As Gelesis is approaching the weight management market in a very different way, a case could be made for an expanded group of comparables that would suggest an even higher current valuation.

Stock Overview and Valuation

Given recent softness in the SPAC market seen by CPSR, and high redemptions in completed de-SPACs, both companies agreed to reduce the valuation and filed an amendment updating the terms.  The updated valuation reflects a lower total share count, lower enterprise value and a lower upfront percentage ownership by existing Gelesis shareholders. While upfront valuation is lower, existing Gelesis holders see an increase in earn-out shares.

As indicated in Figure #1 below, the prior pro forma valuation translated into an 8% ownership of the new company for the PIPE investors. The PIPE investors include PIMCO, Pritzker Vlock Family Office, Chinese Medical Systems and co-founder PureTech Health. The $276 million held-in-trust provided from Capstar public holders translated into a 20% ownership and Capstar Sponsors would have owned about 4% of the company.  Gelesis shareholders had about 69% of the new company with 131.8 million shares and a $964 million enterprise value valuation. 

Figure #1 Prior pro forma valuation

Source: Company reports and Noble Research estimates

Figure #2 below shows the updated pro forma ownership with an enterprise value of $756 million.  The PIPE investors will now have a slightly increased 8% stake in the new company, the Capstar public holders with $276 million held-in-trust will have a 24% ownership, and Capstar Sponsors retain a 4% ownership.  Gelesis holders, given the lower number of stock consideration shares will now have an upfront 64% stake.

Figure #2 Revised pro forma valuation


Source: Company reports and Noble Research estimates

As part of the revised transaction, and substantially offsetting the lower upfront share valuation for Gelesis holders, the earn-out shares were increased (Figure #3). Rather than the prior 15 million shares in 5 million share earn-out increments issued to existing Gelesis shareholders when the stock price reaches $12.50, $15.00, and $17.50 per share, the new earn-out shares are equal installments of 7.83 million shares at the same stock price points for a total of 23.48 million shares.

Figure #3 Increased earn-out shares


Source: Company reports and Noble Research estimates

Total share consideration for the deal was formerly 146.8 million including the 15 million earn-out shares, and is now 134.48 million shares including the 23.48 million earn-out shares.

The newly formed company, as indicated in the previous report, is expected to be listed on the NYSE and trade under the ticker โ€œGLSโ€.  Based on the new valuation consideration, there will be an estimated 111 million shares outstanding following the combination with CPSR.

The following Figure #4 provides an extensive list of health and wellness peer comparables, and an expanded list incorporating disruptive healthcare and consumer subscription companies.  The valuations provided for CPSR/Gelesis are based on the guided revenues and cash provided.  At current levels, shares trade about 1.7x Enterprise Value to 2023 guided Revenues, a substantial 50% discount to the median Health & Wellness Consumer and DTC peers (excluding INMD outlier). If the shares were to trade in-line with the median of its peers, the target value would be $18.00 per share.  If shares traded at the mean of its peers, the target value would be $23.00. As Gelesis is marketing to the weight management market in a very different and disruptive approach, a case could be made for using the expanded group of Disruptive Healthcare and Consumer Subscription comparables that would suggest an even higher current valuation.

Figure #4 Valuation comparables

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IMPORTANT DISCLOSURES

This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. (“Noble”). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst’s judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.

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Company Specific Disclosures

The following disclosures relate to relationships between Noble and the company (the “Company”) covered by the Noble Research Division and referred to in this research report.

Company Specific Disclosures

The following disclosures relate to relationships between Noble and the company (the “Company”) covered by the Noble Research Division and referred to in this research report.

The SPAC Company in this report is a participant in the Company Sponsored Research Program (CSRP); Noble receives compensation from the Company for such participation. No part of the CSRP compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed by the analyst in this research report.

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WARNING

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RESEARCH ANALYST CERTIFICATION

Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.

Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public
appearance and/or research report.

Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.

NOBLE RATINGS DEFINITIONS % OF SECURITIES COVERED % IB CLIENTS
Outperform: potential return is >15% above the current price 95% 33%
Market Perform: potential return is -15% to 15% of the current price 5% 2%
Underperform: potential return is >15% below the current price 0% 0%

NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from “Buy” to “Outperform”, from “Hold” to “Market Perform” and from “Sell” to “Underperform.” The percentage relationships, as compared to current price (definitions), have remained the same.

Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.

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Noble Capital Markets, Inc. is a FINRA (Financial Industry Regulatory Authority) registered broker/dealer.
Noble Capital Markets, Inc. is an MSRB (Municipal Securities Rulemaking Board) registered broker/dealer.
Member – SIPC (Securities Investor Protection Corporation)

Report ID: 24235

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