THE CHALLENGES OF DE-SPACing
Special-Purpose Acquisition Companies, SPACs, have raised more money in the first two and a half months of 2021 than in all of 2020. Reuters reports there are currently 408 SPACs listed in the US with $131 billion in cash looking for acquisition targets. In Europe, there are several out marketing or listed, and we’ve been told at least 15 are being prepared. The UK is considering changing long-standing regulations to make SPACs more practical.
Most of the press, and even the professional publications, focus on the structure of the SPAC and the M&A negotiation between the SPAC and the unlisted target. We’re not going to repeat what is widely written about. Instead, this article will run briefly through the largely unwritten but crucial in-practice delivery issues for a de-SPAC – the process of moving from that announcement of a deal, to closing three+ months later.
What should a company consider?
We’ve had de-SPAC discussions with five companies in the past month. The burden of the process is frequently a surprise to them – hence this article, to help companies understand what their shareholders may be asking of them when the topic is raised.
In 2020, the average US de-SPAC took 105 days to move from announcement to closing according to PrivateRaise data. That seems a long time – just over three months. Consider this, however. Every single de-SPAC process, whether in the US, Europe or Asia, will involve doing 90% of the work of an IPO, including preparing to be a listed company following the rules of the relevant stock exchange/regulator. Often without the usual preparation time when a company starts to consider a listing. And don’t forget, these management teams are also running a company which cannot falter even if they are stretched.
No wonder that PwC’s recent publication on European Companies Considering a US SPAC Merger said “SPAC mergers have shorter listing timelines than traditional IPOs. Target companies should be prepared to be a public company within 3-5 months of executing a merger agreement. With this short runway, companies often have difficulty budgeting adequate time and resources to complete necessary readiness activities for being a public company.”
Yes, we do de-SPACs
To be clear – The Deal Team does de-SPACs for European companies. We have the skills and knowledge to project manage this de-SPAC process on behalf of time-poor issuers, whether the SPAC is listed in the US or in Europe. For a European company, you get a knowledgeable internal resource working with you every day to keep the execution process moving, any time of the day. No need to wait for New York to open.
Specific gating items in the de-SPAC process
What does a European company merging with a SPAC need to prepare? In no particular order, these are some of the bigger gating items we help companies to manage.
Availability of accounts – Does the target have a three year track record plus stub period of audited IFRS accounts?
Time to write the listing document/registration statement– A good listing document, for a well-prepared company who may already have done extensive IPO prep, can be ready in 7-8 weeks. There are 400 pages in a typical IPO prospectus, of which perhaps 25 can be removed as there is no public offering. This shouldn’t be dismissed as simply a legal or regulatory process. It’s the public expression of the equity story which the management team will have to defend in the public markets for years to come.
Regulatory review – The local stock market regulator – SEC in the US, AFM in the Netherlands, BaFin in Germany, FCA in the UK – will review the de-SPAC application as carefully as any IPO prospectus. This takes several weeks, potentially up to 8-10 weeks in the US. The prospectus needs to be 95% complete before submission. Suddenly, that three months I mentioned look tight.
Internal management reporting and upgrades – Immediately upon listing, the company will have a regulatory obligation to monitor its performance against expectations and make announcements if there is a deviation from the market consensus. This means the internal reporting systems must be robust, timely, and allow management to track consolidated financial performance vs budget in IFRS or US GAAP. In the UK and the US, there are additional checks made on internal controls by external experts, either at the time of the listing, or on an ongoing basis. It’s this last one that presents a big hurdle in the US, which I’ll discuss below.
Preparing to be a listed company – Before the approach by the SPAC, the management team may not even have considered becoming listed. Now, they must build in public company levels of corporate governance and compliance to meet their reporting, regulatory and investor relations obligations. New Board members, upgrading the company secretarial function, getting the relevant skills in investor relations/general counsel/financial PR, as well as putting in place procedures for maintaining up to date insider lists, employee share dealing, and how to make the required interim and ad-hoc regulatory announcements. They will also need to consider whether the M&A negotiation has factored in the future capital needs of the business, or whether new capital will be needed in the near or medium term.
The Big One: US-specific issues
I mentioned above the 408 US listed SPACs looking for an acquisition, compared to a small handful in Europe. So a European company de-SPAC is many times more likely to end up listed in the US, than in Europe. And in many if not most cases, these companies have no internal knowledge of what that might imply as a US listing wasn’t previously one of their strategic options. So, they rapidly need to understand the practical consequences of that choice in addition to the above, amongst which:
- Determining the company’s status as a Foreign Private Issuer (“FPI”) at the time of the deal, and on an ongoing basis;
- Accounts will need to be audited to PCAOB standards even if the company is permitted to file IFRS accounts as an FPI;
- Company will have to implement, have reported on, and publicly certify their compliance with Sarbanes-Oxley disclosure rules on an ongoing basis; and
- SPAC- specific regulations mean i) the pre-SPAC shareholders may have the right to require the company to file a registration statement to facilitate their sale for 12 months ii) the company cannot register new management equity plans until 60 days after the end of the de-SPAC process and iii) limitations on using “free writing prospectus” for 3 years which may make future capital raising more cumbersome.
Merging with a SPAC may have advantages for the shareholders of the target, versus an IPO. Delivering a successful de-SPAC relies on having a fully up to speed, capable and resourceful management team who can run the company, get the documents ready, and prepare for their new life as a listed company.
As always, we’re here to help – de-SPACs included.
The Deal Team is passionate about transaction execution – because management should be running their business, not the deal. We are the first professional transaction manager for M&A and capital markets, including de-SPACs for European companies wherever the SPAC itself is located. We deliver speed, agility, and transparency of execution processes to maximise your competitive tension, your control over transaction variables, and your management teams’ capacity to focus on business performance. We do this by providing a dedicated Deal Captain to work shoulder-to-shoulder with management teams, delivering execution excellence onsite throughout a transaction.
To meet the rest of our Team and watch our one minute video click here >