Facing regulatory pressure, special purpose acquisition companies are starting to play defense.
This year, sector advisors say SPACs are increasingly targeting defensive sectors like healthcare and industrials where revenue and profit projections are often easier to calculate than the high-flying technology startups that propelled the asset class to new heights over the last 18 months.
There have been 23 SPAC mergers in the industrials sector, generating more than USD 71.3bn in deal volume so far this year compared to 19 mergers and USD 59.3bn in deal volume last year, according to Dealogic data. There were only six industrials SPAC transactions in 2019 and two in 2018, generating USD 3.7bn and USD 896m in respective deal volume. Similarly, there have been 23 SPAC mergers in the healthcare sector, notching more than USD 47.2bn this year compared to 14 and USD 19.8bn last year.
Considering Securities and Exchange Commission commentary and guidance around whether SPACs should continue to be afforded safe harbor from forward-looking statements, advisors say they expect to see more transactions targeting businesses that have a history of fundamentally sound financials.
“Markets loath uncertainty,” said Jason Osborn, a partner at Winston & Strawn. “SPAC sponsors are going to gravitate toward targets with a clear run-rate of operations, where it is easier to build out projections with historical operations, and markets that are easier to wrap their heads around.”
That should mean more deals like Legato Merger’s [NASDAQ:LEGO] combination with Algoma Steel, a firm founded in 1902 that produces 2.8m tons of steel annually for customers in Canada and the US. The deal, announced last week, values the Canadian firm at USD 1.7bn, or 1.9x expected 2021 EBITDA.
Technology is not going away, advisors say. It is by far the most active sector for SPAC deal-making. Sixty-four SPACs have merged with tech targets in 2021, generating USD 184bn in deal volume. Last year, 34 SPACs merged with tech targets, creating more than USD 67.8bn in deal volume.
Those transactions include electric vehicles and even space travel where advisors say it can be much trickier to pinpoint future financials given those industries are in the nascent stages of growth.
“With a greenfield opportunity in a highly disruptive space, even projections that look really optimistic may actually be conservative,” said Osborn, noting that 10 or 15 years ago it would be hard to believe Tesla would be valued 4x higher than General Motors and Ford combined, which it is today.
Following the SEC’s announcement in April that it was reviewing forward-looking financial projections made by SPACs, the US House Committee on Financial Services held a hearing last week in which it proposed legislation to amend the Securities Act of 1933 to exclude all SPACs from safe harbor.
Just as the SEC reviews S-1 documents in the event of a traditional IPO, merger documents and proxy statements in proposed de-SPACs receive similar scrutiny, said Jocelyn Arel, head of Goodwin Procter’s SPAC practice. While the de-SPAC process often presents a compressed timeline compared to the internal ramp-up as a private company prepares for a traditional IPO, this does not mean that SPAC targets don’t do the same work, Arel said.
Though Arel said she expects to see rulemaking from the SEC on projections, she added that SPAC critics who claim all projections are fraudulent and used only to entice investors have taken it too far. In fact, many SPACs spend considerable time on the projections and the related assumptions, she said.
“We vet every single line” of every disclosure just as Goodwin Procter would in a traditional IPO, she said, adding that companies can be held liable of misstatements under Rule 10b-5, which prohibits material misstatements or omissions tied to the purchase or sale of a security.
Participants are on top of the issue, Osborn said, noting that many SPAC sponsors and targets are preparing for potential regulatory changes even before they sign letters of intent.
“They want to make sure their deals are supported by the market,” he said.
In related news:
- The explosive growth in the SPAC market in the last year and its accompanying media attention are expected to continue to draw the attention of US lawmakers, said three attorneys with relevant experience. While it is far too early to tell whether the outcome of congressional scrutiny of SPACs will result in any new law, it is clear from a House hearing held last week that lawmakers are beginning to ask questions in an apparent attempt to better understand the market, the attorneys said. “They’re concerned about protecting the retail investor, and this is happening at a time when populist sentiment from both the left and right is growing,” the first attorney said. “It’s probably a safe bet that this is going to be an ongoing area of interest,” he added. The other attorneys agreed. Should the proliferation of new SPAC entrants into the market decrease, however, “my impression is that this becomes a far less relevant legislative item for Congress,” said Gregory Schernecke, partner at Dechert.
