INTRODUCTION

BY LAUREN SILVA LAUGHLIN

If beauty is in the eye of the beholder, those with a hand in the SPAC market are seeing quite a pretty picture. More than 300 U.S. special-purpose acquisition companies have listed already in 2021, according to Refinitiv, outpacing previous records at this stage in a calendar year by more than 10-fold. They have minted billions for their creators and put an indelible contemporary spin on how companies go public.

Breakingviews has written about blank-check companies since the SPAC equivalent of the Renaissance – the mid-2000s. Much like art, the output and influences in successive eras have evolved. Old Master SPACs are relatively rare, cautiously constructed works. More recently, the rush to cash in on the craze has brought creations verging on the surreal. There’s even one in the works with the Dadaist name Just Another Acquisition Corp.

SPAC artists, known as sponsors, and their early investor patrons are super-eager to find corporate targets as soon as possible after their own initial public offerings make them flush with cash. The huge incentives to get deals done have at times encouraged the absurd, like a blank-check company associated with tennis star Serena Williams – named Jaws Spitfire Acquisition – purchasing a 3D printing firm.

Some transactions are familiarly easy on the eye, like boutique investment bank Perella Weinberg’s sale to a SPAC at a rational valuation and with a reasonable business plan. Others could take time to be appreciated. The blank-check deal for chastened office-sharing outfit WeWork, tainted by a spectacular failure to go public by the traditional IPO method in 2019, is one such. Others, like breathless SPAC purchases of sundry revenue-light electric-vehicle startups including Nikola and Lucid Motors, may never live up to the initial hype.

The U.S. Securities and Exchange Commission is just beginning to up its game in authenticating SPAC deals. Recently the agency warned the vehicles about their use of optimistic projections in promoting their chosen merger partners. But there’s more – a lot more – to do.

A disciplined, useful market could yet emerge. In the interim, investors not privy to how a SPAC was made are stuck trying to distinguish one of Jeff Koons’ shiny canines from a worthless dog. This collection of Breakingviews columns tells the SPAC story so far, and how it might end.

May 2021

Image: Photo illustration by Matthew Weber/REUTERS from photo by Chris Helgren/REUTERS

OLD MASTERS

Blank M&A checks are getting way too easy to write

Travel deal treads new path for shell companies

Beware the rough end of the SPAC

CONTEMPORARY WORKS 

The house always wins with SPACs

Chancellor: Regulators will kill the SPAC frenzy

Imaginary SPAC one-ups hedgie stars

THE CURATORS

SPACs need a governance overhaul

Regulatory loophole lets SPAC outlooks fly for now

New SEC boss’s SPAC work is already partly done

SPACs can reverse listings decline with SEC help

SEC’s SPAC threat needs more firepower

SPACs give Wall Street another slice of the pie

PAINTING BY NUMBERS

Blackstone’s SPAC foray puts price on convenience

Bill Ackman bests Goldman Sachs in SPAC race

Perella Weinberg deal boosts SPAC credibility

SPACs are one good scrub away from respectability

Dan Loeb deal reveals good and bad of SPACs

WeWork finally dons office-appropriate attire

GRAFFITI

Celebrity SPACs are buyout firms’ poor cousin

Buyout shops make SPACs pass the parcel besties

Robo-suit SPAC paints dystopian financial future

Casino deal epitomizes the house edge

SURREALISM

SPAC solves none of tech world’s hardest problems

SPACs and electric cars drive hype feedback loop

Outer space may be best place for SPAC craze

Air taxi SPAC only partly defies financial gravity

Serena Williams lobs a $1.6 bln SPAC headscratcher

GOING GLOBAL

Look out Europe, a SPAC craze is around the corner

Grab’s $40 bln debut comes with twin airbags

London IPO shakeup is more about SPACs than tech

Hey Hong Kong, leave those SPACs alone

BLANK M&A CHECKS ARE GETTING WAY TOO EASY TO WRITE

OLD MASTERS: BEFORE 2020katrina.hamlin

BY LAUREN SILVA LAUGHLIN

The New York Stock Exchange is making it too easy to write blank checks. It recently relaxed voting rights and other rules to clear the way for more special-purpose acquisition companies, known as SPACs. Rival Nasdaq has been capitalizing on the resurgence of such listings. An otherwise weak market for initial public offerings, however, is chipping away at investor protections.

An already cutthroat battle for market debuts has become even more so. The value of IPOs last year was a fifth of the 2014 tally, according to Thomson Reuters data, and roughly a third as many firms went public. At the same time, activity for shell companies that raise money for a later, unspecified takeover has picked up. They account for half of Nasdaq’s new business so far this year.

For the better part of a decade, the NYSE was happy to forego such listings. Starting in December, though, it proposed changes to match rules at Nasdaq, lowering the threshold for the number of investors and size of such listings, and lifting restrictions that required shareholders to vote on the announced acquisitions. The Securities and Exchange Commission approved two of the new rules in March and a third in July.

It helped. Four new acquisition securities, including one from investor Mark Ein – who recently used another SPAC to buy media company Cision – and two from private-equity firm TPG have listed on the NYSE since May. The changes may benefit exchanges and the vehicles’ managers, but not necessarily investors. Dispensing with putting the choice of target to the ballot, for example, could mean less scrutiny of potential conflicts of interest or possible payouts simply for doing any deal rather than a good one. Shareholders can of course just sell, but in the meantime will have wasted time and fees.

It’s part of a broader unhealthy trend in IPOs. Shares of disappearing-message app Snap went to market with no voting power for new buyers, the first of its sort on the NYSE in decades. The London Stock Exchange is considering a lighter-touch governance model to attract Saudi oil producer Aramco. And the SEC just expanded the Jumpstart Our Business Startups Act to make even more firms eligible to keep their finances hidden for longer when they decide to go public. Investors could use more checks on companies, not blank ones.

First published Aug. 22, 2017

Image: The New York Stock Exchange is pictured in the Manhattan borough of New York City, New York, United States, Nov. 10, 2020. REUTERS/Carlo Allegri

TRAVEL DEAL TREADS NEW PATH FOR SHELL COMPANIES

OLD MASTERS: BEFORE 2020katrina.hamlin

BY JEFFREY GOLDFARB

There may be more to the latest shell companies than financial misadventure. The $439 million purchase of Lindblad, a National Geographic-linked operator of cruises to places like the Galapagos and Antarctica, suggests blank-check vehicles may be worth exploring again.

So-called special-purpose acquisition companies, or SPACs, have mostly earned a reputation for disappointing investors. As one example, GLG Partners sidestepped an initial public offering in 2007 and instead sold itself to Freedom Acquisition Holdings. Three years later, Man Group bought its rival hedge fund for about half the initial valuation.

Prior generations of SPACs were tailor-made for short-term investors. Their stock came with warrants that could be traded separately. That enabled easy arbitrage using borrowed money. What’s more, buying a company often required an 80 percent vote, which led to unsavory practices including “SPACmail” in which hedge funds accumulated blocking stakes. Many blank-check companies wound up better off staying blank and returning capital to shareholders.

Capitol Acquisition Corp II, which just bought Lindblad, is structured differently. Instead of a full warrant with each share, it distributed only half-warrants. The warrants also didn’t start in the money, as before. It only took a majority of shareholders to approve the deal. And while hedge funds like Fir Tree and BlueMountain are on Capitol’s shareholder register, one of the biggest owners is T. Rowe Price, the blue-chip mutual fund manager.

A less racy profile may explain why there are fewer SPACs around these days. From 2005 to 2008, 171 of them raised almost $21 billion, according to Thomson Reuters data. Since then, there have been only 116, attracting $12 billion of capital.

They are still, though, a chancy way to chase private equity-style returns through publicly listed vehicles. Trading can be thin, on top of dilution created by the stakes handed to managers. FinTech Acquisition, for one, sounds faddish and is led by the chairman of The Bancorp, a debit card issuer hit last year by a consent decree from the Federal Deposit Insurance Corp and recently notified by Nasdaq that it is delinquent with its annual report.

On the other hand Burger King was bought three years ago by a shell company backed by financiers Bill Ackman, Nicolas Berggruen and Martin Franklin. The shares have more than doubled. Maybe today’s toned-down SPACs offer an improved chance of a profitable voyage.

First published July 16, 2015

Image: A turtle swims next to a tourist in San Cristobal Island at Galapagos Marine Reserve, Ecuador, Oct. 10, 2016. REUTERS/Nacho Doce

BEWARE THE ROUGH END OF THE SPAC

OLD MASTERS: BEFORE 2020katrina.hamlin

BY LAUREN SILVA LAUGHLIN

SPACs have made a comeback. The push is being helped along by a $550 million listing backed by hedge-fund activist Dan Loeb, which started trading on Tuesday. Special-purpose acquisition companies offer investors the chance to buy in early to companies they otherwise couldn’t tap. Parts of the structure have changed since they were popular a decade ago, but investors still have little protection, and their backers’ peculiar incentives add risk.

Also known as blank-check companies, the vehicles are often touted as a way for the average investor to invest in a company that, for whatever reason, doesn’t want to go through a typical initial public offering. Instead, a SPAC goes out searching for such a target and buys part or all of it. In 2017, 31 such entities listed, according to Thomson Reuters, the biggest year since 2007. Loeb’s Far Point Acquisition joins more than a dozen that have debuted in 2018 so far, and will add legitimacy to a kind of financial product that a decade ago was relegated to the fringes of capital markets. Other firms including Carlyle, TPG and Goldman Sachs have joined the growing list of established investors issuing SPACs.

Far Point has hired Thomas Farley, former boss of the New York Stock Exchange, to hunt for fintech companies on which to spend its $550 million. That could include a smaller stake in any number of technology companies looking to raise capital, and may appeal to investors who missed out on early funding rounds for companies like Snap and Spotify that graced Farley’s exchange over the past couple of years.

What they get at first is a share in the SPAC, which takes their cash and holds it until a target presents itself, plus a fraction of a warrant. In one scenario, the SPAC strikes a deal to buy a minority stake in a hot unlisted company at a price its managers judge to be attractive. The stake becomes, effectively, publicly traded. Later the warrants convert, transferring an extra sliver of the acquired company’s equity from the original owners to the SPAC investors, to thank them for their troubles. When it works, that sounds great. Imagine investing in a SPAC that later brings a “unicorn” like AirBnB or Uber to market.

In practice, it can go very differently. While Far Point wants to make investments in fintech, it and Farley have leeway to buy just about anything, including a company in a sector he has little knowledge of, or one without a track record of revenue. That’s typical of many SPACs. So are other freedoms given to SPAC managers. Once he finds a deal, for example, Farley isn’t required to have an independent investment banker sign off on it, and shareholders may not have a vote.

Managers of SPACs have their reputation on the line, and investors can always sell their shares when they disagree with a proposed transaction. If they do, they get their initial investment back. Both are solid protections in Loeb’s case. A prestigious firm has more to lose than a relative no-namer if Far Point does a bad deal, and if it does no deal, investors aren’t any worse off.

