Share price deal’s doom

COMMENT

We are down to one. We’re referring to the number of live transactions involving special purpose acquisition companies now that the deal between cash- rich INFOR Acquisition and newly spun-out ECN Capital has been called off by “mutual agreement.”

That transaction was a little unusual because instead of a SPAC making the acquisition, the SPAC and its $220 million in cash were going to be acquired by a new operating company. But that plan faced the potential wrath of INFOR shareholders who had little, or no incentive, to support the deal.

The key reason for calling off the deal was that the transaction was being done at fair market value — meaning fair market value for INFOR was being exchanged for fair market value of ECN. ( ECN was spun out of Element Financial. The rest of Element is now known as Element Fleet Management.)

But fair market value as determined by ECN’s board ($ 4.41 a share) was way higher than what the market thought ECN was worth. In the two weeks of official trading i n ECN ( trading was preceded by a period of “when issued” trading) the shares reached a high of $ 3.40. ECN’s shares closed Thursday at $ 3. In all about half of ECN’s 386 million shares have been turned over.

Accordingly there was no rationale for INFOR shareholders to swap a piece of paper at fair market value for a piece of paper trading way below fair market value. INFOR shareholders could simply ask for the redemption value of their invest- ment and be paid in cash.

Neil Selfe, INFOR’s chief executive, said, “ECN Capital’s common shares are not currently trading at a price that would make the arrangement compelling for the company’s shareholders given the exchange ratio agreed to under the arrangement.”

Not all is lost for INFOR’s shareholders. The company’s management will continue to review alternative transactions. And it has about six months to find a possible acquisition.

The end of the tie- up between ECN and INFOR raises at least one issue: why was the deal being done at fair market value?

INFOR’s Selfe said when the Element spin-off was being contemplated that the expectation was that ECN “would trade at a slight premium to book, given the track record of Steve Hudson of creating winners.” Hudson is Element’s founder and ECN’s chief executive. “We thought it would trade at a premium and we said ‘ we would do our deal at book.’ If it’s trading at a premium and we do our deal at book it makes 100-per-cent sense. (But) that didn’t happen.”

It’s worth noting that when ECN was spun out — overwhelmingly approved by Element Financial’s shareholders — a different approach was used to determine ECN’s “value.” A valuation was required to set a new conversion price for the convertible debentures issued by Element Financial to reflect that the new Element Fleet is different from the old Element Financial. ( In the spin- off those converts remained an obligation of Element Fleet.)

There the final decision was made to use “the relative prices of Element Fleet’s common shares and ECN Capital common shares over a 10- day VWAP period immediately following the separation close.” ( Originally the plan was to use market price for Element’s shares and fair market value for ECN.)

That change meant the conversion price for the debentures is higher than it would have been had the original method been used.

WE THOUGHT IT WOULD TRADE AT A PREMIUM.