Suddenly, we hear the word SPAC everywhere, but what does this strange acronym refers to? This is a new investment vehicle whose contours are difficult to define. Let's try to get a clearer picture, because SPACs will, against all odds, gain momentum in our stock market universe. Indeed, in 2020, US markets have shown a strong enthusiasm for SPACs. European stock markets, on the other hand, have remained more cautious. This reluctance seems to be mainly due to investors' lack of knowledge of the format.
How it works
Empty shell, simple envelope, blank check companies... Attempts to illustrate the concept of SPAC are relevant, as the concept is so foreign to us. SPACs are companies with no operational activity, created with the aim of going public in order to raise capital and then acquire, in a second phase, one or several other unlisted companies.
In other words, a SPAC is a company created from scratch, which is an empty structure. The funds raised at the time of the IPO promise to be allocated, not to a specific project (financing of equipment, repayment of debts, etc.) but to a future takeover, in a predefined sector or type of activity. The specificity of the format lies in the promise, because this promise must be clearly stated at the time of creation.
Unlike a traditional company with an established business, the SPAC has no history to reassure investors. It has no previous publications or cash flow. The SPAC project must therefore be carried by men or women whose reliability, reputation or capacity are recognized. For this reason, SPACs are difficult to sell to the general public and are therefore mostly aimed at family offices, sovereign wealth funds, hedge funds or seasoned investors.
The founders (who are financially interested in the project) unveil an ambition, which is promoted on markets. They disclose the criteria: sector, indicative size of the operation, envisaged profitability ratios, etc. When the securities are issued on the stock market, the amounts to be raised are predefined. Once the company is created, the funds are kept in the form of cash and must be used in accordance with the promise, or must be repaid.
In concrete terms, if the acquisition targets proposed to the shareholders are not suitable for them, or are not in line with the project, shareholders can demand that their initial capital be returned to them (hence the "blank check" aspect). If no acquisition proposal is made within the allotted time (generally 24 months), the SPAC will be dissolved, shareholders reimbursed, and the founders will lose their initial investment.
If the target is approved by shareholders, the cash retained is used for the buyout. In other words, the successful acquisition ends the receivership and releases the capital. Satisfied or your money back.
How SPAC works
To be validated, the target must correspond in all points to the promise, in the pre-identified sector of activity, in the time allotted and in the imposed financial dimension: the founders commit themselves on an investment amount, they must use 75% of the raised funds for a single large buyout (or merger).
Sometimes the SPAC is renamed after the acquired company, but this is not an obligation.
The value of shares
Prior to the IPO, the founders set a limit on the amount they wish to raise. Within the framework of a SPAC, the price of the share is fixed by convention at 10 euros (10 dollars in the United States). The company will therefore issue X million units at 10 euros.
A SPAC wishing to raise 250 million euros must therefore issue 25 million units. The unit consists of a reference share and a BSAR (a redeemable share purchase warrant), and both are listed on the stock exchange with a different ISIN code.
As these offerings are not designed for the general public, SPAC is listed on a compartment reserved for qualified investors (in Europe, on the professional compartment of Euronext in this case).
Why does this format appeal to so many investors in the US? First of all, SPACs allow investors to invest in unlisted companies and to easily exchange their shares.
On the founders' side, SPACs offer a relative speed of action, as cash is available to seize opportunities. A faster process than if founders had to raise funds after identifying a target. Even if, in practice, acquisition targets are often identified before the creation.
For everyone, SPAC is synonymous with value creation. The companies acquired are intended to be restructured in order to accelerate their growth or improve their profitability.
On the negative side, the main criticism of SPACs is that they are not subject to the same requirements as a traditional IPO.
SPACs were created in the 1990's but have been enjoying their heyday for the past few years, mainly on American stock markets.
According to Dealogic, no less than 234 such companies will be listed in 2020, raising $81 billion, compared with 59 in 2019, worth $13 billion.
As to whether this is a cyclical phenomenon or an underlying trend, opinions differ. Some observers believe that the craze is fueled by low returns on traditional assets, while others see it as the emergence of a bubble.
A selection of screen companies is shown below.