But the SPAC structure starts investors and managers on an uneven footing. The backers theoretically have a financial incentive to buy something – anything – rather than see the money handed back to investors after their two-year search period expires. That’s because they only get paid once the cash has been spent.

SPAC founders get a sizable equity stake – often 20 percent – in return for finding a deal and putting up some cash to cover expenses. Unlike the carried interest earned by a private-equity manager, say, the award of these shares isn’t linked to how the deal performs. Say a SPAC raises $100 million and invests in a company that turns out to be a dud, its stake declining in value to $70 million. The original holders of a SPAC would have seen their investment drop in value by almost 45 percent. The SPAC founders would be nursing bruised reputations – but would still have received a stake worth $14 million.

The other wrinkle is that there’s a third set of people often involved: hedge funds, whose arbitrage activities are crucial for getting SPAC listings done. They can sign up for shares, immediately sell their warrants to slightly lower their effective entry price, wait as interest accrues on the funds they have invested, and then request their money back when an acquisition target is found. The effect is like buying a bond, with almost no risk.

That’s a perfectly legitimate strategy for hedge funds to exploit, but it means that hot demand for a SPAC offering doesn’t necessarily signal faith in its future acquisition strategy. Meanwhile, if many investors ask for their money back, the SPAC’s backer might top up the acquisition pot, as Loeb has promised to do – but can demand a sweetener for doing so in the form of extra shares, which would transfer a small amount of value away from other investors, including those who loyally backed the transaction.

Investors are a little better protected in the new round of SPACs than they were. Unlike early vintages of the vehicles, warrants in these new deals have strike prices typically 15 percent above the original listing. That reduces the scale of the arbitrage opportunity, and increases shareholders’ likelihood of voting for a deal – since it’s only when one is agreed that the shares are likely to exceed the warrants’ strike price. Previously, some hedge funds effectively held SPACs to ransom by threatening to torpedo deals unless they were given extra perks. In Loeb’s case, the new type of structure might have encouraged more long-term investors to get on board.

Nonetheless, everything comes down to trust. The investor in a SPAC has to believe that the manager values their reputation enough to strike only a truly beneficial deal, rather than just exploit their incentive to buy whatever they can find before their allotted time runs out. Loeb and Farley are putting their names on the line, but others with less to lose may not share their good intentions.

First published June 13, 2018

Image: Thomas Farley speaks to the Economic Club of New York at a luncheon at the New York Stock Exchange in New York, United States, March 13, 2017. REUTERS/Mike Segar

THE HOUSE ALWAYS WINS WITH SPACS

CONTEMPORARY WORKS katrina.hamlin

BY RICHARD BEALES

Finance is like poker: If you don’t know who the sucker is, it’s you. That’s especially true of special-purpose acquisition companies, the Wall Street craze that only seems to gather pace.

Take this week’s blockbuster SPAC deal. Churchill Capital Corp IV agreed a merger with electric-car upstart Lucid Motors, lining the latter up for a public listing at a stonking headline valuation of $24 billion. It’s an unusual but instructive example. The SPAC’s stock atypically galloped upward on rumors of the deal and fell once the facts were announced, already costing some investors money.

For SPACs in general, though, the main reason public shareholders end up as suckers isn’t a poor choice of target, but the dilution as free or cheap equity interests are bestowed upon early investors. A Stanford Law School-led working paper picks this apart for nearly 50 SPACs that completed mergers between January 2019 and June 2020. For their creators, sometimes investment firms and sometimes individuals, diluting other shareholders is the point.

Self-promotion

A SPAC sponsor gets the biggest cut in the form of a so-called promote – free, or nearly free, shares, typically totaling 25% of the number sold in the vehicle’s initial public offering – once a merger is secured. In just under half the deals struck last year, according to an analysis by lawyers at Freshfields, sponsors gave up some of the shares they were due to receive, but only some.

To get that reward, the sponsor contributes the cost of getting a SPAC to the point of an IPO. That’s probably a few million dollars. When all those extra shares arrive, the result, three months after a merger, is an average sponsor return of nearly 400%, according to the Stanford team. A recent JPMorgan analysis put the mean sponsor return at an even more eye-popping 650%. No wonder people like Michael Klein, the ex-Citigroup banker behind Churchill, and investment groups such as Gores keep repeating the SPAC playbook.

The SPAC mafia

Someone has to pay for the giveaway to sponsors, and it’s not the SPAC IPO investors.

These are mainly specialist hedge funds. When SPACs first raise money, what’s on offer is shares with warrants attached. There are also generous redemption terms, so when the cash shells find a deal, the initial investors can choose to get their money back. But they usually keep their warrants – which, like options, entitle them to buy shares at a certain price, becoming valuable if the underlying stock price goes up.

This means, according to the Stanford paper, that for essentially risk-free investments these early holders on average make a nearly 12% return. That’s not bad with, say, 10-year U.S. government bond yields running at around 1.5%. Those warrants are another source of dilution for later-arriving shareholders.

Not so Lucid

The yardstick for presenting most SPAC deals to investors is the typical $10 per share IPO price, and that’s central to the math in the Churchill-Lucid deal. Because that’s how much cash was originally put into the blank-check firm, it’s usually the benchmark for valuing the merged entity, too.

But in practice, the dilution from free shares and such means the SPAC actually contributes less than $10 per share of cash to Lucid. The Stanford researchers figure that, factoring in redemptions, the amount may on average be less than $7.

All this dilution at the SPAC level means there’s an incentive to target the biggest possible merger partner so that the blank-check vehicle has less weight: the Churchill SPAC represents only a fraction of Lucid’s overall valuation. Even so, the Stanford figures suggest the sponsor promote, warrants and rights for investors, plus IPO underwriting fees eat up 14% of the post-merger equity value in the typical case.

In the Lucid example, Churchill’s shares were trading at a much higher price by the time the deal was announced. So some investors might have acquired their shares in the SPAC not near the original IPO price of $10, but in the market for more than $60. On Thursday, they closed under $30.

Early birds

There’s another cohort of investors who get their own special set of rewards in return for boosting the SPAC’s firepower at the time of a deal: the PIPE investors.

The acronym stands for private investment in public equity, and typically comes from institutions or investment funds. In Churchill’s Lucid deal for example, Saudi Arabia’s Public Investment Fund – already a Lucid backer – and funds managed by BlackRock and others signed up to provide $2.5 billion.

Usually that’s at the same $10 per share standard share price, but in Churchill’s case it was at $15, still reflecting a massive discount to the market price at the time. The bells and whistles attached to these PIPE deals aren’t always completely transparent, so a regular investor buying at the same price may not be getting the same deal.

Starting from behind

All this boils down to a predictable outcome, according to the Stanford research: share prices after SPAC merger deals tend to fall. The sponsors’ returns are so large they won’t be much affected, even if they still own shares. The hedge-fund SPAC mafia is long gone. PIPE investors have collected on side deals or priority access, as favored early-birds do in hot IPOs. The owners of target companies, presumably, already secured valuations higher than their wildest dreams.

The suckers are left to deal with the dilution. Churchill’s stock price after it finally announced its Lucid deal is emblematic of the problem, even if it’s too early to know for sure what Lucid will turn out to be worth. Regular investors are the ones taking real risk. Latecomers to the pre-deal runup in Churchill’s price are, so far, the only losers.

Michael Klausner, the lead author of the Stanford study, said on a Freshfields podcast that calculating all the dilution for a single SPAC deal can take him hours. The U.S. market is all about disclosure, and SPACs could be much clearer about the scale of dilution rather than providing only a trail of data to follow. Regulators could demand that if they chose.

There are other ways outside investors’ interests could be better served. SPACs present forecasts, sometimes wildly optimistic, for their merger targets. An IPO candidate cannot, for legal reasons, do that. An electric flying-taxi startup, Joby Aviation, just took off with a $6.6 billion valuation in a SPAC deal. It doesn’t expect any sales until 2024, and that may be optimistic.

A company with no revenue and an unproven business model probably couldn’t go public through a regular IPO process, because investors would be likely to give it a wide berth or a miserly valuation. Thanks to SPACs, that sensible principle no longer applies. Until watchdogs intervene, the poker adage remains investors’ best defense.

First published Feb. 26, 2021

Image: A visitor to Mexico City’s Bellas Artes Museum walks between two Andy Warhol “Dollar Sign” paintings in Mexico, Aug. 24, 1999. REUTERS

CHANCELLOR: REGULATORS WILL KILL THE SPAC FRENZY

CONTEMPORARY WORKS katrina.hamlin

BY EDWARD CHANCELLOR

Three centuries have passed since the launch of “a company for carrying on an undertaking of great advantage, but nobody to know what it is.” It’s easy to think that only fools would invest in a shell company which had yet to declare its purpose. But investors in the most famous of these so-called bubble companies, which sprouted in London’s Exchange Alley in early 1720, weren’t complete idiots. Since its shares were issued on a partly paid basis, they were hugely leveraged to a rising stock price. Some speculators made 30 times their initial down payment. Likewise, most players in the current craze for blank-cheque vehicles, known as special-purpose acquisition companies, or SPACs, are rational. But even rational bubbles eventually burst.

The original English bubble companies covered a wide variety of offerings, including “Settling Terra Australis”, making starch out of potatoes, a “Copartnership for Trading Hair”, as well as others for furnishing funerals, extracting gold and silver from lead, and “A Company for Emptying the Necessary Houses” (i.e. public toilets). The ambitions of the recent batch of SPACs are still more ambitious: there are several flying-taxi startups, a “developer to augment humans to enhance productivity and safety”, a producer of synthetic meat, a high-rise farmer, a maker of recyclable plastic and, naturally, a cannabis producer. Many SPAC promotions are makers of electric vehicles, sensors and batteries – the latter now restyled as “electrification solutions for commercial applications”.

Over 300 SPACs have been launched this year, raising $93 billion, more than during the whole of 2020, according to Refinitiv data. Not everyone on Wall Street is drinking the Kool-Aid, however. Investors in the SPAC IPO can ask for their money back when the company merges with its target. What’s more, they get to keep warrants in the merged entity. In effect, IPO investors are buying risk-free convertible bonds. Pre-merger SPACs have recently produced returns in the low double-digits. A group of hedge funds, known on Wall Street as the “SPAC mafia”, use leverage to extract greater profits.

The vehicles’ promoters have an even juicier deal: at the IPO, they put in some cash to cover the launch costs. In return, promoters receive warrants and a 20% stake in the company. The odds are so heavily stacked in their favour that promoters can even make money when completing deals that destroy value for other shareholders. At the time of the proposed merger, the SPAC raises more money in a so-called “private investment in public equity”, or PIPE. These new investors are offered shares at below market price, warrants and other sweeteners.

