Time for SPACs to return

TheStar Sat, Dec 19, 2020 09:30am - 2 months ago

SPACs have become a more efficient way to get a private company listed into the public space due the ease of process. Instead of going through the normal IPO process, whereby it may even take a year or more, a listing via SPAC is much easier as it only involves the regulatory and shareholders’ approval.

A SPECIAL purpose acquisition company (SPAC) is defined as a company that raises capital via initial public offerings (IPOs) with the hope that it will find a business to be injected into the listed entity within a defined period of its post-listing exercise, typically within three years.

Based on data provided by spacresearch.com, the year 2020 has been a stellar year for SPACs as we have seen some 237 SPAC listings in the US alone worth some US$80.1bil, more than five-folds the 59 offerings worth some US$13.5bil raised last year. The average offering per SPAC listing too has risen significantly with an average size of US$338mil from US$230.5mil in 2019, up more than 46%.

Data also suggests that SPACs have significant dry-power on hand as 223 out of the 281 active SPACs with total combined value of some US$71.8bil are seeking targets to be acquired or to be injected into the blank cheque listed companies.

SPACs have become a more efficient way to get a private company listed into the public space due the ease of process. Instead of going through the normal IPO process, whereby it may even take a year or more, a listing via SPAC is much easier as it only involves the regulatory and shareholders’ approval. Of course, the business to be acquired must also meet the normal financial track record while valuation too needs to be reasonable to ensure the transaction is beneficial to all shareholders.

In Malaysia’s case, while the first SPAC was launched way back in June 2011 with the listing of Hibiscus Petroleum, we had only four subsequent listings thereafter. Hibiscus was followed by the listing of CLIQ Energy in April 2013, Sona Petroleum in July 2013, Reach Energy in August 2014 and followed by Red Sena in December 2015.

Of the five SPACs listed, three had gone through the liquidation phase and monies returned to shareholders while two others migrated to be full-fledged listed and operating companies. The two successful SPACs are of course Hibiscus and Reach Energy.

For CLIQ, although it managed to identify a qualifying asset (QA), it was unable to obtain regulatory approval in time due to circumstances related to events outside its control, especially the collapse of oil price then. In Sona’s case, although it was successful in proposing to acquire a QA, it failed to obtain the required mandate from shareholders. Finally, in Red Sena’s case, it just failed to identify any QA during the 3-year period it was given to find one.

Interestingly, of the five SPACs that came to market, other than Red Sena, which was focused on food and beverage sector, all the other four had identified the oil and gas sector as its core business activity.

Other than focusing on issues related to finding a QA to be injected into a blank cheque IPO, there are other issues related to a SPAC listing. Chief among them are issues related to arbitrage opportunity that exist, especially based on the fact that dissenting shareholders are entitled to receive cash payout equivalent to cash held in the trust account on a pro-rated basis.

Typically, we see SPACs tend to trade at a discount to the cash value per share, especially immediately after listing and this discount narrows as it approaches closer to the 3-year ending period, i.e. on the assumption no QA is injected into the business.

Hence, while a SPAC requires at least 75% of its shareholders in value voting for a proposed acquisition, the dissenting shareholders may have other agenda due to the arbitrage opportunity that exist. This is one of the main drawbacks as to why SPAC is no longer seen as an attractive proposition for promoters or investors looking to set up a SPAC and embark on a uncertain journey.

In essence, we have a situation whereby dissenting shareholders becoming more powerful in SPAC listings as they tend to vote based on the gain that they could potentially make due to the price differential of the market price and the cash held in the trust account. In fact, past records show that these dissenting shareholders are large in numbers and even do emerged as substantial shareholders of a SPAC and most of them include foreign fund managers who are deploying the arbitrage opportunity to take advantage of the price differential.

The second issue on SPAC listing is in actual fact related to valuation. Firstly, the size of any SPACs in terms the fund size is public information. Secondly, there are conditions imposed for a QA to be acquired by the regulators whereby the value must be equivalent to at least 80% of the total amount held in the cash trust account.

The amount held by a SPAC in a cash trust account is equivalent to 90% of the proceeds a SPAC has raised from the IPO. Hence, if a SPAC has raised the minimum allowed of at least RM150mil in an IPO, RM135mil will be held in the cash trust account and the QA must have a value equivalent to 80% of this amount, which in this example is RM108mil. With that in mind, vendors who are approached know the valuation game upfront for the asset to be acquired and there is great tendency for the sellers of a QA to ask for a sky-high price.

Red Sena experienced this during its journey hunting for a QA as F&B players were pricing very rich valuations for the SPAC to even consider injecting into the listed vehicle. With SPAC coming back to life, especially in the US, can our regulators do anything to improve the regulatory landscape of a SPAC listing in Malaysia, without compromising on shareholders’ rights?

As mentioned above, there are two key issues when it comes to SPACs and getting a QA injected into the listed blank cheque company. There is little that can be done on valuation perspective as it is always a question of willing buyer and willing seller. However, there are measures that regulators could take to address issues related to the arbitrage opportunity that will always exist in the marketplace.

Hence, perhaps instead of dissenting shareholders being entitled to receive the proportionate share of the cash trust account, the guidelines should be amended to allow SPACs to pay the last traded market price of the SPAC prior to the general meeting day or the cash trust account, whichever the lower, to dissenting shareholders. In this way, the arbitrage opportunity is removed and there will be greater certainty of a QA being approved for a SPAC.

Of course, if the 75% of shareholders in total value still rejects a proposal to acquire a QA for whatever reason, other than purely due to the arbitrage opportunity, the shareholders will still receive the full amount in the cash trust account upon liquidation. The whole purpose is to ensure dissenting shareholders do not receive the proportionate share of the trust account purely based on arbitrage opportunity and hence the motivation to approve a QA purchase is higher rather than pure short-term financial reason.

With better regulatory control, the chances or possibility of a SPAC migrating to a full-fledge business entity and into an operational company becomes clearer and more certain. With the current excess liquidity and perhaps a better regulatory framework, it is a matter of time before SPAC comes back to the market in a relatively big way, like the euphoria that we see in the US now. SPACs anyone?

Pankaj C. Kumar is a long-time investment analyst. Views expressed here are his own.

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atlan leong
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i think spac should be discontinued as it causes lost to most people. very unhealthy as the management is not penalised for failure to bring value to investor.

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