Blank check lifeline: SPACs

In stormy and uncertain economic conditions, riding the waves of the IPO market can be a nauseating experience. There is one asset class still managing to make a splash, however: special purpose acquisition companies, or SPACs.

Also known as ‘blank check’ companies, SPACs are listed entities created for the sole purpose of making a targeted acquisition. SPAC issues have been dominating the IPO market since the beginning of the year. According to SPAC Analytics, they’ve raised over $3.4 bn from 12 offerings in 2008 alone.

In a SPAC, virtually all of the gross proceeds raised in the IPO are placed in a trust account, which then accumulates interest in the period between public listing and final acquisition. In the throes of a credit squeeze and a choppy market, this feature is helping to keep the head of the asset class above water.

‘Having a cash vehicle in this environment really gives us a competitive advantage in doing a deal without requiring high amounts of leverage,’ notes Jared Bluestein, CFO of Berggruen’s New York-based Berggruen Holdings.

Once the company is trading publicly on an exchange, its management team will typically spend 18 to 24 months searching for a suitable target.

Deal makers must prepare a business combination package that will appeal to their shareholders. The deal also provides a listing opportunity to the target company, a company that is ready to go public by way of a reverse merger. This ‘de-SPACing’, as it has come to be known, has given birth to a new currency for ‘back door’ listings.

The IR detail
SPACs may sound alien to IR practitioners, in that initially they involve representing a stock that essentially does not exist. ‘We’ve had to learn that thinking outside the box is an important stepping-stone to positioning and placing these deals,’ says Paul Dionne, a managing director at I-Bankers Securities, a boutique investment bank that specializes in SPACs.

While the pitch can’t allow for valuation ratios and cash-flow projections, Dionne acknowledges the existence of ‘a growing constituency of investors that have an appetite for non-correlated asset classes. For many fund managers, SPAC investing is providing cheap access to pure alpha.’

When a SPAC goes to market, there is a two-in-one process, a sort of a double IPO. The first part of this takes place when the SPAC files and becomes effective with a listing; a second process starts the day a deal announcement is made and continues until the ‘yes’ vote from a qualified majority is attained, thus consummating a merger and floating the equity of a real operating company.

Phase I: getting the money
In formulating an investor message for a company that cannot discuss any operating history, revenues or prospective targets, attention must be focused on other aspects of the investment proposition: the people and the process.

‘Roadshows put the members of the management team in front of as many informed investors as possible to leverage what is the only component to the equity story in the IPO: the human element of investing in individuals,’ Dionne states.

All documentation and content communicated to investors must comply with the stringent regulations governing blank checks. While it is strictly forbidden to talk in any way about potential target companies, investors can talk about their investment guidelines and styles, their tried and tested transaction strategies, or their intentions to target a particular market sector or region.

Management teams must optimize the limited window of time available to build a book by identifying target investors as early as possible.

Phase II: shareholder approval
A transaction can’t be completed until its shareholders approve the proposed merger. Most SPACs require both a voting majority of shareholders and only a limited number of dissenters. IR, then, must coordinate carefully both voter solicitation and the circulation of target company information.

In-depth proxy materials are filed by the SPAC and provided to investors with the necessary lead time before the extraordinary general meeting record date and vote.

A second roadshow usually ensues. This aims to complement the proxy solicitation effort and can heat up dramatically in the lead-up to a SPAC vote. Rarely is the economic value of a vote so palpable; at the end of the day, the reverse of your ‘yes’ vote sees you getting your money back. Not a bad trade-off.

In these difficult financial conditions, many swimmers risk being pulled under by the current. But SPACs, buoyed by their trust accounts and under the watch of their IR-oriented underwriters and managers, could have more chance than most of keeping their head above water.