Given that listing shares via a SPAC is reckoned to be three times more expensive than a traditional initial stock offering, it’s a wonder that companies choose to list in this manner. But merging with a SPAC offers a speedier way to market than an IPO, allowing companies to catch the current wave of speculative euphoria before it fizzles. Last year, as Tesla’s share price soared into the stratosphere, many SPACs announced mergers with nascent firms in the electric vehicle industry.

Promoters of the 1720 bubble companies made impossible promises. SPAC promoters also entice investors with fantastical visions. Unlike during conventional IPOs, companies merging with SPACs have more freedom to make forecasts about their future sales, profits and valuations. Silicon Valley is happy to turn to this “market for lemons” to offload its duds. To wit: WeWork, the office-sharing company, whose IPO spectacularly collapsed, is now planning to debut via a SPAC.

The big losers are investors who buy shares at the SPAC launch but don’t redeem at the point of merger, and those who acquire shares after the merger. Not only are they picking up wooden nickels, but their investment is diluted by all those warrants and the outsized promoters’ stake. Why do they do it? Investment writer Bill Bernstein suggests that people who get their kicks from gambling are willing to pay more for shares than they are worth from a financial perspective. Bernstein’s “investment entertainment pricing theory” (INEPT) explains why investors hold on to SPACs even though, on average, they’re guaranteed to lose money.

It’s no coincidence that the SPAC market slowed in late February, at the same time as the collapse of GameStop, which had been pumped on WallStreetBets and traded by INEPT investors on the Robinhood trading platform. SPACs now face challenges on many fronts. The SPAC “free lunch” is disappearing as the number of warrants issued in IPOs has declined. The imminent expiry of lockups on last year’s deals may soon flood the market with more SPAC shares. There are concerns that the hundreds of SPACs currently looking for deals will have trouble finding suitable partners, as well as lining up PIPE financing. Promoters are on the back foot.

Several SPACs, which launched with great fanfare, are scaling back their ambitions. For instance, when electric-vehicle battery maker Romeo Power announced a SPAC deal last October, the California-based firm projected 2021 sales of $140 million with sales compounding by 59% over five consecutive years. At the end of the first quarter, however, Romeo lowered its 2021 guidance to up to $18 million. Its share price has fallen by more than 75% from the peak.

Earlier this month, the Securities and Exchange Commission said it was examining “some significant and as yet undiscovered issues with SPACs.” The regulator has suggested that SPACs may not have properly accounted for their warrants. The SEC is also clamping down on shell companies which make misleading statements during their mergers. If the “safe harbor” rule which protects SPACs from lawsuits is taken away, as seems likely, their advantage over conventional IPOs disappears. There are also concerns that some SPACs may have spoken to their merger partners before their IPOs – if true, this would be a flagrant breach of the listing rules.

In June 1720, the English government declared that companies which hadn’t been officially endorsed by Parliament were a “public nuisance”. This regulation killed the bubble companies, and the collapse of these speculative ventures brought down the London stock market. After 1720, only two bubble enterprises continued trading. No doubt future historians will look back with equal amusement at today’s SPAC frenzy, and dub it the most rational bubble the world has ever seen.

First published April 20, 2021

A man bursts soap bubbles as they float past St Paul’s Cathedral in London, United Kingdom, Dec. 27, 2019. REUTERS/Hannah McKay

IMAGINARY SPAC ONE-UPS HEDGIE STARS

CONTEMPORARY WORKS katrina.hamlin

BY LAUREN SILVA LAUGHLIN

Dear prospective investors,

Reuters Breakingviews columnists have spent two decades publishing agenda-setting financial insights on global corporate finance and markets. Not all our views have proven correct. But many of our boldest calls to action have not only been spot on, they have been pursued by the very hedge fund managers now taking your money for blank-check companies, or special-purpose acquisition vehicles.

To that end, Breakingviews is raising $500 million for our own SPAC, which we are calling ASFI Acquisition, and which will list on the Nasdaq under the proposed ticker BRV. Like hedge fund managers Bill Ackman, Dan Loeb, and Jeff Smith – not to mention proven corporate operators like Casper Sleep’s boss Philip Krim – ASFI Acquisition will buy a yet-to-be-found company. We have a clean slate, no conflicts, and low fees. We look forward to acting as the stewards of your capital.

While other SPAC managers have promised to transfer their proven deal-making skills to ordinary investors, their deals often come up short. Take Loeb’s Far Point Acquisition. It agreed in January to buy Global Blue, a duty-free retailer that caters to tourists. After a pandemic, and a bit of buyer’s remorse, Loeb’s camp encouraged its own SPAC shareholders to vote down the deal it originated. The acquisition has since been tweaked in an effort to get it done.

We are also free of conflicts of interest, a problem that bedevils other SPACs like the one managed by former Citigroup banker Michael Klein. He has issued four SPACs, all which carry a variation of the name Churchill Capital, and paid his own investment bank to hunt for deals for his investment vehicle. Tilman Fertitta is using his own SPAC to buy a division of his gaming company. Ackman is collecting fees on the hedge fund that will invest in the SPAC that his firm raised. ASFI Acquisition has no such extraordinary relationships, per the Trust Principles espoused by our parent company, Thomson Reuters.

Many SPAC managers also take a pretty penny from investors. In the case of Starboard Capital boss Jeff Smith, who is raising $300 million in a new vehicle, that’s the standard 20% of shares just for doing a deal. ASFI Acquisition will be taking a fee of just 1%. To put that in context, a $500 million SPAC with Smith’s fee structure would effectively need to increase its value from a discounted $400 million to $600 million to get initial investors the same 20% return we are targeting with our investment.

But are these reasons enough to entrust your capital with a crew of financial commentators over hedge fund stars? Loeb’s firm took a stake in Campbell Soup shortly after this publication suggested it needed an activist. We dared agitators to come into AT&T and SoftBank Group before Elliott Management took the bait. Ackman’s Pershing Square jumped on the bandwagon to fight United Technologies’ deal to buy Raytheon Technologies after we pointed out its silliness.

Finally, with an investment in ASFI Acquisition, we are confident you will not only be rewarded with above-market returns, you will receive a lifetime subscription to Breakingviews.

Sincerely

The Managers.

First published Aug. 20, 2020

https://soundcloud.com/reuters/viewsroom-breakingviews-new

Image: Journalists report from the studio at the Nasdaq Market Site in Times Square in New York, Sept. 20, 2007. REUTERS/Brendan McDermid/File Photo

SPACS NEED A GOVERNANCE OVERHAUL

THE CURATORSkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

Special-purpose acquisition companies are about to have a moment. With initial public offerings struggling and mergers effectively halted, pools of cash sitting in publicly listed vehicles provide an opportunity for dealmaking and going public. But the fees and valuation methodology of SPACs favor their managers. They will be unloved in the deal world until that changes.

A SPAC’s backers, usually one or more folks with relevant track records, set up a company and raise money from investors in an IPO with the intention of making acquisitions. Blank-check companies, as they are also known, used to be a relatively obscure area of the capital markets business. Over the last several years, though, they have become more commonplace as well known investors including TPG and Third Point have formed them and bought familiar companies like Hostess Brands.

Last month Diamond Eagle Acquisition, a SPAC backed by former MGM Chief Executive Harry Sloan, bought online gambling outfit DraftKings and back-office firm SBTech for cash and stock, effectively merging them and taking the combination public at the same time.

The risk is that the biggest beneficiaries are a SPAC’s managers. They typically receive a 20% stake. In some ways this is like the carried interest that private equity managers get as part of their reward for buying good companies. But carried interest is effectively a share of gains. SPAC executives typically keep a slug of equity whether or not a deal turns out well for other investors although sometimes, as in the case with DraftKings, part of it will be forfeited when negotiating a deal.

Investors in a SPAC have the right to approve a merger. But they have incentives to take a deal even on mediocre terms. As well as shares, they generally receive warrants exercisable only after a transaction is done. While the warrants are only valuable if the vehicle’s stock price goes up, they’re worth nothing if no acquisition is completed. And SPAC investors are stuck with whatever deal terms the manager presents to them.

SPAC managers could better align their incentives by tying compensation more closely to stock- price performance after they make an acquisition, rather than collecting a hefty payoff just for doing a deal. Some managers would gain credibility by adding more of their own cash to the mix, too. A blank check needn’t come with carte blanche on governance.

First published May 6, 2020

Image: A gallery assistant white washes the walls around the Andy Warhol Painting “Mercedes Type 400 Touring Car”, an acrylic and silk screen ink on canvas, in the Milton Keynes Gallery, Milton Keynes, United Kingdom, Sept. 7, 2001. REUTERS/Darren Staples

REGULATORY LOOPHOLE LETS SPAC OUTLOOKS FLY FOR NOW

THE CURATORSkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

When CIIG Merger, a special-purpose acquisition company, recently announced a deal to buy UK electric van company Arrival, the executives behind the transaction made some bold statements. The UK-based company projected it would make $1 billion in revenue by 2024 despite having none now. Four years is an eternity in a rapidly changing transportation world. But, still, the SPAC is putting a $5.4 billion valuation on the company, which investors will have to approve. A loophole in Securities and Exchange Commission regulations may lend a helping hand.

SPACs are increasingly becoming an alternative to the traditional initial public offering process. They raise money from public investors, then later use the pot of cash to buy companies through negotiated transactions. The process eliminates the stress of a roadshow, adds certainty, and over the past several months has disrupted traditional listings, otherwise cornered by investment banks.

But fee structures often enrich managers simply for buying companies, rather than good ones that are ready for public consumption at the right price. Investors – at least those who initially own shares in the SPAC – often go along with transactions, too, because they receive warrants that can become more valuable when a deal is complete.

Lately SPACs have been leaning on the use of projections, which can grease the wheels for companies in high growth areas. They may not make much money now, but they are promising, and they can glean investor cash if they can tell their story. Arrival is one of many electric-vehicle-related companies that have hit up SPACs.

A legal nuance is giving them this advantage. Companies that have established filings with the SEC are protected under “safe harbor” provisions, established as part of the Private Securities Litigation Reform Act of 1995. This regulation shields management from liability when making financial projections in good faith. But companies going public through an IPO, without track records with public investors or the SEC, are not protected by this provision.

While the companies SPACs buy don’t have a public history, the shell companies do, and so they use this history as a way to be protected under safe harbor. These tactics could be tested. A recent lawsuit was brought against Waitr, a food delivery business bought by a SPAC in 2018, claiming it misled investors about its prospects. For now, though, SPAC managers are going out with their best future foot forward.

First published Dec. 1, 2020

Image: A man looks at a fully-electric bus built by electric van and bus maker Arrival, in Banbury, Britain, Feb. 23, 2021. REUTERS/Nick Carey

NEW SEC BOSS’S SPAC WORK IS ALREADY PARTLY DONE

THE CURATORSkatrina.hamlin

BY RICHARD BEALES

Gary Gensler is enough of a politician to know the value of a quick win. The new chair of the U.S. Securities and Exchange Commission was only sworn in on Saturday. He can already point to a sharp slowdown in the previously frothy world of new blank-check company floats and in dealmaking by these so-called special-purpose acquisition companies, or SPACs.

