Cheap Acquisitions Might Be Last Chance for SPACs

NEW YORK (Reuters) – The blank-check companies known as SPACs, which have raised billions but not yet made the acquisitions that money is supposed to be spent on, are in a race against time.


The success of these 57 companies in spending the $11.3 billion they have raised in stock flotations may determine whether such special purpose acquisition companies (SPACs) will be in the thick of things when the IPO market recovers.


A special purpose acquisition company is a shell organization that uses money raised in an initial public offering to buy another business. That business then becomes publicly traded through the SPAC once shareholders approve the deal.


After an IPO, a SPAC typically has two years to make an acquisition, or it has to return the money to investors. Since the last boom year for SPAC IPOs was 2007, most of these companies have to seal a deal in the next year.


The credit crisis has sidelined many potential rival bidders, including private equity firms, for acquisition targets, giving these cash-rich SPACs a potential opening.


“The stars are aligned in terms of targets,” said Peter Weprin, managing director in the capital markets group at Cowen and Company LLC. “You are one of the only games in town with all that cash.”


But with the majority of IPOs performing poorly in 2008, SPAC investors have been voting down one acquisition proposal after another.


By the count of one banker, Benjamin Howe, chief executive of Boston-based boutique investment firm America’s Growth Capital, 21 acquisition proposals were nixed by shareholders in 2008, while nine were OKed. Of those, only two were approved in the second half of the year.


“In theory, it appears to be a perfect storm for SPACs,” said Gil Ottensoser, managing director at Deutsche Bank (DBKGn.DE), referring to abundant bargains.


“In reality, part of the challenge is that there is no IPO market, and public valuations in this environment can never be low enough,” he said.


The moribund IPO market means that investors are opting for the safety of getting their money back over risking their investment in a new company, no matter how good a deal a SPAC is proposing, he said.


After a stellar 2007, when 65 SPACs raised about $11.6 billion, 2008 saw deal volume in dollar terms fall 70 percent, according to Thomson Reuters data.


The largest SPACs that have not yet made an acquisition include Liberty Acquisition Holdings Corp (LIA.A) which raised a record $1.035 billion for a SPAC in an IPO in December 2007, and Sapphire Industrials Corp (FYR.A), which went public in January 2008 with an $800 million IPO.


The largest acquisition of 2008, and the second-largest ever, was by blank check company Hicks Acquisition Co I Inc (TOH.A) which together with established private equity firm the Blackstone Group LP (BX.N) agreed in June to buy Graham Packaging Co for $3.2 billion.


Some 14 SPACs with IPOs estimated to raise $2.9 billion withdrew their filings in 2008, including MAFS Acquisition Corp, a $500 million SPAC whose sponsors included financier Ronald Perelman, who controls cosmetics maker Revlon Inc (REV.N).




The SPACs’ success will depend largely on whether they are lucky with their timing, an analyst said.


“What I am looking for are ideally deals that price today, and are cheap relative to market, but go to a vote in four to six months, when ideally the market is higher,” said Neil Danics of SPAC Analytics, a research service.


He added: “My view is that this (2009) is a make-or-break year for SPACs. If these types of interesting transactions can get done then the market will say, ‘look, they were able to deliver good transactions.'”


The SPACs’ cash holdings give them an edge but could also be a double-edged sword as their cash-strapped investors, primarily hedge funds contending with unprecedented levels of redemptions by investors in 2008, want to recoup some cash.


“There are about 30 hedge funds that control the SPAC market, and they’ve been clobbered by the markets,” said America’s Growth Capital’s Howe. The S&P 500 fell about 40 percent in 2008.


“I think the majority of them (SPACs) will be redeemed.”


Either way, few SPACs are likely to make their acquisitions until the IPO market regains its old form, bankers said.


“When the IPO calendar comes back, and the buy side’s appetite for risk returns, it’s logical to believe that SPACs will be able to consummate good acquisitions as well,” Ottensoser said.

(Reporting by Phil Wahba, editing by Matthew Lewis)