Spotlight on SPACs

SPACs have been one of the most significant trends in global equity and M&A markets over the past two years, with record numbers of SPACs listing and creating a vast war chest of funds for M&A activity. Although historically more prevalent in the US, they are increasingly making a mark in the UK and Europe as well. Read on to get up to speed on the latest developments.

What is a SPAC?

A “SPAC” is a “special purpose acquisition company”. As the name suggests, it is a newly formed shell company, formed for the specific purpose of raising capital through an IPO in order to fund an (as yet unidentified) acquisition within a specified timeframe post-IPO. This will often be done by way of merger, with the target then effectively becoming the listed business. Usually a SPAC will complete one main business combination, which is one of the things that differentiates a SPAC from a traditional investment fund. A SPAC listing will typically be spearheaded by well-connected founders (or “sponsors”) who have industry or private equity expertise, with IPO investors basically investing in the strength of the founders’ reputation and confidence in the founders’ ability to consummate an attractive business combination.

Although “shell” or “blank cheque” companies of various types exist in many jurisdictions, when people speak of “SPACs” today they are usually referring to the model that originated in the US. The hallmarks of a US-style SPAC include:

• An acquisition strategy defined y geography, industry and/or financial or othe characteristics of target, but no specific target at point of the IPO;

• Proceeds raised at IPO will be held in trust and may only be used to fund acquisition of a target business; if not deployed within a specified timefame (typically 2 years), the SPAC will be liquidated and funds returned pro rata to investors;

• Shareholders typically entitled to vote on the business combination once identified;

• Shareholders entitled to redeem shares for cash at time of business combination; and

• IPO which involves listing of units comprised of shares and warrants to subscribe for further shares, all of which can eventually be separately traded.

It is not unusual for the price of the business combination to significantly exceed the ring-fenced IPO proceeds (sometimes by several multiples). Add to that the cost of redeeming a portion of the shares at the time of the business combination pursuant to shareholders’ redemption rights, and the SPAC will typically need additional funds beyond the IPO proceeds in order to complete a business combination. This is often accomplished by way of a “PIPE” (“private investment in public equity”) transaction, whereby certain wall-crossed investors commit (concurrently with entry by the SPAC into a merger/acquisition agreement, and conditional upon completion of the business combination) to purchase new shares in the SPAC.

SPAC resurgence in the US and emergence in Europe and the UK

SPACs have been around for decades, but have experienced a marked resurgence in recent years, fuelled by unprecedented levels of SPAC listings in the US. According to Refinitiv data, there were over 240 SPAC listings in the US in 2020, raising more than $80 million (more than traditional IPOs that year). This record was surpassed within just the first few months of 2021, and as at the end of June 2021 there had been more than 360 US SPACs raising more than $106 million.

The numbers for the US dwarf those in Europe and the UK, which together saw just 3 SPAC listings in 2020 (raising $500 million). Nevertheless, while momentum in the US appears to be slowing down since the first few months of the year, there has been increasing interest in Europe as a result of the recent US SPAC boom, with multiple European stock exchanges actively promoting themselves as destinations for SPAC listings. European SPAC activity has already increased significantly in 2021 compared with the year before, with the prior year with 27 SPAC listings raising more than $6 billion as at 23 July, (according to Bloomberg), and further SPAC deals are reportedly in the pipeline in markets including London, Amsterdam, Frankfurt and Paris.

Among the high profile European SPAC deals recently launched are:

• Pegasus Europe SPAC (the largest European SPAC to date, listed in Amsterdam, with a focus on the financial sevices industry; raised €500 million in April IPO);

• Hedosophia European Growth (listed in Amsterdam with a focus on European technology companies; raised €400 million in May IPO);

• I2PO (listed in Paris with a focus on the entertainment and leisure sector; raised €275 million in July IPO); and

• VAM Investments SPAC BV (Italian-sponsored SPAC listed in Amsterdam with a focus on consumer products and services in Europe; raised €225 million in July IPO).

Most of the SPACs launched in Europe this year have very much been based on the US model, incorporating most of the features of US SPACs described above. The ability to successfully implement this model in the European context depends on a number of factors, including local corporate law requirements in the SPAC’s jurisdiction of incorporation (which may be different from the jurisdiction of the listing venue), as well as stock exchange and listing requirements, and engagement with these issues early in an IPO process is vital.