Last week, only two new SPACs floated on U.S. markets, according to Dealogic, down from an average of more than 25 per week in the peak month of March. The vehicles raise cash with the goal of buying another company, and the pace of those deal announcements has dropped off, too.

The engine of SPAC issuance was arguably spinning too fast anyway, after an already record-breaking 2020 was easily eclipsed in just the first quarter of this year. The flood may also have given some investors indigestion, including institutions like BlackRock and Fidelity that buy into acquisitions alongside SPACs. Since the end of March, though, the SEC has also been pouring cold water on hot features.

Gensler’s agency has chilled two big perceived advantages. Staff have suggested that a SPAC acquisition, known as a de-SPAC, may in substance be the real initial public offering, which could make due diligence and disclosure norms resemble those of an IPO. And they have raised questions about the use of rosy projections for SPAC targets, suggesting at a minimum the need to enumerate risk factors and also that legal liability may be greater than some practitioners thought.

A few dozen such risks took up three of 35 pages in an investor presentation for Altimeter Growth’s $40 billion de-SPAC deal with Southeast Asian ride-hailing-to-payments app Grab, one of the few to land last week following the SEC’s statements. Other disclaimers occupied another four pages.

For now, concerns about whether ramping up disclosure does enough has helped put the brake on SPACs, while traditional IPOs continue to flow. IPOScoop.com tallies 19 non-SPAC offerings in April so far, and enough in the pipeline to top 30 for the month, beating the January-to-March average.

Yet SPAC Research counts 431 vehicles listed and looking for a target and 266 more waiting for IPOs. The craze offers watchdogs another way to help companies onto public markets, something the SEC has encouraged in the past. How to take advantage of that while curbing excesses is Gensler’s next challenge.

First published April 20, 2021

Image: Gary Gensler, then chairman of the Commodity Futures Trading Commission, listens during an interview with Reuters in London, United Kingdom, Oct. 2, 2012. REUTERS/Simon Newman

SPACS CAN REVERSE LISTINGS DECLINE WITH SEC HELP

THE CURATORSkatrina.hamlin

BY RICHARD BEALES

The acting chair of the U.S. Securities and Exchange Commission, Alison Herren Lee, is a fan of companies going public. It’s a reason why she and other watchdogs might treat special-purpose acquisition companies gently despite their flaws.

Public markets are liquid, and listed stocks are the easiest way for retail investors to access the returns that U.S. companies have delivered on average and over time. Despite the growing prominence of private funds, public markets still provide companies with capital. Extensive disclosure requirements make for a relatively level playing field for investors, too. For these reasons, the decline in the number of U.S.-listed companies from a peak above 8,000 in the mid-1990s to only about half that number in recent years is unwelcome for regulators like the SEC.

Reforms enacted in 2012 making IPOs easier for younger companies were intended to change that trend. But it’s a recent flood of SPACs, also known as blank-check companies, that are moving the needle. These vehicles raise money in initial public offerings with the sole objective of buying other companies. An acquisition target becomes a public company by backing into the SPAC’s listing. That requires less legwork than going through an IPO.

The record-breaking tally of roughly 250 SPAC IPOs in 2020, raising $83 billion, was surpassed in just the first three months of this year according to SPAC Research. At the recent heady pace of around 300 offerings per quarter, SPACs could in theory double the number of exchange-listed U.S. companies in less than four years.

Given their potential to bring more companies to public markets, Lee, then an SEC commissioner, in October categorized SPACs as a promising innovation. Yet the explosion in blank-check company activity has also led to fresh scrutiny. The SEC may require more disclosure on what the vehicles’ sponsors stand to gain or, say, rein in the use of rose-tinted business projections.

Regulators might not want to be too discouraging, however, if they want more public companies. Maybe Lee and her colleagues could instead find ways to make IPOs even less of a slog without sacrificing their disclosure benefits. That could pave the way for more new public companies, rather than fewer.

First published April 7, 2021

Image: Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, United States, March 17, 2020. REUTERS/Lucas Jackson

SEC’S SPAC THREATS NEED MORE FIREPOWER

THE CURATORSkatrina.hamlin

BY GINA CHON

The U.S. Securities and Exchange Commission is inching closer to taking a stick to the SPAC craze. On Thursday it released a statement on how targets of special-purpose acquisition companies use projections in deals. That’s a start. But more and clearer disclosures on structure, price, and management goodies are needed. Then the agency has guardrails to punish rule breakers with fines.

SPACs are entities that raise cash from public investors and then use the money to buy companies. They bill themselves as acquisition vehicles, though the deals have traits of initial public offerings. In reality the regulatory requirements don’t strictly adhere to either.

The SEC’s focus on the use of projections is an obvious first candidate. SPACs have often said they were protected because companies with established filings have “safe harbor” provisions, as part of the Private Securities Litigation Reform Act of 1995, and blank-check companies typically have several quarters of filings before finding a deal. The SEC clarified this assumption, saying companies bought by SPACs “have no more of a track record” than private companies doing IPOs.

That leaves them more exposed to litigation and liabilities, but there are other places for more stringent requirements. Unlike a conventional IPO, underwriters don’t conduct due diligence on a target company. And unlike mergers, SPACs don’t typically have independent advisors sign off on fairness opinions. Target companies also file a “background to the merger,” outlining a blow-by-blow of how a deal came together. Blank-check firms offer proxy statements before shareholders vote on a deal, but many details are often vague.

SPACs are different because the companies they buy are private and many disclosures in M&A deals are meant to protect public investors. Still, large payouts to managers encourage SPACs to buy companies that may not be fit for the public market, and scant information can allow for back-door dealing. With more than 400 SPACs hunting for deals, monitoring transactions more closely fits squarely within the SEC mandate to protect investors.

The SEC could start with itself. It is the first and most important vetting source in an IPO. Prospectuses go through several rounds of comments and companies are often required to offer more disclosure based on idiosyncratic parts of their business. SPACs are starting to go through a similar vetting process.

The agency could also require investment banks to provide an important check either by giving a fairness opinion on valuation and financial data, including projections, or by conducting due diligence on target companies. And managers should be required to clearly lay out how much money they will make on a transaction based at different valuations, so investors can make their own assessment about whether they are getting a fair shake.

These rules may take a while to enact, so in the meantime, the SEC could demand more compliance. Last year, the agency asked Legacy Acquisition to provide more information about its merger with online auto aftermarket firm Onyx Enterprises, including how it settled on the deal price. This type of rigor should become regular practice.

Some companies have been held liable, too. In 2019, the SEC slapped a $100,000 fine on the former chief executive of Cambridge Capital Acquisition Corporation, a Florida-based SPAC that had merged with a computer company. The agency found that he failed to conduct appropriate due diligence so that Cambridge shareholders didn’t have adequate information to judge the deal. That’s a start. Steeper penalties along those lines could curb the riskier blank checks.

First published April 9, 2021

Image: A woman passes Roy Lichenstein’s Pop Art classic, ‘Whaam!’ at the Tate Modern gallery in central London, United Kingdom, on May 22, 2006. REUTERS

SPACS GIVE WALL STREET ANOTHER SLICE OF THE PIE

THE CURATORSkatrina.hamlin

Investment banks know a fee opportunity when they see it. And this year, the big opportunity has been offerings of special-purpose acquisition companies, which list shares on the public market with the intention of buying another business later. The investment banking fee pool since the beginning of the year has jumped more than 400% compared to the same period last year, to almost $3 billion. What SPAC listings lack in cachet, compared with regular initial public offerings, they make up for in relative simplicity, and their rapidly rising numbers.

Traditional IPOs are still the bread and butter of Wall Street’s equity desks. So far this year, the fees have generated more than twice as much as SPACs. And the fee pool for regular IPOs has grown too – more than 40% compared to last year – as companies look to shore up their balance sheets without issuing debt.

The fees – on a relative basis – for traditional IPOs are higher, but SPACs deals aren’t too far behind. A traditional IPO can pay its bankers up to 7% of their total offering value. Fees for larger deals are closer to 5.5%. That’s about where SPAC deals clock in: Bankers often take in 2% when an equity offering is complete and another 3.5% after the SPAC makes an acquisition. But then the bank can earn an additional fee if a concurrent private placement is done.

And SPACs call for a different set of skills. Since normally their only asset is cash when they list their shares, investment bankers don’t have to worry about getting the valuation right. They don’t have the threat of a displeased client either – or harming their reputation if the offering doesn’t go so well. That’s especially true as the SPACs become more mainstream. Investment bankers don’t have to worry about being the desk that takes on substandard deals simply because it can’t win the big ones.

In a sign of SPACs’ growing importance, UBS recently promoted Jeff Mortara, its head of SPACs, to co-run the Swiss bank’s entire U.S. equity capital markets business. That might irk the investment bankers who pride themselves on sophisticated pricing models and old-fashioned relationships. But if they’re all paid from the same fee pool, it’s a small cross to bear.

First published Nov. 3, 2020

Image: A slice of cherry pie is pictured at Twede’s Cafe, in North Bend, Washington, United States, Sept. 2, 2018. REUTERS/Lindsey Wasson

BLACKSTONE’S SPAC FORAY PUTS PRICE ON CONVENIENCE

PAINTING BY NUMBERSkatrina.hamlin

BY JOHN FOLEY

Blackstone isn’t known for leaving money on the table. But in merging Paysafe, a payments company it co-owns with fellow buyout group CVC, with a listed cash shell, Steve Schwarzman’s firm has shown there’s a price for convenience. In this case, it’s around $1.2 billion.

Three years after they bought the digital payments firm, Blackstone and CVC are cutting their stake in Paysafe by just over half and merging it with a special-purpose acquisition company backed by financial mogul Bill Foley. Factoring in a 20% increase in the value of the SPAC’s shares on Monday, Blackstone and CVC will take out $2.3 billion of cash and hold on to just under $4 billion of stock, worth a total of $6.3 billion.

On paper, that means the buyout firms are taking a haircut. Based on the SPAC’s share price on Monday after the deal was announced, investors think Paysafe’s enterprise value is around $10.4 billion. Deduct the $2.9 billion of net debt it has today – in other words, before doing the SPAC deal – and the theoretical value of the private owners’ stock is more like $7.5 billion. It’s as if they’ve given up $1.2 billion, a little more than 15% of their value, to list the shares, extract cash and bring payments expert Foley on board.

While that sounds like a lot, it’s pretty attractive for a buyout firm like Blackstone. In a traditional initial public offering, shareholders would expect the owners to sell shares cheaply enough that the stock can rise on the first day. There would be fees to pay to bankers, perhaps $250 million on a deal of this size. Most importantly, it would be hard to raise a substantial amount of new money and sell lots of shares without sending a negative signal to new buyers, which might punish the valuation.