- Allowing SPAC listings in Hong Kong would present an alternative to reverse takeovers (RTOs) for listing aspirants, and curtail shell-company trading in the city, despite concerns inherent with blank-check companies, according to seven industry advisors and players polled by this news service. On 1 March, the city’s Financial Secretary Paul Chan briefed the Securities and Futures Commission and the Hong Kong Exchanges and Clearing about exploring suitable listing regimes of SPACs to keep Hong Kong competitive as an international financial center, according a government press release. The number of Asian SPAC listings in the US soared over five times to 19 successful listings year-to-date, compared to three US-listed SPACs backed by Asian sponsors in the same period last year, Dealogic data shows. In terms of deal value, Asian-backed SPACs raised almost USD 4.3bn YTD, according to Dealogic data.
- Carro, a Singapore-based used car marketplace operator, has been approached by SPACs that are linked to its existing investors, said CFO Ernest Chew. However, the company is not rushing for an IPO or a de-SPAC process at this point as it is concentrating on growth and profitability in its operating markets in Singapore, Indonesia, Thailand and Malaysia, he said. It notched USD 89.3m in 2019 revenue.
- Accedo, a Swedish video technology company, regularly receives takeover approaches from other players in the market, according to CEO Michael Lantz, who said it forwards to SEB, its private equity owner. The sponsor has held 70% of Accedo since 2016 and has its own exit agenda, he said. It may mandate financial advisors for an IPO or a trade sale, he said, adding that it might consider such opportunities in two years. In case of an IPO, it will prioritize listing on NASDAQ Stockholm, he said, adding that it may also consider merging with a SPAC.
- SoFi Technologies [NASDAQ:SOFI], an online retail finance company, expects to use capital from its recent SPAC merger to fuel customer growth and improve its product suite, said CFO Chris Lapointe. The San Francisco-based company, which began trading on NASDAQ on 1 June after its merger with Social Capital Hedosophia V, is marketing itself as a “one-stop financial services platform,” Lapointe said. SoFi will continue to evaluate opportunities to acquire but has not set aside a specific pool of capital to make purchases, Lapointe said. When it does consider deals, it will do so from a vertical integration perspective because being fully vertically integrated allows it to differentiate its products and have the lowest cost of operations, the CFO said.
- CompoSecure, a manufacturer of metal credit and identification cards, could consider opportunistic acquisitions in the cryptocurrency market and broader digital asset ecosystem, said President and CEO Jon Wilk. The Somerset, New Jersey-based company, which announced a merger with special purpose acquisition company Roman DBDR Tech Acquisition in April, could turn to bolt-on acquisitions for specific capabilities or services that it wants to plug into its ecosystem, Wilk said. It has not acquired before, and acquisitions would focus on the potential target’s capabilities rather than its revenue, he said.
- BitTitan, an IT and managed services automation provider, has not yet mandated an advisor to facilitate its public debut but “could do it tomorrow” if the market conditions were right, said co-founder, owner and CEO Geeman Yip. The Bellevue, Washington-based company could look to go public anytime within the next 24 months, Yip said, calling market dynamics the most important timing consideration. BitTitan is in discussions with SPACs that want to combine it with other mergers the blank-check companies are looking to execute, Yip said. It has not sought out SPACs for a potential merger, he added, but it is taking the inbound approaches seriously.
- Energy storage developer Highview Power could enter public markets as part of its rapid expansion plans, CFO Nomi Ahmad said. No firm decisions have been made as the company considers all strategic options, including an IPO, a SPAC transaction or a private placement “to maximize value.” SPACs offer a quick, effective route to market but are potentially a more volatile alternative to a longer-term, traditional IPO given uncertainties around SEC rulings and market ebbs and flows, he noted. UK- and US-based Highview Power is in late-stage discussions with financial advisors but is receptive to approaches from external parties, Ahmad said.