SPAC attack

The IPO window largely closed, and SPAC activity continues to be all over the map.  

March 24: SPAC Victory Acquisition Corp. announced Tuesday its agreement to acquire VC-backed jukebox company TouchTunes Corp. in an all-stock deal valued at up to $370 million. New York-based TouchTunes, is by VantagePoint Venture Partners. -- Demitri Diakantonis

March 17: SPAC KBL Healthcare Acquisition Corp., a subsidiary of New York venture capital firm KBL Healthcare Ventures, announced late Monday that it had acquired logistics company PRWT Services Inc. for about $140 million. -- Demitri Diakantonis

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March 13: For a second time, blank check company Polaris Acquisition Corp. has amended the terms of its proposed reverse merger with Hughes Telematics Inc. in a bid to support the shareholder vote. In June 2008 Polaris agreed to an all-stock deal worth nearly $700 million for Apollo Management LP's automotive telematics company Hughes.-- Vyvyan Tenorio

March 3: Enterprise Acquisition Corp., a special purpose acquisition company, has withdrawn its plan to buy private equity-backed Workflow Management Inc. for about $670 million, including debt. -- Vyvyan Tenorio

The deal was announced in August. See more below.

Feb. 9: Blackstone Group LP portfolio company Graham Packaging Co. LP agreed to buy a minority stake in container maker PPI Blowpack Pvt. Ltd. for an undisclosed price. In January, Blackstone agreed to amend terms on the $3.2 billion reverse merger of Graham Packaging with Texas buyout veteran Tom Hicks' special purpose acquisition company. -- Christine Idzelis

The deal was announced in June. See more below.

In late December, blank check company Asia Special Situation Acquisition Corp. said it planned to acquire White Energy Co. Ltd.'s clean coal technology subsidiary through a reverse merger valued at A$385 million ($268 million). -- Vyvyan Tenorio

Also late last year, a few deals made it through, like Dick Heckmann's China Water and Drinks deal and Hyde Park Acquisition Corp.'s Essex Crane Rental Corp. deal, but as 14 acquisitions (based on UBS' numbers) have been approved, busted mergers have outnumbered them, The Deal's Vyvyan Tenorio wrote in November. The latest to go bust, she wrote, was MBF Healthcare Acquisition Corp.'s $420 million deal with Critical Homecare Solutions Holdings Inc.

September saw two planned deals: Sept. 23: Greenhill & Co.-sponsored SPAC GHL Acquisition Corp. unveiled a deal for satellite services provider Iridium Holdings LLC in a deal valuing the target at $591 million. Sept. 16: Renaissance Acquisition Corp. said it would buy telecom company First Communications Inc. in a $249 million deal.

Rounding out August, Toronto-based SPAC Tailwind Financial Inc. unvieled a $600 million shipping deal Aug. 27, just days after blank-check company Enterprise Acquisition said Aug. 25 it would take a majority stake in Dayton, Ohio-based print products maker Workflow Management, a Perseus LLC portfolio company, for $742 million, including debt.

The buyer went public in November, raising $250 million. The SPAC has at its helm president and CEO Dan Staton, a managing director of Staton Capital LLC and chairman of Penthouse magazine owner FriendFinder Networks Inc., and Mark Bell, a managing director of Marc Bell Capital Partners LLC and FriendFinder's president and CEO. The duo also produce Broadway shows including "Jersey Boys," "Little Shop of Horrors" and "The Wedding Singer," The Deal's Luisa Beltran noted.

Also Aug. 25, Oceanaut Inc., a SPAC sponsored by Excel Maritime Carriers Ltd., said it would acquire four ships for $352 million in total.

Earlier in August, private equity firm H.I.G. Capital LLC sold CRM company Stream Holdings Corp. to blank-check company Global BPO Services Corp. for $200 million in cash plus adjustments. Meanwhile, another vehicle Sports Property Acquisition Corp. made a play for Tribune Co.'s Chicago Cubs. The SPAC raised $215 million in a January IPO. And in late July, China Holdings Acquisition Corp. said it would buy Singapore-listed stamp machine maker Bright World Precision Machinery Ltd. for as much as $404 million.