There are likely to be more where this came from. Paysafe is not Blackstone’s first sale of a company through a SPAC. And many private equity owners have one eye on speedy exits, since U.S. President-elect Joe Biden has vowed to increase the taxes they pay on investment gains. The convenience afforded by SPACs comes at a price, but it’s one buyout firms will be happy enough to pay.

First published Dec. 7, 2020

Image: Blackstone Chief Executive and Co-Founder Steve Schwarzman speaks at a Reuters Newsmaker event in New York, United States, Nov. 6, 2019. REUTERS/Gary He

BILL ACKMAN BESTS GOLDMAN SACHS IN SPAC RACE

PAINTING BY NUMBERSkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

Investors who want to buy companies that buy other companies are spoiled for choice. Goldman Sachs and Bill Ackman, who runs Pershing Square, are both launching so-called special-purpose acquisition vehicles. But the two are very different. Goldman’s is smaller at $700 million. Ackman’s is a giant $6 billion, and adds some governance-friendly tweaks. Ackman has the edge, in ambition if nothing else.

A SPAC raises cash by selling shares, then acquires a company that wants to skip the traditional initial public offering. Investors vote on the acquisition, and those who reject it generally get their money back. The shares typically come with some warrants, which can be sold for cash or swapped for shares later if the enlarged company does well.

Picking a SPAC is usually about picking a backer. Goldman and Ackman both have pulling power in that sense. Ackman is putting his reputation on the line by pledging as much as $3.5 billion of funds from Pershing Square investors, which will include some of his own money, making his SPAC by far the biggest of his kind. He’ll get fees and kudos if that works well, and a pummeling if it doesn’t.

Ackman has also ironed out some commonly seen flaws. For example, usually a SPAC’s backers get 20% of the company as a reward when a deal closes. That can mean they’re better off doing a mediocre deal than none at all. Goldman’s SPAC has that risk. Ackman has done away with this feature, swapping it for the right to buy less dilutive warrants, which are only worth anything if the company’s value goes up by 20% or more.

Perhaps the biggest difference is Ackman’s plan to incentivize investors to stick around until a deal is done. Investors in his SPAC only get one-third of their warrants up front, and the rest once an acquisition is made. Those who don’t stay invested forfeit their unvested warrants to those who do. Hence his SPAC being named “Tontine,” after a kind of insurance policy where the entire value goes to the last survivor.

On the face of it, that gives added incentive to investors to approve an acquisition they may not love. They also stand to make less of a quick buck by selling their warrants at the get-go. Those in search of more certain and short-term profit might therefore prefer Goldman’s offering. Then again, if Ackman seriously believes he can deliver the goods, he should be happy enough to wave those investors goodbye.

First published June 23, 2020

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PERELLA WEINBERG DEAL BOOST SPAC CREDIBILITY

PAINTING BY NUMBERSkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

Perella Weinberg is injecting some financial sense into one of the hottest market trends. The advisory firm founded by Joseph Perella, Peter Weinberg and Terry Meguid has registered a $977 million valuation in a deal to sell itself to a special-purpose acquisition company. It is a sensible price for a real business in a competitive market.

The firm’s 60-odd partners made their careers doling out advice to companies like cruise-liner operator Royal Caribbean and private equity giant KKR. The boutique firm, with a 15-year track record, brought in $533 million of revenue in 2019, posting a compound annual growth rate of 15% on average over the three years prior. On an adjusted basis, Perella Weinberg actually makes a profit, too.

It’s a sharp contrast with many SPAC deals. Perhaps most famously, electric-truck startup Nikola struck a deal to sell itself to a SPAC last March, with optimistic projections but no history or revenue, at a $3.3 billion valuation. A volatile ride has ensued for investors.

Perella Weinberg’s projections are highly credible by comparison. The firm says revenue will grow almost a fifth this year from a depressed 2020 figure. The 2021 estimate of $575 million is just a 7% increase from 2019, and that’s despite expectations for a record year in mergers. The valuation isn’t wild either, and can be calculated based on earnings, a rarity among frequently profit-free SPAC targets. At roughly 15 times projected 2021 adjusted earnings, the company is seeking a valuation lower than close peer Moelis at around 20 times, using Refinitiv data.

Last year Perella Weinberg took 24th spot in Refinitiv’s league tables, with rivals Moelis, Evercore, Lazard, Jefferies Financial and Rothschild ahead – it’s a tough market. But that leaves room for investors to capitalize on sprucing the business up, especially if it uses cash proceeds and a newly-minted public currency to hire revenue-producing staff.

SPAC initial public offerings surged last year, as did their acquisitions, known as de-SPAC deals. Some of the vehicles give sponsors outsized paydays, and many targets have looked speculative. Yet SPACs do provide private companies an opportunity to list without the uncertainty of an IPO process through relatively fast, negotiated transactions. It’s only appropriate that Perella Weinberg’s case should look unusually well advised.

First published Jan. 21, 2021

Image: Joe Perella, chairman and chief executive officer of Perella Weinberg Partners, speaks at the Reuters Global Finance Summit in New York, Nov. 16, 2009. REUTERS/Brendan McDermid

SPACS ARE ONE GOOD SCRUB AWAY FROM RESPECTABILITY

PAINTING BY NUMBERSkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

Like many red-hot investments, special-purpose acquisition companies inspire a mixture of desire and disdain. But with a bit of a scrub, they could be a force for good in helping companies raise equity, shaking up an area of the market that for decades has been cornered by investment banks.

Appetite for SPACs has reached manic levels. In the past week, lifestyle guru Martha Stewart, adult entertainment group Playboy Enterprises and former Cosmopolitan editor Joanna Coles have all featured in vehicles that raise capital with the sole intention of finding and merging with another company. The target companies end up with a stock-market listing with relatively little fuss. SPACs listed in the United States raised $41.7 billion in the first nine months of this year, according to Refinitiv – more than the five previous years combined.

High financiers like Bill Ackman and Dan Loeb have all lent their names and Rolodexes to SPACs in recent months, but still a grubby feel persists. One problem is that there have been high-profile stumbles. Electric-truck maker Nikola, whose executive chairman quit and shares slid after a research firm accused it of fraud, came to the public markets through a SPAC. And the structures are generous to their managers, which creates a conflict. Backers typically receive shares in the new company for little or nothing.

There’s even an exchange-traded fund for punters who want to bet on SPACs without having to choose based on their individual merits. An ETF may be a helpful way of seeing these vehicles’ aggregate performance, but it also offers a new to ride the bandwagon. U.S. Securities & Exchange Commission boss Jay Clayton is now looking into compensation structures.

With a cooler head, SPACs can do some good by sparing companies the volatility of the traditional IPO. But first they need two things. One is a tweak to the lopsided fee structures. Some, like Ackman, have tried to make it fairer by setting a higher trigger for their rewards, or taking a pared-down basket of goodies. The other is for bigger, more respectable names to start using them. Holiday rental app Airbnb is one giant private firm that has been wooed by SPACs but so far kept its distance. A target of that size and caliber would definitely spruce up the neighborhood.

First published Oct. 5, 2020

Image: Grooming equipment is seen at the Bespoken Man, a full-service gentleman’s barber shop in Sandton, South Africa, Dec. 14, 2018. REUTERS/Siphiwe Sibeko

DAN LOEB DEAL REVEALS GOOD AND BAD OF SPACS

PAINTING BY NUMBERSkatrina.hamlin

BY RICHARD BEALES

Covid-19 has disrupted plenty of mergers. One that has managed to come out the other side Far Point Acquisition’s $2.6 billion purchase of Swiss travel-related payments business Global Blue, finally approved by the buyer’s shareholders on Monday. But the deal leaves the special-purpose acquisition company, or SPAC – the latest hot financial product – with mixed reviews.

The coronavirus pandemic torpedoed travel and Global Blue’s business shortly after the deal was signed. Far Point, a SPAC backed by Dan Loeb’s Third Point hedge fund firm that raised $550 million in 2018, was left with a target less valuable than it had thought. And Third Point funds were on the hook to backstop redemptions by Far Point investors who wanted to cash out.

In the end Global Blue owners including private equity firm Silver Lake made concessions, and Third Point made others. Though Far Point management recommended outside shareholders vote against the deal, two-thirds supported it. Many are also redeeming their shares, a seemingly contradictory position that is generally allowed in SPAC structures.

Loeb will be spared a big additional outlay. He had negotiated down Third Point’s backstop obligation – originally a selling point for Far Point – in return for handing Global Blue’s owners most of the free shares a SPAC founder gets after doing a deal.

There’s good and bad in the outcome. SPACs, which sell stock in initial public offerings with the goal of buying other companies, are touted as a way to help targets go public and raise funds without having to endure the IPO process themselves. As part of its deal Global Blue has also now gained additional investment, including from Alibaba affiliate Ant Financial.

But the SPAC structure ended up looking ragged. Backers often give up some of their free stock in deal negotiations, but still mostly end up with handsome gains. This case, though, may give pause to some of the increasingly varied personalities launching U.S. SPACs this year, whose 2020 IPO proceeds so far are above $30 billion, more than double the previous full year, according to Dealogic.

Meanwhile, Far Point investors are redeeming shares to the tune of around $500 million – the vast majority of the cash it originally raised. If a SPAC becomes less of a blank check and more of an IPO facilitator, some target companies might instead just decide to hire an investment bank.

First published Aug. 25, 2020

Image: A passenger aircraft flies past the sun at sunset during a hot summer day in Malaga, southern Spain, Aug. 3, 2018. REUTERS/Jon Nazca

WEWORK FINALLY DONS OFFICE-APPROPRIATE ATTIRE

PAINTING BY NUMBERSkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

WeWork has had a refurb, and it’s mostly convincing. On Friday the office-sharing lessor said that it would go public via a merger with a special-purpose acquisition company, putting a $9 billion enterprise value on the firm run by Sandeep Mathrani. That’s relatively conservative compared to its 2019 valuation of around $47 billion. Yet it’s still inflated by a market prone to absurdity, and hasn’t totally shaken off its old habits.

WeWork has improved in some ways since it was run by since-ousted founder Adam Neumann. Its growth is no longer gangbusters, but revenue is resilient. At $3.2 billion in 2020, it was flat compared to the year before, even though office rentals collapsed due to the pandemic. The company continues to get its expenses in line, and Covid-19 has put it in a better position than competitors: As workers start trotting back into their cubicles, they are more likely than before to look for space that isn’t permanent.

By merging with a SPAC WeWork is also getting $1.3 billion of cash from investors, including funds linked to real estate mogul Barry Sternlicht and investment giant BlackRock. It will have nearly $1.9 billion on its balance sheet after the deal closes, enough for its day-to-day business to keep burning cash at 2020’s rate for two years. With an enterprise value of roughly 3 times last year’s revenue, a discount to peer IWG, the price seems right.

