SPAC Weekly 8/17: Special Purpose Acquisition Corps 101

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By Troy Marchand, Foundry Capital

The first installment of SPAC Weekly is being introduced via Valuewalk.com for the week of Aug. 17. The idea is to keep investors up to speed on Special Purpose Acquisition Corps, also known as SPACs, on a weekly basis. A SPAC is a blank check company created for the purpose of acquiring a private company. It is a backdoor route to taking a private company public while enriching the teams that execute on completing a deal.

Due to the nature of what was just described, Wall Street does not pay attention to SPACs, and they often time are under-the-radar investments that come and go in cycles. They were all the rave between 2005 and 2008 before the financial collapse and were in hibernation for many years, but in the past couple of years, we have seen quite a few SPACs announced. Some transactions are really good and some are awful, so please pay attention to the players involved and what they are buying.

Investors will treat bad deals very harshly, either voting down the deal entirely or thrashing shares post deal announcement. I have many examples of each. The hard part writing weekly about SPACs is the unknown and infrequent announcement of a deal or IPO. Therefore, some weeks may be longer than others strictly due to this nature. We intend to keep it to the point and use terms for any investor, regardless of level, so we apologize to those who fully understand SPACs as we get those new to the space up to speed on the inner workings.

I have spoken with many institutional investors who could not tell me what a SPAC is, so if you are new, don’t be overwhelmed. Feel free to email us at [email protected] with specific questions, and we will do our best to respond in a timely fashion. Thanks for reading, and we look forward to providing more color around all things SPAC.

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The purpose of this weekly update is not meant to be a recommendation to buy or sell SPAC securities but instead is to be used for informational purposes, so please do your own work and read the 300+ pages of the S-1. We also try to be completely accurate with the information we report, so please excuse any misstatements and feel free to let us know in the comments section or in an email. While we will attempt to keep the lists exhaustive of all deals, so please feel free to let us know if you are aware of one that we missed, both U.S.- and Europe-listed.

New SPAC Announced:

First up this week is a newly-announced SPAC which was filed on Aug. 13. TPC Capital filed to raise $460 million in an initial public offering (IPO). They are creating a blank check company or SPAC to make acquisitions. The new entity, Pace Holdings Corp., will be listed on the NASDAQ. Pace Holdings will be led by Karl Peterson, a managing partner at TPG in Europe.

No specific targets have been identified at this point, though they will look at underperforming companies in the technology, media or business services industries. Like the majority of SPACs, Pace will have up to 24 months to use the capital raised. They will not be limited to their specific targets though, as we have seen managers in the past drift from their industry expertise.

One that comes to mind that has drifted away from their core expertise in the past would be Jason Industries (JASN), which has been quite the train wreck for Jeff Quinn and investors. Mr. Quinn with Quinpario Holdings initially set out with capital to acquire a company in the specialty chemical space, as his prior experience with Solutia proved to be quite successful. Unfortunately for investors, Mr. Quinn decided to pursue Jason Industries, which is an automotive and related business. The stock has been nearly cut in half since trading began as JASN on July 1, 2014. Let’s hope TPG and investors learned a lesson and that the TPG management team will focus on areas within their core expertise.

After the offering, TPG will own 20% of Pace while also pledging $10 million to 11.2 million for warrants that could boost its stake at a later date. TPG Capital manages approximately $75 billion in assets, and the firm has a stellar track record. I anticipate Pace Holdings being oversubscribed as investors search for investments in a no-growth economy.

The initial symbol for Pace Holdings will be PACEU, which is a unit. For those unfamiliar with how SPACs operate, typically the SPAC will trade as a unit (meaning one common and one warrant) for a period of time; in this case, they break apart on the 52nd day of trading. After this date, which is set out in the S-1, the unit will break apart and trade independently. So the common stock will trade as PACE, and the warrants will trade as PACEW.

In the specific case of Pace, the warrants will entitle each holder to one-third of one Class A ordinary share. Three warrants may be exercised for one whole Class A ordinary share at a price of $11.50. The IPO price is set at $10 a share, and the cash minus expenses of 55 cents will be held in an escrow account. Owners of the shares will have the ability to vote on the deal when it is presented to shareholders. Shareholders who vote “No” to management's proposed merger may take cash from the escrow account.

Different SPACs have different terms, so an investor needs to be sure they understand the dynamics of each deal. I have seen SPACs in the past give “rights” instead of warrants. In one case, one right was worth one-tenth of a common share of stock. This is not the case all the time, but typically when the unit breaks apart, the warrant trades in the 20-cent to 40-cent range until a proposed deal is announced. If investors like the proposed deal, warrants can rise quickly in price, sometimes reaching several dollars.

Recently Announced Deal:

July 23, 2015-- ROI Acquisition Corp II (ROIQ; ROIQW) announced a proposed transaction to merge with Ascend Telecom Holdings. Ascend is an independent provider of passive telecom infrastructure for wireless telecom operators in India. Upon completion of the merger, the current Ascend management team will remain in place.

“Buyer Beware” ROI Acquisition Corp I, also launched by the same management team as ROI Acquisition Corp II has gone bankrupt. Clinton Group is an investment firm out of New York City, and they are behind both ROIs. ROI Acquisition Corp I merged with Everywhere Global (EVRY, then EVRYQ before being delisted). Everywhere Global made tabletop and food preparation products for consumers and restaurants. The company was loaded with very expensive debt, and sales in the space deteriorated, causing them to eventually file bankruptcy.

Also note that SPAC management teams typically make very good money for launching a SPAC and getting a deal done, irregardless of how “good” of a deal they completed. The only issue with having a deal go bankrupt is that SPACs only work with a credible management team. Otherwise shareholders are likely to vote down the deals on a regular basis.

SPACs Without Deals Announced:

WL Ross Holding Corp (WLRH)

Hennessy Capital Acquisition Corp II (HCACU)

Quinpario Acquisition Corp 2 (QPAC)

FinTech Acquisition Corp (FNTCU)

Easterly Acquisition Corp (EACQU)

Barington/Hilco Acqusition Corp (BHACU)

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