In a year defined by historic economic and social disruption, traditional paths to raising capital have largely shuddered to a halt. Yet many businesses, whether growing or struggling, need capital now more than ever. Filling the role typically held by the initial public offering (IPO) and reverse takeover (RTO) processes, Special Purpose Acquisition Companies (SPACs) have stormed back to prominence on Wall Street by raising capital at a record pace … and then injecting those funds into capital-needy industries and companies. With traditional M&A and IPO opportunities stalled, the return of the so-called “Blank Check Companies” couldn’t be more timely.
Mergers with SPACs have always been an alternative to traditional IPOs. With the IPO market effectively minimized for the time being, SPAC mergers are an increasingly desirable public market liquidity option for private companies.
What the numbers tell us
2020 is a record-shattering year for a revitalized SPAC market. According to data provided by ELLO Capital, there have been 95 SPAC IPOs so far in 2020, raising $37.8 billion (average size: $397 million). That compares with 59 in all of 2019, which raised $13.6 billion (average size: $230 million).
On July 22, 2020, Pershing Square founder Bill Ackman raised $4 billion in the IPO of Pershing Square Tontine Holdings Ltd., the largest SPAC IPO to date. With an initial target of $3 billion, the SPAC included a unique pricing approach: a fixed pool of warrants to be distributed to shareholders who accept a subsequent deal – increasing the take for approvers.
“COVID-19 is likely a direct cause of the acceleration in SPACs this year, as global lockdown policies have restricted travel and the ability to do roadshows. As a result, SPACs have largely replaced traditional IPOs,” said Mark Young, co-founding partner of Bridge Point Capital. “Plus, SPACS appeal to the high-growth technology sector, which has led the market recovery post-February correction, and continue to drive grwoth in the work-from-home economy.”
SPACs: rules of the road
- Speed is the name of the game – Leveraging the market expertise of leadership team, a SPAC can raise funds in a matter of days, without the time and resource demands of a roadshow.
- Minimum value is set – The acquired company/companies must have a minimum value, generally 80% of the fund the SPAC has in escrow following the IPO. Multiple closings, obviously, complicate the otherwise-simple SPAC process and inject completion risk into the transaction.
- The clock is ticking – There’s a deadline reality for both the SPAC and the target: If the SPAC doesn’t close the deal by the deadline, it must return the funds it raised in its offering. On the flip side, getting near the deadline can help give a target company some leverage.
- Valuation risk – Investors in SPACs are very much like IPO investors: there is an expectation that they are buying at a discount and there is significant growth potential around the corner. They are not looking for turnaround stories. In turn, SPACs are perceived as focused on growth verticals.
- Shareholder approval required – The SPAC is a public company that inherits all the baggage – reporting/regulatory demands, liabilities, etc. – of a public company. Approval by target company shareholders likely will be required. And the SPAC would need to file a proxy statement and secure approval from the Securities and Exchange Commission.
- Redemption risk – Here’s an interesting twist: At the time of the transaction, the SPAC’s public shareholders can redeem their stock. The risk: the SPAC’s cash availability – which might be needed to complete the transaction – could take a hit if the redemptions are significant.
- Warrants also in play – Sometimes the purchase price includes stock; the value of those shares are impacted by the associated rights. In most cases, the warrants can be exercised at a premium to the original offering price. What can happen: the valuation of stock included in purchase price may rise above, or fall below, the value of the stock issued to a target. The driving factor: can a deal actually get done.
- Navigate the de-SPAC phase – Definition: the time between the definitive agreement and closing. What needs to be done: communicate details of the transaction to the SPAC’s stakeholders. The goal: optimize the story, educate sales people, engage analysts – protect value.
The record so far
• DraftKings (NASDAQ: DKNG): Shares in the online fantasy and gambling company jumped to $18.69 per share when the merger agreement was announced in December, and then edged up to $19.35 per share on the first day of trading, Since then, the price has climbed to about $44.00 per share before settling back into the $37.00-$40.00 area. Its current market capitalization is over $13.5 billion.
• Virgin Galactic (NYSE: SPCE.N): The Richard Branson-backed competitor to Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin, Virgin Galactic shares currently trade in around $17.00-$20.00, about double their late October day-one level, and more than three times their low of $6.90 per share. The stock has reached a high of $42.49 per share, and the company’s current market capitalization is $3.9 billion.
• Nikola (NASDAQ: NKLA): The green truck company has been on a roller-coaster ride since its late June debut. It has climbed as high as $93.99 at one point and currently trades at about $37.00 per share. Market capitalization is just under $14 billion.
Leading the way is a pending deal from Churchill Capital Corp. III, which has agreed to acquire health-cost management services provider MultiPlan for $11 billion. This would make it the largest ever SPAC deal.
“The healthcare and life sciences industries are two sectors likely to continue driving SPAC growth in the COVID-19 era,” said Nadia Tian, co-founding partner of Bridge Point Capital. “This is because healthcare traditionally outperforms the market in a recession, SPACs allow biotech companies to have more cash on hand than a traditional IPO, and the government and consumers are especially focused on these areas as we search for solutions to the COVID-19 outbreak.”
Final thoughts
Private companies that were planning an IPO or other significant M&A deal before the global economic downturn caused by the COVID-19 pandemic may want to seriously consider a SPAC deal. As with all transactions significant, intensive planning, vetting, due diligence and other considerations must be undertaken.
MGO’s dedicated SEC practice has experience with IPOs, RTOs, M&A deals and the unique characteristics of SPAC acquisitions. To understand your options, and the path ahead, please feel free to reach out to us for a consultation.