But there are still cracks in the masonry. Like WeWork of yore, the current company hasn’t proved it can earn money. It says it can generate positive EBITDA, but not until the fourth quarter of this year and only then using an adjusted figure of its own concocting. To make meaningful progress on that figure, the company is assuming it grows 2022 revenue by more than 40%.

That could potentially happen if the office market comes roaring back, but it might not. So investing in WeWork still requires a dash of hope. The equity market is indulging companies like WeWork, and projections that may never come true. It’s hard to fault WeWork for shrewdly taking advantage of the certainty that comes with SPAC deals, but investors may find, they bought into a market on rented time.

First published March 26, 2021

Image: A man in a suit talks on his phone as he walks on Wall Street during a warm spring day in New York City, United States, May 3, 2018. REUTERS/Brendan McDermid

CELEBRITY SPACS ARE BUYOUT FIRMS’ POOR COUSIN

GRAFFITIkatrina.hamlin

BY JOHN FOLEY

Listed companies created to buy other companies used to be at the shadier end of finance. Now they are high fashion. Gary Cohn, one-time economic adviser to President Donald Trump, and former Republican House Speaker Paul Ryan are among the elites launching so-called special-purpose acquisition companies, or SPACs, seeking between them to raise $900 million. The vehicles are a bit like private equity’s poor cousin.

Cohn and Ryan are following a playbook that has generated $31 billion of capital this year so far, according to Dealogic. A SPAC raises money in an initial public offering, then buys a company that wants a stock-market listing without the usual palaver. The founders typically start out entitled to 20% of the company, minus whatever equity is given to the sellers. There’s usually some provision to keep them honest – in Cohn’s case, the backers can’t sell during the first year after a merger if the company’s value hasn’t increased by one-fifth. Hedge fund bosses Dan Loeb and Bill Ackman are among the other elites that have created SPACs, each with their own tweaks.

This may not be Paris Hilton advertising cryptocurrencies, but it’s celebrity endorsement nonetheless. Cohn’s fund makes a feature of his extensive dealings with chief executives and policy makers. Before working for Trump, he was a top executive at Goldman Sachs. Ryan’s SPAC “will leverage his deep network of relationships at the most senior levels of business.” While both claim other qualities too, the implication is that these individuals can open doors. If they succeed they will become rich – or even richer – in the process.

True, there’s more to it. SPACs at least talk not just about buying businesses but running them. Former Citigroup banker Michael Klein, who launched a series of SPACs, boasts a network of executives he can parachute in, including former Ford Motor Chief Executive Alan Mulally.

Private equity firms already do something similar. Big-name SPACs are a version of buyout shops like Blackstone and KKR, but more readily available to the speculative masses and without the financial leverage or the decades-long track record. What both approaches share is a strong underlying message that wealthy, connected people get better deals, and the next best thing to being one of them is to ride on their coattails.

First published Aug. 26, 2020

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BUYOUT SHOPS MAKE SPACS PASS THE PARCEL BESTIES

GRAFFITIkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

Private equity firms have a new type of buyer for their assets. Blackstone is selling benefits service provider Alight Solutions to a special-purpose acquisition company for $5.4 billion, the second such transaction for the buyout shop in two months. Last year, the value of private equity portfolio companies sold to SPACs jumped sixfold from the year before to almost $60 billion, according to Refinitiv data. The game of pass the parcel has found a new regular player.

Blackstone is doing a repeat deal with Bill Foley, the former chairman of Fidelity National Financial behind the publicly traded vehicle buying Alight. Foley Trasimene Acquisition will inject $1 billion and the company will gain a listing. Other investors including Thomas H. Lee Partners and Third Point Capital will also invest. Another Foley-backed SPAC agreed to buy payments firm Paysafe from Blackstone in December.

The frothy conditions for SPACs represent a red flag. In 2020, roughly 250 blank-check vehicles listed on U.S. markets, approaching three times the number in 2019, the previous record, according to Refinitiv. The trend has continued into 2021. Many of those vehicles are now hunting for acquisitions, and private equity-owned businesses are, as they say, available.

Last week Goldman Sachs Chief Executive David Solomon told investors that incentives for both managers of blank-check vehicles and those who are selling companies to SPACs have ushered in excesses. This risks blowback even for better deals. Foley isn’t immune: In August a group of shareholders sued him, alleging he enriched himself when Fidelity National purchased a company connected to him.

In the case of Blackstone’s sale of Alight, the endorsement from big investing names lends credibility to the transaction, as does the agreed valuation. The price pegs the target’s worth at roughly 12 times its estimated 2021 EBITDA. That’s nearly a 30% discount to where rival Paychex trades. That makes the deal look sensible. With so much SPAC cash sloshing around, though, it could prove to be an exception.

First published Jan. 25, 2021

Image: Bill Foley, arrives on the red carpet for an awards ceremony at the T-Mobile Arenain Las Vegas, Nevada, United States, on June 21, 2017. Stephen R. Sylvanie-USA TODAY Sports

ROBO-SUIT SPAC PAINTS DYSTOPIAN FINANCIAL FUTURE

GRAFFITIkatrina.hamlin

BY JOHN FOLEY

It was a bad day for Credit Suisse, but a very good day for former employee Brian Finn. As the Swiss bank revealed a $4.7 billion loss from the failings of Archegos Capital Management on Tuesday, Finn’s special-purpose acquisition company agreed to buy robo-suit maker Sarcos in a deal worth $1.7 billion. Both could end up in the financial history books for different reasons.

Outside investors entrusted just under $300 million to Finn’s company, Rotor Acquisition, with the idea that he would buy a company with exciting prospects. So he picked one in which he, Rotor’s chief financial officer and one of its four independent directors are all investors. That’s not unheard of for a SPAC – casino and casual dining mogul Tilman Fertitta did something similar. But it sets up some bruising conflicts of interest.

The main one is that Finn stands to make big bucks just from getting a deal done. Sarcos has raised less than $100 million to date according to Crunchbase, so it’s likely that a $1.2 billion pre-deal valuation means a big paper profit. As a founder of the SPAC, Finn is also part of a team that invested around $7 million of its own money but will own $63 million of stock when the deal closes. There’s also a generous bonus payment to Sarcos shareholders – including Finn – if the shares hit certain levels after the acquisition closes.

Policing those conflicts falls to independent directors, led by Stefan Selig, another Wall Street vet. But even with outside advisers and lawyers, Selig – who worked at First Boston with Finn back in the good old days before it was bought by Credit Suisse – is only human. The deal has been cobbled together within three months of Rotor raising its war chest, a time frame that’s not unusual among deals announced so far this year.

The broad idea behind SPACs is that they bring to market high-growth, early-stage companies that retail investors would never normally get a look at. Sarcos is a perfect example. The company thinks it could be worth $26 billion in four years, even though its main product doesn’t exist yet. If all goes well, riches will abound. If it fails, investors – and their lawyers – will ask how these kinds of conflict-laden fantasy deals were ever considered to be the norm.

First published April 6, 2021

Image: Sakakibara Kikai’s engineer Go Sakakibara poses with a robot at its factory in Shinto Village, Gunma Prefecture, Japan, April 12, 2018. REUTERS/Kim Kyung-Hoon

CASINO DEAL EPITOMIZES THE HOUSE EDGE

GRAFFITIkatrina.hamlin

BY LAUREN SILVA LAUGHLIN

Houston billionaire Tilman Fertitta has found a new way to bet with the house – and it helps immensely that it’s his own. He is using his blank-check company to buy his online-gaming business from his eponymous restaurants-to-river cruises conglomerate. The same can’t be said for investors.

On the face of it, the deal between Golden Nugget Online Gaming and Landcadia Holdings II, the special-purpose acquisition vehicle Fertitta helps manage with Jefferies Financial, has not taken advantage of the inherent conflicts in the transaction.

Sure, the SPAC negotiated a $745 million enterprise valuation with the company, and Fertitta holds the senior executive role at both firms. But bankers at Houlihan Lokey signed off on the price, which looks fair.

It values the online business at around 6 times what the company itself expects 2021 revenue to hit. That’s nearly a tenth more than where DraftKings completed its SPAC transaction in April. But since then, DraftKings’ shares have about doubled. That makes the price for Golden Nugget Online Gaming look like a downright sure thing. The company’s revenue grew at an average annual clip of 48% for the four years through 2019. Pandemic lockdowns are likely only to help that continue. Importantly, it is profitable, which is more than can be said for companies like Nikola, the electric-truck maker with hardly any revenue that went public via a SPAC earlier this month.

Fertitta’s SPAC track record, though small, suggests some investors may have wished they hadn’t placed their chips alongside his. His first vehicle bought Waitr, a food-delivery service, in 2018. The stock, which was at 28 cents a share in November, has been helped by a Covid-induced rebound. Shares are now at just over $2 apiece, a roughly 80% drop from when the deal was first agreed.

The trouble is Fertitta has far more to gain than lose if things don’t go well. The parent company he runs is receiving a handy injection of cash. As manager of the SPAC, Fertitta is receiving a boatload of stock for next to nothing. So both he and his company will become more flush as a result of the deal. Meanwhile he maintains both voting and economic control. That’s practically the definition of the house edge.

First published June 30, 2020

Image: Young croupier trainees display a deck of cards on a gaming table at the Cerus Casino Academy in Marseille, France, Nov. 6, 2013. REUTERS/Jean-Paul Pelissier

SPAC SOLVES NONE OF TECH WORLD’S HARDEST PROBLEMS

GETTING SURREALkatrina.hamlin

BY RICHARD BEALES

Social Capital’s mission is “to advance humanity by solving the world’s hardest problems.” The investment firm is backing the $500 million initial public offering of a blank-check vehicle that aims to buy a tech startup, thereby helping bring more so-called unicorns – tech firms worth $1 billion or more – to the public market. It’s a nice theory, but the practice could be different.

Also backed by a London venture firm, Social Capital Hedosophia Holdings says tech startups are deterred from going public by the distractions of the IPO process, and the difficulties of arriving at a sustainable valuation and building a long-term shareholder base. Even so, there are benefits, like awareness and the availability of shares as a liquid currency. The idea is the special-purpose acquisition company, or SPAC, could bridge this gap.

It’s true an IPO process is not easy. Establishing the internal processes needed is a big step for startups, and articulating the nature, strategy and governance of a company in black and white requires clarity many early-stage companies lack. Yet Social Capital Hedosophia should demand this of any target – and, once acquired, periodic public reporting would be required anyway.

As for valuation, IPO pricing is as much art as science, but the same goes in the venture-capital world – just ask any investor in Uber. It’s not clear how an acquisition by the VC folks in charge of Social Capital Hedosophia would be any more transparent, even if it would avoid the crazy price and order-book inflation of a hot IPO. And while the relatively smaller number of SPAC investors would in theory be more engaged, some would nonetheless be in it only until an acquisition is done.

Along with his colleagues, Social Capital boss and former Facebook executive Chamath Palihapitiya, who will run the SPAC, could certainly help a startup prepare for the public eye less frenetically than enduring rounds of prospectus-drafting with bankers. As the SPAC filing notes, however, there is “vast” capital available in private markets, plenty attached to this kind of expertise.

