Analysis: SPACs spend money to salvage deals as market unravels

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March 16 (Reuters) – SPACs are turning to costly new tactics to keep investors from jumping ship as market confidence dwindles in the once-hot alternative to IPOs.

Blank check acquisition companies and the companies they acquire must sell larger stakes in companies to investors in some cases, often at steep discounts. Deal managers are also seeking support funding from investment firms and injecting more of their own cash.

Less than three months into 2022, 13 mergers involving special purpose acquisition companies have already failed in the United States, according to data from industry tracker SPAC Research. That compares to a total of 18 for all of 2021.

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In monetary terms, nearly $9.5 billion in mergers have been canceled this year, according to Dealogic data.

According to market participants, the main cause of abandonment of transactions is takeover risk – where investors exercise their right to sell shares of the company back to SPAC before the merger is complete, and for the price that they paid.

“Every trade worries about redemptions and every trade tries to find a way to mitigate it,” said Amir Emami, global co-head of SPAC coverage at RBC Capital Markets.

Approaches employed by SPACs include offering free shares to investors who choose not to redeem the shares.

SPACs are shell companies that raise funds in an initial public offering and place them in a trust with the intention of merging with a private company and taking it public. Since investors do not know the target company before the IPO, SPACs often grant them the right to redeem their initial investment as an incentive to put their money in the trust.

Yet large takeovers are undermining the viability of these deals. At the same time, the shares of many companies that went public during last year’s boom have depreciated, leaving some investors to suffer losses and making SPAC news riskier.

Indeed, the offers are drying up.

According to SPAC Research, only 24 SPAC mergers worth $28.3 billion have been announced so far this year, compared to 93 deals worth $233 billion in the first quarter of 2021. Only 48 new SPACs floated on U.S. exchanges through the end of February, up from 214 in the same period last year, according to Dealogic data.

“What was an attractive deal, say six months ago, may not be now given that the market has sold off significantly since then,” Emami said.

‘THE ICING ON THE CAKE’

Measures such as offering additional shares have been successful in pushing through some mergers, but can come at a high financial cost to SPAC managers, their target companies and their original investors, who become diluted.

“With a high number of SPACs still looking for targets and skepticism due to the market pullback, it has become more difficult to persuade target companies to want to engage with SPACs and have the management distraction that comes with it. ensues,” said Atif Azher, Partner at Law. Simpson Thacher & Bartlett LLP.

Bonus shares, or “bonus pools,” for investors who avoid redemptions, are usually made up of founders’ shares or common shares of the company that were reserved for SPAC managers.

In January, in Cohn Robbins Holdings Corp’s (CRHC.N) $9.3 billion merger with lottery operator Allwyn, 6.6 million shares, worth an estimated $65 million , were offered to shareholders who chose not to redeem their shares. Read more

“The best way to maximize SPAC shareholder participation is to bring a highly profitable company to market with attractive growth prospects at an attractive valuation. The free share reward is just the icing on the cake,” they said. said Cohn Robbins co-chairs Gary D. Cohn. and Clifton S. Robbins told Reuters.

DPCM Capital Inc (XPOA.N), another SPAC, gave shareholders about 5 million shares for not buying out their existing stake in its $1.2 billion merger with quantum computing company D- wave Quantum Inc. Read more

SPACs also raise additional funding, known as private equity placements (PIPE), to secure deals. A dozen SPACs have raised additional PIPEs in recent months to mitigate the risk of takeovers.

Part of the fundraising is also done through OTC equity derivative contracts. If the investors who buy the shares choose not to buy them back before the completion of the merger, SPAC agrees to buy back those shares from them at a later date after the merger is safely in the bag.

MANAGERS PAY MILLIONS

Some investment firms have also stepped in in recent months to support deals. One of them, Atalaya Capital Management LP, offered Yellowstone Acquisition Company up to $70 million for its $777 million merger with airport hangar manager Sky Harbor in January, five months after the merger. announcement of the SPAC agreement.

In other cases, SPAC investors are involved.

Shareholders of SPAC Dynamics Special Purpose Corp (DYNS.O), for example, including funds managed by Cathie Wood’s ARK Investment Management, Morgan Stanley and T. Rowe Price, committed $86 million in non-buyout agreements in December to help it finalize its merger. with biotech company Senti Bio, in a deal valued at $601 million. Read more

Some SPAC managers have also opted to invest more of their own money in trades to offset buybacks. For example, the parent company of Trebia Acquisition Corp, a SPAC that agreed to merge with marketing platform System1 Inc (SST.N), agreed to provide a $250 million backstop in January 2022 for the closing. of the $1.4 billion deal.

“Most of the more recent terminations are more market-driven,” said Michael Levitt, partner at law firm Freshfields Bruckhaus Deringer.

“They (the SPACs) are concerned that the redemptions will be too high and that the target company will not have enough money to meet its minimum cash condition,” he added, referring to the specified amount that a SPAC must hold on the closing of the case.

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Reporting by Anirban Sen in Bengaluru and Echo Wang in New York; Editing by Greg Roumeliotis and Pravin Char

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