Meanwhile, just as Delos Acquisition Corp., which was formed with a focus on the business and information services industry and slated to be underwritten by Morgan Stanley, yanked its $150 million IPO on July 11 reflecting tough times for IPOs stateside, SPACs had taken off in Europe, with total capital raised for the year slated in mid-July to reach $1.4 billion.

Closing out June, Hicks unveiled a $3.2 billion deal for Graham Packaging with backing from Blackstone. The parties toted it as the largest-ever SPAC deal with an industrial company. Thomas Hicks, a co-founder of private equity firm, Hicks, Muse, Tate & Furst, landed $552 million for the SPAC in October 2007.

Some, however, have gotten out of the gate. Navios Maritime Holdings Inc.'s Navios Maritime Acquisition Corp. debuted June 26 on the New York Stock Exchange. At $220 million, it was the first sizable SPAC to float since February, The Deal's George White noted. Navios Maritime is a former SPAC itself; the SPAC International Shipping Enterprises acquired it in 2005.

In addition to Navios Maritime, two other new SPACs, or blank-check companies formed with the express purpose of seeking out deals, registered for offerings within two weeks, White reported, citing Dealflow Media's SPAC report. He wrote June 23:

Hedge fund Crescendo Partners LP is sponsoring two of the new SPACs, Symphony Acquisition Corp. and Staccato Acquisition Corp., which plan to raise $49 million each for the acquisition of a company that derives at least 50% of its gross revenues from construction, engineering, water, design, environmental, energy, recycling, waste management, logistics or related industries.

Meanwhile, questions for investors in the SPAC equation surrounding how to gain shareholder approval, how to navigate conflict-of-interest issues and whether SPACs have indeed jumped the shark headlined Dealflow Media's 2008 SPAC conference.

May exposed some SPAC deals as bad apples. A significant bust came May 28, when Liberty Lane Acquisition Corp. scrapped a planned $350 million initial public offering, the first-ever blank-check IPO Goldman Sachs & Co. was planning to underwrite. Goldman was taking a different tack with the SPAC in a move to attract long-term investors. Management was to retain 7.5% as opposed to the typical 20%, while the exercise price of $7.50 per half warrant was 25% less than the price of a full share, bulking the typical one share and one warrant per unit structure. Pricing was postponed twice before the offering was scrapped; the different terms made it harder to sell, Reuters pointed out.

Acquicor Technology Inc., which was founded by Apple Inc. co-founder Steve Wozniak alongside other former Apple and IBM Corp. execs, acquired Jazz Technologies Inc. in 2006 for $260 million, shortly after it had gone public, raising $173 million. Jazz said May 19 Israeli chip manufacturer Tower Semiconductor Ltd. would acquire it for $40 million, or $169 million including debt.

Days earlier, Jamba Inc., owner of the California-based smoothie chain Jamba Juice Co., unveiled a restructuring with plans to shutter 10 underperforming stores and slash 53 jobs, which could help it trim $4 million in costs. In April, the company set up a $25 million credit facility with Wells Fargo.

Deals have soured, but it's not stopping everyone. Shell company Heckmann Corp. said May 20 it would pay $625 million for China Water and Drinks, in a move to take advantage of China's growing bottled water market. Heckmann raised $400 million when it went public in November.

Ahead of the June news, one of the latest filings came in late April. Angelo Gordon & Co. revealed April 23: a $300 million SPAC. The New York alternative investment management firm plans to raise $300 million to $345 million, it said in a regulatory filing, for Angelo, Gordon Acquisition Corp., which has no stated focus on a particular sector.

Also April 23, legendary college football coach Lou Holtz, who is now in the SPAC game, weighed in on both SPACs and football, while SPAC veterans expounded the virtues of their asset class at boutique investment bank Morgan Joseph & Co.'s Inaugural SPAC Conference in New York.