Most of the providers of that capital stand to collect hefty so-called carry and fees on investments, and Social Capital Hedosophia’s sponsors are no exception. At the margin a few tech companies might become public that otherwise wouldn’t. But overall, the new SPAC looks destined to add more value for its backers than the market.

First published Aug. 24, 2017

Image: A visitor takes a photograph of the painting “Visage of the War” by Spanish surrealist artist Salvator Dali during the exhibition “Dali & Magritte” at the Royal Museums of Fine Arts of Belgium in Brussels, Oct. 11, 2019. REUTERS/Francois Lenoir

SPACS AND ELECTRIC CARS DRIVE HYPE FEEDBACK LOOP

GETTING SURREALkatrina.hamlin

BY ANTONY CURRIE

Trust one of Wall Street’s best-known dealmakers to strike the biggest blank-cheque merger in history. Former Citigroup executive Michael Klein on Monday used one of his special-purpose acquisition companies, Churchill Capital IV, to snap up electric-car maker Lucid Motors. It takes the hype for both trends to a new level.

First there’s the transaction itself. The merger with Klein’s SPAC will bring Lucid $2.1 billion in cash and values it at just under $12 billion – chunky sums for this kind of merger. But that’s just the first part. The second involves the carmaker raising additional cash from other investors via a structure increasingly used in conjunction with a SPAC, the so-called PIPE: private investment in public equity.

Often, this kind of complementary PIPE capital raise is executed at or close to the value of the SPAC merger. In this case, the $2.5 billion being committed – an amount which also raises eyebrows for this kind of deal – is at a price that doubles Lucid’s market value.

Yet investors, including BlackRock, Franklin Templeton and Saudi Arabia’s Public Investment Fund, which currently owns 85% of Lucid, are not put off by such froth. They’re buying in at an enterprise value of just under 4.5 times 2023 sales, using Lucid’s estimates.

That’s higher than rivals like Fisker and Canoo, which have also been swallowed by SPACs. But Lucid is one of the better upstarts. Peter Rawlinson, the 14-year-old firm’s chief executive, was the chief engineer of Tesla’s Model S; before that he was at Lotus and Jaguar. He’s surrounded by executives who have worked for Ford Motor, Audi, Hyundai and other automakers, as well as at technology giants like Apple. Moreover, its first car, the Lucid Air, is set to go on sale later this year, with 7,500 reservations already placed.

Churchill Capital IV shareholders have revved the engine too much, though. After weeks of leaks about a potential deal, the stock rose more than fivefold. Even following an after-hours pullback on Monday to reflect the terms of the merger, the stock still trades at a level implying a valuation north of $65 billion and an enterprise value of 11.5 times 2023 sales, surpassing even Tesla’s heady valuation. Such an overcharged transaction risks an electric shock.

First published Feb. 23, 2021

Image: The 2016 Fisker V10 Force 1 is unveiled at the North American International Auto Show in Detroit, Jan. 12, 2016. REUTERS/Gary Cameron

OUTER SPACE MAY BE BEST PLACE FOR SPAC CRAZE

GETTING SURREALkatrina.hamlin

BY ANNA SZYMANSKI

Outer space may be a good fit for SPACs. The aerospace startup Astra said on Tuesday that it’s launching itself into the public markets with a special-purpose acquisition company called Holicity, at a $2.1 billion valuation. SPACs, effectively shell companies with cash that provide a shortcut to a listing, are well suited to companies reliant on investors’ faith in a distant future. And the final frontier is about as future as it gets.

The California-based firm led by Chief Executive Chris Kemp, who was chief technology officer at NASA, produces small rockets for sending satellites into space. That puts it in an industry whose revenue could hit $1 trillion by 2040, according to Morgan Stanley. Holicity CEO Craig McCaw, a pioneer in offering cellular phone service, knows the satellite industry well.

Investors seem to approve the match, as the blank-check company’s stock price soared over 57% after the announcement. Astra launched a rocket into space for the first time in December. Though it missed its orbital target, it showed it was capable of getting there. It’s one of a handful of privately-funded companies to do this, and it did so faster than Elon Musk’s SpaceX.

Like rockets themselves, this is still a risky endeavor. The company says it will begin monthly launches by the end of this year. But its growth expectations are ambitious: it suggests launches could jump to 300 in 2025 from 15 next year, with total launch revenue growing from $47 million to over $1 billion. But this reflects the company’s plan to distinguish itself with more frequent launches in an increasingly competitive industry.

This is why a SPAC is a good fit. First, speed in accessing capital is important as the commercial space race intensifies, and this deal is expected to close in the second quarter. And using blank-check companies allow firms to focus more on future projections in their pitch to investors, a practice that is restricted in traditional initial public offerings. That doesn’t mean the price is right, or investors won’t be disappointed – only that while SPACs can sound like rocket science, Astra’s decision to use one is pretty straightforward.

First published Feb. 3, 2021

Image: The spiral galaxy NGC 5643 in the constellation of Lupus (The Wolf), about 60 million light-years away from Earth, is seen in this image released Oct. 2, 2020. ESA/Hubble/NASA/Handout via REUTERS

AIR TAXI SPAC ONLY PARTLY DEFIES FINANCIAL GRAVITY

GETTING SURREALkatrina.hamlin

BY CHRISTOPHER THOMPSON

Flying taxi startup Lilium is ascending into aerial traffic. The German company announced plans on Tuesday to list in New York via a special-purpose acquisition vehicle headed by ex-General Motors North America boss Barry Engle. Cutting journey times between neighbouring cities might appeal to the well-heeled. But with first sales scheduled only in 2024, it may run into plenty of competition.

Lilium’s investor blurb gives a neat illustration of its pitch. Drivers on a clogged California highway sit below a billboard advertising $130 hops between Silicon Valley capital Palo Alto and wine county Napa. The Munich-based company, whose aircraft are powered by batteries rather than jet fuel, isn’t trying to democratize helicopter travel. It merely wants to open it up slightly beyond the moneyed 1%.

Shaving an hour off a commute from Philadelphia to Manhattan, an indicative route, will probably cost aspirant high-fliers $170. Putting that in context, as an hourly rate that fare is equivalent to a $317,000 annual salary, assuming a 55-hour work-week and one month off. That’s certainly not stratospheric: 4% of U.S. households make the grade. And if Lilium broadens its pitch to special days or one-off events it could appeal to the 12 million or so U.S. households that earn above $200,000 per year.

That points to a sizeable potential market. But appearances can be deceptive. After trials in Florida and Germany, first commercial sales aren’t expected until 2024. After that, Engle expects the top-line to ascend at a near-vertical 1,200% over two years to hit a 2026 revenue target of $3.3 billion. Lilium declines to say what market share of the nascent air-taxi market that represents. Conveniently, it implies investors are getting a good deal: after accounting for $780 million of cash from the merger, Lilium will have an enterprise value of $2.4 billion, or 0.7 times those 2026 sales. Rival Joby Aviation is going public at more than 2 times.

Joby and others also plan to be airborne in a similar timeframe. And, despite its cacophonous take-offs and landings, old-fashioned chopper outfit Blade is already plying some city-to-city routes. Lilium’s dream of upending short-haul sky travel is undoubtedly seductive. It may bump into traffic on the way up.

First published March 30, 2021

Image: An undated handout picture from flying taxi startup Lilium shows its five-seater prototype in Munich, Germany, October, 2019. Lilium/Handout via REUTERS

SERENA WILLIAMS LOBS A $1.6 BLN SPAC HEADSCRATCHER

GETTING SURREALkatrina.hamlin

BY JENNIFER SABA

What does tennis superstar Serena Williams, a 3D printing firm eyeing aggressive growth and the special-purpose acquisition company of a lodging mogul have in common? Outside the money free-for-all that is America’s blank-check takeover craze, pretty much nothing at all.

Williams is on the board of directors at Jaws Spitfire Acquisition, a SPAC founded by Starwood Capital Chairman Barry Sternlicht. On Tuesday, Jaws agreed to merge with Velo3D, a technology firm that focuses on specialized printing in a deal valued at $1.6 billion.

The holder of 23 Grand Slam titles isn’t a stranger to startups. She launched Serena Ventures in 2014 to focus on early-stage firms including online educator MasterClass and shaving company Billie. Her husband cofounded Reddit. While Williams is not a direct investor in Jaws, as a board member she gave the green light to snatch up Velo3D, which was founded seven years ago and backed by Khosla Ventures, SpaceX – Elon Musk’s interstellar startup, which is also a customer – and Bessemer Ventures.

However, the eagle eyes of a line judge are required to see how the deal stacks up financially. Velo3D had $19 million in revenue last year, though it’s aiming for a slice of the over-$100 billion addressable high-value metals market. It’s projecting that by 2026 it will make nearly $1 billion. Still, the enterprise value of the deal is over 60 times estimated 2021 sales of $26 million.

By comparison, public competitor Proto Labs fetches about 7 times the next 12 months revenue, according to Refinitiv, while the industry median for the same time period is 3 times revenue. Jaws’ shares fell about 6% in noon trading to $10.09, a hair above the $10 at which they were sold to investors.

SPAC mania shows no signs of slowing down. In the first three months of the year, SPAC initial public offerings in the United States have surpassed the more-than $80 billion raised in 2020, according to SPAC Research. More head-scratching matches on the center court of Wall Street are in store.

First published March 23, 2021

Image: Serena Williams of the United States plays during her semi-final match against Japan’s Naomi Osaka at the Australian Open in Melbourne, Australia, Feb. 18, 2021. REUTERS/Asanka Brendon Ratnayake

LOOK OUT EUROPE, A SPAC CRAZE IS AROUND THE CORNER

GOING GLOBALkatrina.hamlin

BY CHRISTOPHER THOMPSON

American cultural imports are often regarded with froideur in France. Recently, telecoms mogul Xavier Niel and banker Matthieu Pigasse received a warmer reception for their U.S.-style special-purpose acquisition company focused on consumer goods. Despite the product’s poor track record in Europe, look for the SPAC craze to infect the continent’s rainmaker class.

These vehicles, set up by financiers to raise funds for unspecified deals, are rare in Europe. Prior to December, just 19 listed over the past six years, according to Refinitiv, raising $3.4 billion. In 2020 alone, bold-faced names on Wall Street like Pershing Square’s Bill Ackman raised $66 billion worth.

SPACs are often controversial because they hand outsized rewards to founders and allow companies to skirt listing rules when going public. In Europe similar vehicles have a sketchy past. Vallar, the London-listed shell which raised $1.1 billion in 2010 for mining deals off banking scion Nat Rothschild’s contacts, foundered amid corporate governance problems.

Iliad co-founder Niel and Centerview Partners Paris chief Pigasse, have broken the drought before. They launched Mediawan in 2016, which bought European media businesses. Their new venture, 2MX Organic, comes as the volume of initial public offerings has declined for the last three years. Just $17.2 billion was raised in 2020, down 20%. European investors are hungry for new ways to put capital to work.

