The Wall Street Journal today July 14, 2020, B10 has a story “Blank-Check Route to Listing Gets Boost From Virus”. Having discussed the SPAC is some length in our previous research notes we explore if the SPAC is an investor friendly structure? We think it may well be, for reasons we describe here.
Wall Street Journal July 13, Monday, 2020, B1 article ” Deal Takes Health Firm MultiPlan Public “. MultiPlan a healthcare services provider owned by private equity firm Hellman & Friedman is merging with a SPAC Churchill Capital Corp.III in $ 11 billion deal. We provide color on the mechanics and timeline for such transactions here.
The choice between a traditional IPO vs. a SPAC acquisition is not quite straight forward. In a SPAC the transaction is subject to a vote by the SPAC’s shareholders. Moreover, one starts off with an initially concentrated shareholder base. Then there is the potential impact of the warrant overhang. We point out some pros and cons here.
ActiveAllocator Research ; After examining 18 Blank Check Company transactions we conclude that there are significant benefits to using the SPAC route to go public. These include a quicker and easier route to becoming a publicly-traded company compared to a traditional IPO. Also these often have greater ability to achieve higher cash monetization upfront, relative to an IPO or a spin-off, given their flexible transaction structure. Sellers are motivated for they can choose stock or cash as consideration. Valuations are easier to arrive at. Often, limited float provides favorable demand / supply balance to support trading and valuation, the usage of leverage tends to be lower and there are positive implications for tax efficiency.
ActiveAllocator examined a random sample of 15 SPAC acquisitions over the past two decades to decipher if there were reasons that make it attractive as an acquisition vehicle. This is by no means a scientific study but some interesting insights do emerge as described here.
ActiveAllocator Research – The Wall Street Journal Friday, July 10, BI article ” ‘Blank Check’ IPO Brings Ackman Back on Stage”. Here is what a simple SPAC may look like. It can even have variants to bring in elements of a tontine.
A Bloomberg article suggests that ” — Pershing Square Tontine Holdings Ltd. — will reward investors who hang on to their shares after an acquisition is selected by giving them a fixed number of warrants. When shareholders cash out, those who remain receive more warrants, giving them an incentive to stay.”
Here the analogy is to mortality. When shareholders cash out, the economic effect is similar to mortality in insurance. In this variant the remaining shareholders receive those residual warrants and their payoff will increase – hence perhaps the term tontine in the SPAC vehicle.
ActiveAllocator will Not be allocating to it.
The Wall Street Journal Friday, July 10, BI ” ‘Blank Check’ IPO Brings Ackman Bank on Stage. Looks like Pershing Square’s Bill Ackman is coming out with a SPAC.
- Special purpose acquisition corporations (SPACs) are newly formed public companies with a mandate to acquire or merge with an operating company within a prescribed time-frame (usually 24 months from the IPO). SPACs raised $13.6 billion in 59 IPOs in 2019 and around 70 are actively seeking targets. Many of the acquisitions have been structured as reverse mergers where the seller receives cash and stock from the SPAC. The SPAC often represents a quicker and easier way of going public than IPO. Several private equity firms have sold portfolio companies to SPACs. Here is how I visualize it.
ActiveAllocator Research – A SPAC is a publicly traded blank check company with a mandate to acquire or merge with an operating company within a prescribed time-frame (usually within 24 months from the IPO). Here are a few things to keep in mind.