Meanwhile, Tenorio zoomed in on a key problem for SPACs right now in a Deal story April 17, a glut of registrations have effectively shut the window, but, more importantly, she pointed out:

A handful of recently minted SPACs have announced they would dissolve because shareholders have failed to approve proposed acquisitions. This development may be a sign that the shine on SPACs may be fading among investors -- the vast majority of whom are hedge fund arbitrageurs.

Seven SPACs are now liquidating, half of which were announced in the last few months: Good Harbor Partners Acquisition Corp., Grubb & Ellis Realty Advisors, Harbor Acquisition Corp., HD Partners Acquisition Corp., JK Acquisition Corp., North American Insurance Leaders Inc. and Oracle Healthcare Corp. Shareholders have rejected 13 deals.

The reasons? They include "recent declines in Ebitda multiples to disaffection over the viability of the acquisitions or outright uncertainty over investment performance," Tenorio wrote, citing industry sources. Whether this is a short-term trend or a long-term change of tack remains to be seen. But good or bad, it seems like a week goes by without some SPAC-related news.

MARCH IN SHORT

• March ended with a bang when a regulatory filing revealed that actor and producer Ashton Kutcher, best-known for "That '70s Show" and MTV's "Punk'd," signed on to William Morris Agency Inc.'s Performance Acquisition Co., a SPAC hoping to raise $500 million on the American Stock Exchange.
• The news came days after Liberty Lane filed March 25 to raise its $350 million vehicle, a plan it abandoned two months later.
• A day earlier, SPAC Marathon Acquisition Corp. agreed to a deal for London's Global Ship Lease Inc. that values the target at $1 billion. The deal closed in August.
  
• And that news came just weeks after New York hedge fund Halcyon Asset Management LLC's $974 million reverse merger with Alternative Asset Management Acquisition Corp., a blank-check company, announced March 13.

SPACs are here to stay, having represented 21% of cash raised in the IPO market in 2007, notes Deal contributor Joseph Bartlett. "The SPACs phenomenon is based on fundamental shifts in the U.S. financial markets, the first being the extended closure (since 2001) of the IPO window in the U.S. for small- and midcap companies."

So what are they, exactly? Tenorio offers a primer:

As blind pools, SPACs don't have an operating business when they raise money in public markets. But they have 18 months from an IPO to complete a deal using about 80% of net assets. Up to 95% of the money raised is held in a third-party trust. Once a SPAC has identified a target, it has to notify shareholders and submit documentation to the SEC. Shareholders can approve it and sell or redeem their shares. If the SPAC fails to successfully make an acquisition, the trust is liquidated and the cash returned.

SPACs are an investment favorite of hedge funds (Amaranth Advisors LLC loved 'em before its spectacular implosion) and, of late, large institutional investors like mutual funds. She writes:

Clearly there's an appetite for SPACs among sponsors whose access to capital may be limited, and among hedge funds that hope to profit from arbitrage opportunities. SPACs have also opened avenues for well-heeled financiers such as Texas private equity pioneer Tom Hicks. In June, Hicks filed to raise $400 million through an IPO for a SPAC. [He wound up raising $552 million in October.] Hedge funds, too, are exploiting these vehicles to take themselves public. GLG Partners LP, one of Europe's largest hedge funds, went public in 2006 through a reverse $3.4 billion takeover of Freedom Acquisitions Holdings Inc., which raised $528 million late in the year.