The Frenchmen won’t be alone. The continent is chockful of dealmakers and bankers who, like their American cousins, have the track records needed to win investor backing. Consider former bank chief executives like Jean Pierre Mustier of UniCredit and Tidjane Thiam of Credit Suisse. Or ex-UBS investment bank head Andrea Orcel.

Similarly, notable M&A grandees like Erik Maris in France or Claudio Costamagna in Italy may find a role model in former Citigroup executive-turned-rainmaker Michael Klein’s four U.S. SPACs. Gallic tech entrepreneur Marc Simoncini or Germany’s Samwer brothers, founders of Rocket Internet, could be in the mix. Even blank-cheque mining vehicles may stage a comeback: Imagine Glencore’s departing CEO Ivan Glasenberg buying his former company’s coal assets.

At least 10 European SPAC deals are in the pipeline, Reuters reports, set to raise some $3 billion. True, that’s small compared to the United States. But like other cultural imports, good and bad, what happens in America eventually makes its way across the pond.

First published Dec. 29, 2020

Image: A road warning sign is seen in front of a large mural depicting the EU flag, attributed to the British artist Banksy at the Port of Dover, Britain, Feb. 14, 2019. REUTERS/Toby Melville

GRAB’S $40 BLN DEBUT COMES WITH TWIN AIRBAGS

GOING GLOBALkatrina.hamlin

BY UNA GALANI

Silicon Valley investor Altimeter Capital has sketched a handy roadmap for speeding hot Asian technology companies to overseas public markets. Southeast Asian ride-hailing-to-delivery-to-payments group Grab is listing in New York via a combination with a blank-cheque firm. It’s the largest so-called special-purpose acquisition company merger, with a structure that cushions the SoftBank-backed company’s amped-up $39.6 billion equity valuation.

Bankers have been scratching their heads over ways to introduce U.S. investors to fast-growing companies from a relatively unknown region. One approach is to assign conservative growth forecasts and valuations. That’s what RMG Acquisition Corp II, led by Riverside Management’s Jim Carpenter, did in February with its $4.4 billion purchase of India’s ReNew Power, one of the few such sizeable deals thus far from Asia.

Altimeter’s route is different. It values the Singapore-based group’s loss-making business, minus cash, at a generous 13 times its own estimate for 2021 sales, a multiple twice that of peer and backer Uber Technologies. The number looks only slightly better against Sea, a $120 billion e-commerce-to-games-to-payments giant, also based in Singapore, that trades at 14 times sales in New York. Grab expects its revenue to grow at a stunning compound annual rate of 42% between now and 2023.

However, A-list investors like Singapore’s Temasek, BlackRock and Fidelity coming into the Grab transaction through a $4 billion private placement of shares can take some comfort. Altimeter is contributing almost one-fifth of the placement and will backstop any redemptions from the SPAC to the tune of $500 million. It has also volunteered to a three-year lockup for some of its shares, three times the norm. Together, those moves inject more credibility to Grab’s bullish forecasts.

Even so, the valuation piles the pressure on co-founder and Chief Executive Anthony Tan. By Grab’s own EBITDA yardstick, its ride-hailing business is already profitable, and it expects its delivery operations, serving a region with a population twice that of the United States, to break even later this year. Tan’s challenge is to do the same in fintech as it expands beyond simple payments to insurance, wealth management and loans. He also needs to ensure competition against Gojek in Indonesia doesn’t burn cash. Having bought into a premium valuation, investors need him to keep his eyes on the road.

First published April 13, 2021

Image: A Grab taxi drives on a street in Hanoi, Vietnam, Oct. 29, 2018. REUTERS/Kham

LONDON IPO SHAKEUP IS MORE ABOUT SPACS THAN TECH

GOING GLOBALkatrina.hamlin

BY PETER THAL LARSEN

It’s never a good idea to rewrite stock market rules during a boom. Yet that’s what Rishi Sunak is planning. Britain’s finance minister on Tuesday welcomed a review which recommends sweeping away barriers to companies that list their shares in London. Though the changes may persuade some UK startups not to defect to other exchanges, the more immediate effect will be to let Britain join the craze for special-purpose acquisition companies, or SPACs.

The review led by former European Commissioner Jonathan Hill was prompted by the dearth of UK initial public offerings, particularly by tech companies. His recommendations seek to remove the obstacles that discourage startups from floating in London. They would allow shares with reduced voting rights to join the London Stock Exchange’s “premium” segment, enabling founders to keep control for up to five years. The proportion of stock a company must sell would shrink to 15%, from 25% today.

It’s far from clear that these changes will prompt a rush of offerings. There’s little evidence that British firms are selling their shares elsewhere: Just 14 UK-based companies listed in the United States between 2015 and 2020, raising only $3 billion, according to think tank New Financial. Entrepreneurs determined to keep control after an IPO will still prefer the United States, which places no time limit on their super-voting shares.

The bigger beneficiaries of Hill’s reforms are bankers and executives eager to launch SPACs in London. They want to mimic the United States, where blank-cheque vehicles accounted for roughly half the money raised in new listings last year. Hill endorses scrapping the requirement for SPACs to suspend their shares when they identify a target, a deterrent for prospective investors. More controversially, he also suggests rewriting liability rules to make it easier for company directors to issue financial forecasts.

In a further sign of the government’s deregulatory leanings, Hill wants to give Britain’s Financial Conduct Authority a duty to consider Britain’s attractiveness as a place to do business. That’s a requirement Prime Minister David Cameron’s government explicitly scrapped after the 2008 financial crisis.

Hill’s review is peppered with references to ambitious, innovative, and fast-growing companies. But looser rules also apply to stagnant, imitative, and poorly managed ones. The modest benefits of the overhaul will be felt soon. The costs will only become clear after the boom ends.

First published March 3, 2021

Image: Britain’s Chancellor of the Exchequer Rishi Sunak attends a virtual press conference inside 10 Downing Street in central London, United Kingdom, March 3, 2021. Tolga Akmen/Pool via REUTERS

HEY HONG KONG, LEAVE THOSE SPACS ALONE

GOING GLOBALkatrina.hamlin

BY JENNIFER HUGHES

Every exchange should keep an eye on its rivals. In that spirit, the success of New York’s two bourses in allowing special-purpose acquisition companies to float is prompting Hong Kong to consider following suit. The problem is that it only recently triumphed in a long battle to rein in backdoor listings, which is what SPACs exist to enable. The benefits to the city of re-opening a years-long contentious debate are not clear.

Some $66 billion has been raised just this year, according to Dealogic, by SPACs now in search of companies to buy. Hong Kong is not alone in considering a slice of the action: London and Singapore, its regional arch-rival, are also mulling plans, while household-name tycoons such as Richard Li, son of Li Ka-shing, are working on launching their own U.S. blank-cheque companies.

In Hong Kong’s most recent battle against backdoor listings, scores of companies were going public but in time sold or minimised their main business in the expectation another would buy the shell to avoid an initial public offering. Thus a local nightclub operator could end up dwarfed by a mainland property management unit. A gold miner in 2016 sold its one excavation site claiming it felt it wasn’t diversified enough, sparking fears it intended to become a shell. That prompted funds giant BlackRock into a then-rare public rebuke. The city only triumphed in 2019 with new rules giving the exchange’s Listing Committee the power to force a company into a full IPO if the committee felt its mooted deal carried shell-like risks.

It is hard to see SPACs fitting into that process. Without a way of avoiding committee approval, they cannot offer the speedier route to market they tout in New York. Nor would they necessarily be cheaper than IPOs. Fees paid to underwriters in Hong Kong are about 2% of the total raised, at least half the amount usually charged by Wall Street bankers.

In New York, SPAC fever has brushed off any memories of the damage done by backdoor listings just over a decade ago when a series of mostly Chinese companies were found to be frauds after reversing into U.S. shell companies. Hong Kong’s experience is more recent still and local SPAC fans would do well to remember it.

First published March 3, 2021

Image: Hong Kong Exchanges and Clearing Chairman Laura Cha Shih May-lung speaks during a ceremony marking the first day of trade after Lunar New Year at the Hong Kong stock exchange in Hong Kong, China, Feb. 8, 2019. REUTERS/Tyrone Siu

Art of the SPAC

INTRODUCTION

CONTENTS

BLANK M&A CHECKS ARE GETTING WAY TOO EASY TO WRITE

TRAVEL DEAL TREADS NEW PATH FOR SHELL COMPANIES

BEWARE THE ROUGH END OF THE SPAC

THE HOUSE ALWAYS WINS WITH SPACS

CHANCELLOR: REGULATORS WILL KILL THE SPAC FRENZY

IMAGINARY SPAC ONE-UPS HEDGIE STARS

SPACS NEED A GOVERNANCE OVERHAUL

REGULATORY LOOPHOLE LETS SPAC OUTLOOKS FLY FOR NOW

NEW SEC BOSS’S SPAC WORK IS ALREADY PARTLY DONE

SPACS CAN REVERSE LISTINGS DECLINE WITH SEC HELP

SEC’S SPAC THREATS NEED MORE FIREPOWER

SPACS GIVE WALL STREET ANOTHER SLICE OF THE PIE

BLACKSTONE’S SPAC FORAY PUTS PRICE ON CONVENIENCE

BILL ACKMAN BESTS GOLDMAN SACHS IN SPAC RACE

PERELLA WEINBERG DEAL BOOST SPAC CREDIBILITY

SPACS ARE ONE GOOD SCRUB AWAY FROM RESPECTABILITY

DAN LOEB DEAL REVEALS GOOD AND BAD OF SPACS

WEWORK FINALLY DONS OFFICE-APPROPRIATE ATTIRE

CELEBRITY SPACS ARE BUYOUT FIRMS’ POOR COUSIN

BUYOUT SHOPS MAKE SPACS PASS THE PARCEL BESTIES

ROBO-SUIT SPAC PAINTS DYSTOPIAN FINANCIAL FUTURE

CASINO DEAL EPITOMIZES THE HOUSE EDGE

SPAC SOLVES NONE OF TECH WORLD’S HARDEST PROBLEMS

SPACS AND ELECTRIC CARS DRIVE HYPE FEEDBACK LOOP

OUTER SPACE MAY BE BEST PLACE FOR SPAC CRAZE

AIR TAXI SPAC ONLY PARTLY DEFIES FINANCIAL GRAVITY

SERENA WILLIAMS LOBS A $1.6 BLN SPAC HEADSCRATCHER

LOOK OUT EUROPE, A SPAC CRAZE IS AROUND THE CORNER

GRAB’S $40 BLN DEBUT COMES WITH TWIN AIRBAGS

LONDON IPO SHAKEUP IS MORE ABOUT SPACS THAN TECH

HEY HONG KONG, LEAVE THOSE SPACS ALONE