Nearly 66% of the 158 special purpose acquisition companies funded since 2003 have announced proposed business combinations. Most remaining SPACs are less than a year old and have plenty of time left.
Since last summer, the number of proposed SPAC acquisitions has increased significantly. More than 90 transactions have been announced, 52 consummated, 18 disapproved, and 20 await approval from the Securities and Exchange Commission.
Now that there’s a reasonably sized sample pool of SPAC acquisitions, there are several things SPAC sponsors should consider before proposing a combination.
Given the 20% equity interest to which the sponsor is entitled, the market expects a transaction with an enterprise value that’s at least twice the size of the amount raised in the initial public offering—and even larger is better. This deal dynamic should allow the founder’s equity interest to be more easily accommodated by the post-combination economics.
Additionally, if the sponsor has structured the transaction properly and is acquiring the business at a discount, it’s more likely that a discount on a larger transaction will more readily absorb the SPAC sponsor’s equity interest.
Equally important, the market needs visibility on how to value the proposed target. Though there are methods of valuation that an established investment bank may use to validate the purchase price, the investment community relies more heavily on a comparison to other public companies. These relative values may continue to fluctuate after the announcement and will continue to impact investor sentiment.
Two themes have emerged as successful combination strategies: China and shipping. SPACs that have announced deals related to those themes have been well received —even if they were not originally designed as China- or shipping-focused.
These SPACs have typically outperformed others in post-business combination operations and trading. Recently, investors approved Vantage’s acquisition of jack-up rig and drillship contract rights; Michael Gross’ Marathon acquisition company announced a shipping transaction; and Heckman’s SPAC announced the acquisition of a China water company.
The only three SPACs to complete IPOs since the early part of the year are two China-focused SPACs (Hambrecht Asia and China Fundamental) and one large shipping SPAC (Navios).
The lesson here is that the valuation and economics of the proposed combination don’t determine a successful outcome. A growth theme already embraced by investors should also be present. In addition to emerging markets and shipping, investors have enthusiastically supported well-themed deals.
The announcement by Polaris to acquire Hughes Telematics, a competitor of OnStar, traded up immediately. With the price of crude oil rising, investors in Vantage overwhelmingly approved the deal. Also approved were American Apparel and Jamba Juice.
In juxtaposition, however, is the recently withdrawn deal to acquire the well-known and respected investment fund Halcyon. This was a result of poor timing, given the performance of other funds in 2008 and the drop in value of GLG, the U.K. fund acquired by Freedom Acquisition in 2007.
Interestingly, GLG obtained the immediate embrace of investors since Blackstone successfully went public just a week prior. But at the beginning of this year, Blackstone dropped in value and GLG suffered the loss of a trader, making Halcyon a considerably different story.
While selecting a well-profiled target is the proper starting point to any SPAC acquisition, structuring the transaction and implementing favorable approval processes can also have a positive impact. Sponsors and affiliates should consider the additional purchase of open market shares pursuant to a pre-qualified 10b-5(1) trading plan, also known as a limit order.
The 10b-5(1) plan enables the additional purchase of SPAC securities after the announcement of the proposed business combination and the terms of the transaction. If the plan hasn’t been established at the time of the IPO, there are concerns that the party establishing the plan, down the road, may have access to nonpublic information, and therefore, be ineligible.
In such a case, a primary concern is access to the target company’s projections or commercial arrangements that the SPAC is seeking SEC confidential treatment of. The agreement to acquire additional shares shows commitment to the specific proposed deal and, depending on the actual plan, enables other investors who aren’t intending to support the deal to sell to someone who supports it. Plans range from a commitment of 2.5% to 10%.
Similarly, SPAC sponsors and their advisers have increased the conversion threshold—the amount of stockholders who may vote against the deal and require a return of their capital—from 20% to 30% or higher. The increase in the conversion threshold acts in a similar manner by enabling an investor who wouldn’t be inclined to support the business combination with an avenue for selling while still permitting the transaction to close.
The primary difference is that the 10b-5(1) plan requires an investor to invest fresh capital while the higher conversion threshold would reduce the amount of capital and shares outstanding. In either case, the SPAC sponsor has increased the probability of an approved transaction.
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