Clouded future of SPACs

The score card for transactions by special purpose acquisition companies reads this way: one, involving Acasta Enterprises, which filed a material change report Monday has been completed; another, involving INFOR Acquisition was called off by mutual agreement of the parties; while two others, a deal by Dundee Acquisition and another by Alignvest Acquisition, await the verdict of the companies’ respective shareholders later this month at meetings.

As for the long term, chances are that SPACs will not become a permanent part of the financing landscape in Canada as they are in the United States.

According to SPAC Analytics, over the past four years, on average about 14 SPACs are financed each year with the average raise being about US$192.4 million.

On average, over the past 14 years, about one-third of the SPACs in the U.S. are liquidated, which means that either the SPAC’s shareholders don’t support going though with the transaction — or that a potential acquisition is not presented to shareholders.

So why are SPACs unlikely to become that popular in Canada? Here are some factors.

UNCERTAINTY

Given the structure, it’s tough and takes a lot of time for a SPAC buyer to close a transaction. While the two parties can agree on terms for the acquisition, and while the SPAC can try and arrange the meeting as quickly as possible, the final decision rests with the shareholders: If they don’t like the deal they will vote it down and the two parties then go their separate ways. Such an outcome isn’t likely when either a private equity or industry buyer comes knocking.

TOO SHAREHOLDER FRIENDLY

SPACs employ a very shareholder friendly structure, so much so that shareholders can support a transaction — and then ask for their money back. Shareholders can do that because in the initial public offering they buy $10 units consisting of a common share plus a warrant (either a full or half warrant) that later trades separately: when the deal is announced they can redeem the shares for cash and in effect get a free ride via the warrant. (As a result two classes of shareholders are created.)

That feature played out in two deals: In Acasta’s case, holders of $285 million of shares (or 70 per cent of what was raised) wanted their money back, yet 89 per cent supported the transaction; in Dundee’s case, a scheduled shareholder meeting was postponed because the SPAC wanted to raise an additional $50 million of equity (about half of what was raised initially) to fund either future growth or to cover redemptions.

HIGH COSTS

Given the options enjoyed by shareholders, SPACs don’t come cheap. Consider Acasta, which raised $402.5 million in the summer of 2015: from those gross proceeds, $22.1 million was set aside to cover the underwriters’ fees. When its three-part acquisition was announced, another $25.6 million of available cash was set aside to cover employee taxes at one of the companies being acquired and transaction costs.

Acasta’s cash balances were further reduced when shareholders asked for $285 million of shares to be redeemed. (Under one interpretation it cost Acasta $22.1 million to raise a net $117.5 million.) That potential cash shortfall problem was solved when institutional investors kicked in an additional $130 million and the founders another $30 million (meaning they have invested $45 million in all.)

PROMOTE FEES

SPAC deals are supposed to be attractive to the founders, the group that buys the cheap stock in return for paying the costs and seeking out potential transactions. But in three of the four deals announced so far, the founders cut their promote fee with only the Alignvest bucking the trend.