THE GOOD, THE BAD AND THE FIXES

Generally, SPACs seek to overcome some of the problems involved in the back-door route -- reverse merger into a public shell. It's a two-step process, Sonnenschein Nath & Rosenthal LLP's Bartlett notes: An underwritten IPO followed by an acquisition, effectively a back-door IPO but with built-in safeguards, promising shareholders get a say in choosing the target. He lays out the plusses, particularly when compared to shells, and the minuses:

• It affords retail investors access to many advantages of private equity. While hedge funds typically buy the stock, any average investor can too.
• Investors buy what the SPAC has set out to do; whereas investors in a shell are bystanders.
• And shareholders can vote for a deal or against it and recoup much of their investment, which is far less common with shells.
• All told, a SPAC deal is still a reverse IPO, so if a company is to float successfully, why not use the traditional avenue? The road is shorter, cheaper and less risky. But the window, for now, is closed.
• Further, many deals involve proceeds that fall short of the amount deemed advisable to escape orphanage, a problem that can be countered with rollups.

The remaining issues are tougher, he notes:

• How attractive is a company willing to hang around an average of 218 days for a yes vote that may or may not come? "If it is any good, it should be snapped up quickly by financial and/or strategic investors."
• And a no vote can be catastrophic. "Take a look at the stock price nosedive of targets left at the altar by LBO funds reneging at the last minute." (For more on buyouts gone bust, see a related Dealwatch.)
• Further, once proxy materials go out, anyone can take a peek: competitors as well as customers.
• The 18-month deadline imposes tremendous pressure to cut a deal.

So what are the fixes?

• For SPACs themselves, a team-up with a PE fund may be the best model. (See below.) Potential conflicts of interest surrounding the role of private equity investors in SPACs can also arise, but the shareholders always have the cash-out option.
• Meanwhile the SEC needs to regulate to prevent market manipulation (one SEC rule is that SPACs can't predetermine acquisition targets, a contested point because they're often industry-specific) and the average 218-day delay (also aimed at preventing abuse) from sign to close needs to be shortened.
• Finally, reliable data on post-closing stock performance is essential, he notes, to help investors decide which SPACs and targets will withstand the after market.

GAME PLAN

SPACs are trying to differentiate from the checkered past of blind pools, note William F. Griffin Jr. and Andrew D. Myers, shareholders with Davis, Malm & D'Agostine PC. There are investor protections: the aforementioned shareholder vote on acquisitions and cash-out option; management and frequently underwriters have skin in the game via stock and warrant purchase agreements and deferred fees, respectively; a relatively small amount of offering proceeds goes toward working capital to consummate an acquisition.

So for a private equity investor, there are three ways to go about getting into the SPAC game, notes the SPAC lady herself, Tina Pappas, a managing director with Morgan Joseph:

• Sponsoring a SPAC as an issuer: PE firms that have done so include: MBF Healthcare Partners LP, Steel Partners, LLM Capital Partners LLC, Camden Partners Holdings LLC and GSC Group, while several others are in registration.
• Exits for existing investments: 72 SPACs have more than $12.3 billion in capital looking for acquisitions. She calls a reverse merger one of the most compelling options.
• Co-investing in a SPAC acquisition: In an arrangement where an existing consortium of SPACs just need some more cash to complete a transaction, a firm could come in and perhaps be entitled part of the founders' 20% ownership right and warranty options.

A DIFFERENT ANIMAL

And in a then-recent twist, Tenoiro noted in July:

SPACs have now tapped the Rule 144A [under which an issuer can offer a private sale of securities to qualified institutional buyers, or QIBs, without government oversight] market for privately issued, unregistered securities, which coincidentally is an increasingly popular alternative for private equity firms looking to go public.

It affords more flexibility, she writes, as QIBs are perceived as sophisticated institutional buyers who don't need the same protections as individual or smaller investors. They're not subject to the long SEC review process (drawn out to guard against potential abuses). And how many 144A SPACs there have been is hard to say, given that they're private placements, she writes. "Not surprisingly, sources say investors in these offerings are essentially the same community of hedge funds that invest in SPACs."

And after the IPO come the mergers. McDermott Will & Emery LLP's Joel L. Rubinstein and Dennis J. White weighed in on the nuances in September. Unsurprisingly, competition for the listings is fierce. As The Deal's Donna Block noted Feb. 21: Nasdaq's move to institute new listing standards for special purpose acquisition vehicles is an attempt to capture ASE listings.

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