Just when things looked pretty bleak for special purpose acquisition companies, or SPACs, the markets have become bleaker still. Those highly engineered, cash-rich M&A platforms might have offered a timely balm to some of the pains the liquidity crunch brought on last summer. "They're funded vehicles in a world suffering from a severe liquidity crisis," as one hedge fund investor in SPACs puts it.
It hasn't worked out as many had hoped. Plunging capital markets and frozen credit markets have helped throttle many acquisition plays. Two notable exceptions: Dick Heckmann's $625 million purchase of China Water and Drinks Inc. and Hyde Park Acquisition Corp.'s $210 million takeover of Kirtland Capital Partners-backed Essex Crane Rental Corp.
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"The overwhelming sentiment of the markets is negative," says the investor, who requested anonymity.
SPAC deals announced before the financial meltdown in mid-September
have dropped by at least 20% in equity value, which means they would
have had to be restructured. "Overall, the decline of the markets has
affected deals since the markets collapsed in recent weeks," says
Christopher Gastelu, an executive director at UBS who advises on SPACs.
More importantly perhaps, hedge funds -- historically SPACs' biggest
investors because of arbitrage opportunities in a SPAC's
common-and-warrants share structure -- have had to cope with liquidity
problems as redemption calls have accelerated. SPAC shares have fallen
on strong selling pressures, further undermining acquisition bids.
According to Morgan Joseph & Co.'s SPAC index, measuring
the daily performance of all SPAC units, shares slipped 11% between
Sept. 1 and Oct. 30. Many individual SPAC shares have been trading
below cash value.
This year, 14 acquisitions have been approved, by UBS' tally, but the list of canceled mergers has exceeded that.
The turmoil's latest victim: MBF Healthcare Acquisition Corp.'s proposed $420 million merger with Critical Homecare Solutions Holdings Inc. The healthcare transaction, backed by a private equity healthcare specialist, Coral Gables, Fla.-based MBF Healthcare Partners LP, looked like it could have gone either way.
The target, Conshohocken, Pa.-based Critical Homecare, backed by PE firm Kohlberg & Co. LLC,
provides medicine and nutrition to patients. With roughly $200 million
in annual revenue, the company had filed to go public in October 2007
but withdrew in February.
Like other SPAC managers, MBF tried to boost its chances by first
offering to buy some warrants in privately negotiated purchases and
seeking to put more equity into the deal. When financing tightened, the
deal had to be revised numerous times.
Meanwhile, the SPAC's shares sunk in mid-September and haven't
recovered since. In the end, the challenges proved too daunting, and
the merger collapsed Oct. 31 even before it got to a shareholder vote.
By contrast, the irrepressible Heckmann, founder of U.S. Filter
Corp. and boasting a long track record in the water business, sailed
through, drawing longer-term institutional investors willing to hold on
to China Water shares post-merger.
Likewise, Hyde Park's secondary buyout, bolstered by Essex Crane's strong operating results, appeared well thought-out.
Which all goes to show that the SPAC model isn't quite dead -- yet.
--Luisa Beltran contributed to this article.
