In August 2021, the Financial Conduct Authority (FCA) brought in changes to the Listing Rules which were aimed at making London a more hospitable listing venue for new special purpose acquisition companies (SPACs). The impetus for doing so was to allow London to participate in the undoubted SPAC ‘boom’, which had at that point been raging in the US over the previous year.
The changes put in place a new rule whereby a SPAC which meets certain criteria will not suffer a suspension of listing when it consummates its business combination (deSPAC), which otherwise can last several weeks or months for a regular SPAC taking over a private company, and which has dissuaded sponsors of large SPACs from a London listing.
To meet the criteria to avoid suspension at deSPAC, the SPAC must raise at least £ 100m gross cash proceeds from public shareholders at the date of listing, and must have a number of other features that will be familiar from the US SPAC context, like a requirement to ring-fence the investors’ initial investment until the business combination, a right of shareholders to vote on the business combination and to redeem their SPAC shares at that time, a requirement to close a business combination within two years (extendable) and meet Certain disclosure obligations and manage any conflicts at the board level.
Ten months on from the FCA’s rule changes, the take-up of the new, more friendly London listing environment for SPACs has been muted. It appears only four SPACs listed on the standard segment of the London Stock Exchange’s main market met the eligibility criteria to avoid a suspension at deSPAC. This lower enthusiasm reflects a broader slowdown in new offerings of SPACs generally, with only 53 SPAC initial public offerings (IPOs) in Q1 2022 versus 163 in Q4 2021 in the US. The rate at which existing SPAC shareholders are electing to have their shares redeemed at the deSPAC stage, rather than staying in the combined company, are high, and availability of additional private sources of funds usually necessary for the closing of SPAC deals (private investment in public equity (PIPE) financing) has noticeably dropped.
Some of the reasons behind this slowdown are particular to the US, primarily the Security and Exchange Commission (SEC) ‘s tougher regulatory stance on SPACs and its current proposal of new rules. The SEC’s proposed new rules would, among other things, increase disclosure obligations for insiders, extend liability for disclosure to initial underwriting banks and potentially other participants, like PIPE investors, that have been involved in the deSPAC process, and clarify that there is no safe Harbor from liability that was previously arguably thought by market participants to permit target companies to share their projections for future growth in the public disclosures used to explain the deal. The tougher regulatory environment in the US may begin to make raising and completing a SPAC transaction in the UK seem more attractive, but as the largest and most developed market for these vehicles in the world, changes in sentiment in the US affect appetite for SPACs everywhere .
For companies considering a business combination or flotation, does this mean a SPAC deal should be ruled out? Despite the slowing pace of new SPAC offerings, there remain huge numbers of existing SPACs currently hunting for a target, many of which face time pressure to agree a deal imminently, with the Wall Street Journal reporting that around 280 US SPACs have deadlines in the first quarter of 2023 alone. An average target’s confidence that the SPAC will be able to retain or raise the required financing for closing is certainly lower given current market conditions than it has been in recent years, but for the right type of company, a SPAC deal continues to have advantages relative to a traditional IPO it would consider.
Compared to an IPO process, a SPAC deal provides the target better certainty over the price it can expect. In an IPO process, a private company spends the time and money upfront to prepare itself to go public before the IPO is priced, and depending on market appetite, the valuation may differ markedly from what was expected at the start of the process. In a SPAC deal, the per-share merger consideration and cash to be available to the target at closing, are both negotiated upfront in the business combination agreement.
If the SPAC has arranged backup PIPE financing to provide assurance to the target that cash will be available at the closing irrespective of redemption numbers, this results in greater certainty over the deal proceeds. In addition to certainty, the fact that valuation is set in a negotiated process can lead to a higher valuation than a traditional IPO. The value of the SPAC shares issued as consideration in the transaction is of course dependent on how those shares are valued by the market once they represent the combined business, but the cash available to the business, and the percentage ownership of the combined company, are fixed at the outset.
A SPAC is set up by a ‘sponsor’, an individual or a group (often a private equity firm), with experience of building businesses and investing in one or more sectors. Usually, the sponsor will be the 20 percent owner of the SPAC, purchased for a minimum price. For the target company, a SPAC deal comes not just with a cash infusion and exposure to the public markets as in an IPO, but with the addition of the SPAC sponsor as a major shareholder and usually a board member.
If the target company finds the right SPAC buyer, the experience, expertise and network of the SPAC sponsor can be a significant advantage relative to an IPO. In the current market, the large number of SPACs in existence with ticking clocks to the end of their permitted deal-making period, competition for deals is intense and allows those companies that are good candidates for SPAC acquisition to choose an impressive partner (and to negotiate the agreement as to economics and overall ownership interests with the sponsor).
In the UK, and in the past years in the US, the time to complete a SPAC deal has been quicker than the timeline associated with a traditional IPO. SPAC deals have been completed in four to five months relative to the nine to 12 months that is normal for an IPO process, with a significant saving in terms of cost and management attention.
However, the recent increase in regulatory scrutiny and proposed rule changes in the US explicitly aimed at making the deSPAC process align more closely with the IPO process are eroding this timing advantage. While it is therefore likely the timing advantage of the deSPAC process will become less pronounced, it has not disappeared altogether.
A deSPAC process should not be used to rush to market a target company that is not yet ‘ready’ for public markets, but for a company that would separately be ripe to consider an IPO, the deSPAC route still offers some efficiency. As SPACs have a fixed deadline to complete a deal, which can only be extended in certain circumstances, this may incentivise target companies to prefer newer SPACs, that have a longer life left to complete their business combination.
For some time there was a perception that SPAC deals were an easy route to public listing at a high valuation for young companies. The various challenges that SPAC deals have faced in the past months has rightly ended that perception, and companies that would not be ready to go public through an IPO should think twice before considering a SPAC acquisition.
However, there remain many billions of dollars of what might be termed SPAC ‘dry powder’, which is available and actively hunting for a deal to complete within their remaining life span. Some of that is managed by highly experienced deal makers with the capacity to raise financing and execute the deal in a timely and efficient manner and to offer value-creating help within the combined business post-acquisition.
For companies that are considering an IPO, or that are already publicly listed in a different market, the SPAC acquisition process still offers some advantages over a traditional IPO, and the competition in the market means targets are in a stronger negotiating position than ever.
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