Valuation isn’t the most important factor in a SPAC-off, the process in which bankers shop certain portfolio companies exclusively to select SPACs and not PE or strategic buyers.
“You’re not trying to maximize price in SPAC-off; it’s a capital markets exercise,” said Jefferies Managing Director Michael Dodds at McDermott Will & Emery’s recent Healthcare Private Equity Miami Conference. “You’re trying to optimize the certainty in price so the public company trades well,” he said, speaking to the quality and importance of the PIPE investors that invest in the SPAC.
“A lot of people throw up their hands and say, ‘they are all the same, we’ll just pick one’ – and I fundamentally disagree with that.”
In a virtual panel earlier this month, PE investors and experts shared insights and strategies around the process of selling healthcare portfolio companies to SPACs, which have already raised $96.4 billion year-to-date – topping all of 2020, according to SPAC Research.
The quality and reputation of the sponsor and the CEO is probably the most important factor, said Roger Marrero, senior partner at Comvest Partners. The firm’s portfolio company IMC Health and CareMax Medical Centers recently merged with a Deerfield-sponsored SPAC in a $614 million transaction.
“Yeah, you can squeak out some better valuation from somebody else, but by definition you are going to have a lot more at stake post-close, post-de-SPAC,” Marrero said on the virtual panel. “Ultimately you want to be in the sandbox with somebody that has a network, a reputation and a good understanding of what it’s like to be a public company – and how to grow your business.”
Particularly for mid-market healthcare services businesses that don’t have good existing public comps, sellers should ask questions around what a specific SPAC brings to the table, Dodds said: Can the SPAC sponsor can help a company diversify its board? Can the SPAC bring in blue-chip shareholders [like a Wellington Management or T. Rowe Price] to help diversify the investor base?
To be sure, when an experienced public-company management team is seeking a SPAC combination, “it’s about picking the ones with the best terms,” Dodds said.
Either way, if a private equity firm is selling into a SPAC, it will continue to hold the majority of shares after the de-SPACing process (which occurs after a target is identified for acquisition and concludes when the private company ultimately becomes a public company); so ideally, the stock goes up as you exit over time.
Hence, the growth profile that you sell to PIPE shareholders and the SPAC is something you ultimately have to sustain, Marerro said. “Those are the projections the public market will be ultimately holding you against, and at a certain point, when actuals deviate enough from that projection line that you sold the market when you went public, that’ll be the day of reckoning.”
Another key difference between a traditional M&A sale process and a SPAC-off: You don’t want to market a company to 10 or 20 different SPACs. A process should be very focused, involving a small handful SPACs or even bi-lateral conversations, Dodds said.
“If you go to too many, the higher quality ones won’t participate,” Dodds said. “They don’t have the time or money to waste.” Companies are also more likely to get better terms by running a limited process, as SPACs are willing to pay a premium for time saved, he noted.
As such, the diligence work is also lighter in a SPAC process, panelists said.
“Most of the heavy lifting is actually upfront,” Dodds said, speaking to the market risk and price discovery work that’s completed by the time an agreement is announced. “[SPACs are] motivated to do a deal and they don’t have the due diligence budget that a GP would have.”
The speed in which companies and SPACs are transacting can also increase risk to SPAC investors, cautioned another panelist, Tom Conaghan, co-head of capital markets practice, McDermott Will & Emery.
“The amount of due diligence that’s done on a company is very accelerated, and sometimes can be limited because of the way these deals are done in a public company style; there’s not a lot of days and weeks of negotiating indemnification,” Conaghan said. “It’s really about diligencing the value of the product that you’re pitching to the market, so you can sometimes miss things.”
When those issues are discovered, the stock price in the aftermarket may suffer as a result, he said. That makes the quality of PIPE investment that much more important.
“By aligning with longer-term shareholders in the SPAC that have the fortitude to stick with [the company], it’s appealing to them [sellers], especially for an early stage company that is sure to have some bumps in the road along the way,” added Susan Harrington, vice president of commercial operations & business development for Regenerative Medicine Commercialization, Fresenius Medical Care.