Lessons And Concerns From The 1st Canadian SPAC Transaction

A Special Purpose Acquisition Corporation (SPAC) is a publicly traded shell corporation, with no operating business, that is created with the sole purpose of acquiring an operating business, commonly known as a target. Of the six SPACs that are trading on the Toronto Stock Exchange (TSX), Infor Acquisition Corp. (TSX: IAC.A) became the 1st Canadian SPAC to announce a transaction last month.

Infor entered into a definitive agreement to acquire ECN Capital, a commercial financing business with C$8.0 billion in assets under management[i]. The deal is expected to close in mid-October.

From Infor’s common shareholders’ perspective, it seems like a solid deal, and credits to Infor for creating a shareholder friendly structure. At the outset, the deal appeared to be a great start for Canadian SPACs. However, Infor’s founders have agreed to reduce their founders’ shares by approximately C$50MM[ii] to get the deal done. There is a general perception that this transaction might set a concerning precedent, forcing other SPACs to reduce their founders’ shares and drop their premiums to complete acquisitions.

This article provides insights into the reasons that pressed Infor to lower the founders’ premium and how SPACs can strategically choose ideal targets that are better aligned for SPAC transactions and demand a higher premium.

SPAC Vs. IPO

SPACs are one of the available options for private companies, or corporate spin-offs, looking to complete a public listing. The traditional route for a public listing is to do an Initial Public Offering (IPO). Compared to an IPO, a SPAC transaction is less time consuming, has greater certainty of funding and closing, has less stringent listing requirements, and allows a greater percentage of the capital to be deployed towards monetizing the current target shareholder (this is a key differentiator). These advantages allow SPACs to demand premiums that are usually more expensive than an IPO.

For an IPO on the TSX, the typical capital raising fee paid to investment bankers is 4-6%. If the same target company opted to do a SPAC transaction, there is no direct cash fee paid by the target. Instead, there is an equity dilution – referred to as the premium to net cash. In a recent US SPAC transaction, the premium was as high as 14%[iii]. In the Infor transaction, the premium was at a relatively low 5% for the below reason.

Infor’s acquisition target, ECN Capital, is a spinoff from one of the largest publicly traded Non-Bank Financial Companies on the TSX. It has a dominant capital markets presence and clout, and could have easily completed a spin-off or IPO on its own. By targeting a traditional and powerful IPO candidate, Infor lost all bargaining power in this transaction.

As a result, it had no choice but to reduce its founders’ shares such that the premium to net cash was on par with an IPO capital raising fee. Infor’s CFO Dennis Pellarin, said in a conference call: “the value of the founders’ share received (by arm’s length founders) is approximately equal to 5% of the capital raised (or net cash).”

Ideal targets for SPACs

One of the striking differences between a SPAC transaction and IPO is the percentage of capital that can be deployed towards monetizing current target shareholders. In an IPO, underwriters are reluctant to allow more than 10% of the capital raised towards paying out current shareholders. In the case of SPACs, that number could go significantly higher. This is one of the reasons Private Equity firms that seek to monetize a larger portion of their ownership upfront, choose to exit their investments through a SPAC transaction over an IPO.

A recent example would be Apollo Global Management opting to do a SPAC transaction to exit its investment in Hostess Brand LLC (the maker of Twinkies & Ding Dongs). On the whole, 65% of the $725MM[iv] capital raised (the SPAC’s net cash of $375MM plus an additional private placement of $350MM) was used as cash consideration to pay the selling equity holders. These features would never materialize in an IPO. By working with Apollo on such flexible structures, the SPAC founders yielded a 14% premium to net cash.

This strategy could be expanded to a number of private companies and entrepreneurs that have built quality business and are looking for a partial exit or monetization event – and to continue running the business. Many of them end up avoiding the IPO route because the underwriters tend to shy away from a large monetization event for the target shareholders. A SPAC transaction could be an ideal option for such targets, as well. Further, given that an IPO is not an option for such targets, the SPACs could demand a higher premium by bringing them into the public markets.

In general, by going after targets that require creative structures that would not fit in a plain vanilla IPO setting, SPACs could not only demand a higher premium, but also expand the public markets to companies that would otherwise stay away from it.

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[i] Source: Infor press release.

[ii] Source: Calculating numbers present in documents filed in SEDAR.

· Number of founders’ shares: 6.8MM – value of founders’ shares if fully converted: $68MM.

· Founders agreed to reduce their founders’ shares by 80%. Value of reduction is 80% of $68MM = $54MM.

[iii] Source: based on numbers in Gores Holdings Inc.’s proxy statements filled in EDGAR.

· Value of founders’ shares $53MM (for which they paid $25K).

· Net cash in the SPAC: $375MM.

· 53/375 = 14.1% premium to net cash.

[iv] Source: Based on numbers in Gores Holdings Inc.’s proxy statements filled in EDGAR.

· The SPAC will use $97MM + 375MM = $472MM as cash consideration payable to the selling equity holders.

· Total capital raised = $725MM (the SPAC’s net-cash of $375MM + private placement of $350MM).

· 472/725 = 65% used as cash consideration payable to the selling equity holders,