SPACs in London

Turning our attention to the UK in particular, although investment funds and other types of “blank cheque” companies have always been common in the UK, until recently launching a US-style SPAC in London involved significant roadblocks as a result of certain features of the UK listing regime. The chief barrier was the presumption in the UK Listing Rules that an issuer will be suspended from trading when it announces a potential acquisition until detailed information about the proposed target is provided to the market – effectively locking up investors for a significant period of time post-announcement of a business combination.

In light of the increased interest in SPACs internationally and a desire to ensure London did not miss out on potential SPAC listing opportunities, the UK Government ordered a review of the UK listing process which culminated in a recommendation to amend the UK Listing Rules to become more amenable to SPAC listings. The FCA’s final rule changes in response to these recommendations were published on 27 July 2021 and became effective on 10 August 2021. Under the revised rules, SPACs listed in London are not subject to the presumption of suspension as long as they (i) raise at least £100 million from public investors and (ii) include certain investor safeguards in their structure. These required safeguards include:

• A “redemption” option allowing investors to exit a SPAC prior to any business combination being completed;

• Ensuring money raised from public shareholders is ring-fenced;

• Requiring shareholder approval for any proposed business combination, with SPAC founders, sponsors and directors being prevented from voting; and

• A time limit on a SPAC’s operating period if no business combination is completed (typically 2 years, or 3 years with shareholder approval, with the possibility to extend the period by a further 6 months without shareholder approval if a business combination has been agreed but not completed within the original time limit).

Most of these safeguards reflect the usual practice for US-style SPACs, with the exception of excluding SPAC founders and sponsors from voting on the acquisition.

The rule changes generally bring the London market more in line with other jurisdictions in terms of the way SPAC deals are structured. The extent to which US-style SPACs will feature more prominently in the London market following the rule changes remains to be seen, and will be influenced by broader market factors, but the rule changes represent a major development and show there is significant interest from a variety of parties in seeing SPACs become a part of the UK equity landscape.

De-SPAC transactions

Even if you do not participate in a SPAC IPO (either by listing one or investing in one), you may well come across a SPAC in the context of the M&A market. The SPAC boom of the past couple of years means that there is a vast amount of money sitting in these listed cash vehicles looking for M&A targets (most of which need to complete a business combination, or “de- SPAC” transaction, within 2 years or else face winding up and returning funds to shareholders). European businesses are the subject of interest from both the increasing number of European SPACs and many US SPACs – particularly as the US market is very crowded, leading to SPACs looking further afield for acquisition opportunities. De- SPAC transactions with European targets have increased exponentially in 2021, with aggregate deal values in the tens of billions. Technology- driven, innovative and start-up companies, as well as companies with an ESG focus, have been of particular interest to SPACs. Among recent de-SPAC transactions involving US SPACs acquiring European or UK targets (effectively taking them public in the US) are the SPAC business combinations of the UK electric vehicle maker Arrival and the Italian luxury clothing brand Ermenegildo Zegna.

A de-SPAC transaction can be an attractive option for many companies, allowing them a faster route to the public markets and a more controlled price discovery process. Nevertheless, a number of considerations need to be taken into account in connection with any potential business combination with a SPAC, and detailed advice will be required from lawyers and accountants regarding the technical legal and regulatory requirements (which will vary by jurisdiction) and tax aspects of the business combination process, particularly where a US SPAC is acquiring a European business. In addition to completing an M&A transaction, the target is essentially transitioning into a listed business, and will need to prepare for this as well.

The outlook for European SPACs

With support from stock exchanges and regulators, and a variety of high profile market players keen to utilise the SPAC model, SPACs are well-placed to deepen their footprint in Europe and the UK over the remainder of 2021 and beyond. A big factor that will affect overall market sentiment and investor appetite will be the performance of the recent vintage European SPACs launched in 2021 to date, the performance of their shares in the market, their success in completing attractive business combinations and their performance post-combination. This is currently against the backdrop of a very active M&A market overall, including US SPACs looking for European targets, so there will be intense competition for strong targets. But the SPAC market has proven to be a dynamic one and, although doubtless the SPAC market, like all markets, will experience ebbs and flows, SPACs are likely to remain a significant part of the equity markets and M&A landscape for some time to come.

Author: Jeffrey Johnson, Partner