French SPAC: The keys to building European champions

In December 2020, 2MX Organic, the second special purpose acquisition company (SPAC) to be registered, launched, and listed in France on Euronext Paris, announced the success of its EUR 300 million offering addressed to qualified investors in France and abroad, almost five years after the listing of the first French SPAC Mediawan¹. While only three European SPAC IPOs have been completed on European stock exchanges in 2020 (out of a total of eight Europe-based SPACs)², trend seems to be changing in 2021.

Since 2MX Organic’s listing, more Europe-based SPACs have completed their IPOs on European markets, including the listing of Lakestar SPAC I SE on the Frankfurt Stock Exchange and the listing on Euronext Amster­dam of ESG Core Investments, European FinTech IPO Company 1 B.V. (EFIC 1) and Pegasus Acquisition Company Europe B.V. (launched by Tikehau Capital), the largest European SPAC to date with its EUR 500 million private placement.

In addition, Paris-based venture capital firm 360 Capital Partners on the one hand, and Europe’s biggest hotel group Accor on the other hand respectively announced that they will launch the first French Tech SPAC with 360 Disruptech EU and the first French “corporate SPAC” with Accor Acquisition Company.

As the “SPAC mania” cools down in the United States (248 SPACs were launched for a total amount of USD 83.4 billion in 2020 and already 325 SPACs raised a total of USD 103.6 billion to date in 2021³), Europe is just heating up, yet at a much more reasonable path. However, while the competition, if any, should be focused on U.S. stock exchanges vs. European stock exchanges, there seems to be a newly created competitive bidding among European venues with Amsterdam becoming the most popular one, partly because of the financial services industry slowly regrouping around the Dutch capital city after the Brexit, up to the point that even the French regulator felt the need to publicly confirm its practical experience with these transactions.

European jurisdictions, and especially France, have all necessary ingredients for the success of SPACs, and as the French regulated recently said: “The French legal framework and regulatory requirements enable the listing of SPACs to be welcome in Paris, all the while providing appropriate investor protection.”⁴

1. An operating company in the making

A SPAC is a commercial company whose purpose is to become an operating company from its de-SPACing, i.e., from the date of completion of the initial business combination for which it has been incorporated, which shall occur within 24 months from the date of the SPAC’s listing.

A SPAC is not a fund, neither from a legal standpoint – it is a commercial company – nor from a regulatory standpoint since the SPAC does not meet the criteria of alternative investment funds (AIF) within the meaning of the provisions of the French Monetary and Financial Code and the AIFM Directive⁵.

From its listing date, the SPAC will look for targets, select one or more of them, and carry out the initial business combination to effect its de-SPACing. The completion of that determining transaction will shape the success of the SPAC.

2. A project led by a team

The project presented by the SPAC is led by a team comprising the founders (or sponsors) of the SPAC, who are behind the project, and the members of the board of directors or supervisory board, depending on the governance of the SPAC.

The profile and track record of the founders, as well as their knowledge of the sector, are guarantees of the reliability of the project: the legitimacy of the SPAC is based on the latter. The founders shall also convince the investors of the capacity of the team to carry out the initial business combination in the targeted sector within the given time period. Indeed, if the initial business combination is not carried out within the 24-month time period following its listing, the SPAC will be liquidated.

In this regard, the success of the first two French SPAC IPOs, i.e., Mediawan and 2MX Organic, lies for the most part in the complementarity of the profiles of their founders. That does not mean that the success of a SPAC is based on the renown of the latter, but rather on the track record of the founders in the targeted sector and on their capacity as deal makers.

Because recent SPACs in Europe have been launched by high-profile founders (French billionaire Xavier Niel with Matthieu Pigasse and Moez-Alexandre Zouari, or investment company Tikehau Capital with co-sponsors former UniCredit CEO Jean-Pierre Mustier and Bernard Arnault’s holding Financière Agache), it may discourage other potential sponsors from getting involved. But successful entrepreneurs, especially the ones having an industry expertise, have the perfect profile to co-sponsor an industry-focused SPAC together with other successful entrepreneurs and/or investment companies or funds.

Contrary to a classic IPO, for which the history and development project of the company are highlighted, the SPAC is a gamble on the future, started from a blank page. The quality of the project shall thus be flawless to convince investors, which are more and more called on regarding various SPAC projects.

The project relates to both a determined sector and the possibility to form a group through external growth transactions. The targeted sector shall have strong growth potential, while at the same time enabling for a consolidation of its assets and/or players. The SPAC is a vehicle making it possible, in shorter time, to form a European leader capable of competing with American, Chinese, or Indian groups.

3. At-risk founders benefiting from a strong leverage

Until the de-SPACing, the risk is borne by the founders only, whose initial investment will finance the IPO, operating, target search and initial business combination costs. The compensation for this risk-taking is the benefit for the founders of an immediate leverage (“promote”) on the day of the IPO. By investing about 2.5% of the funds to be raised by the SPAC during its IPO, they will hold 20% of the share capital and voting rights of said SPAC.

Co-founders of a SPAC do not need to invest to the same extent, provided the global at-risk investment made by all founders is about 2.5% of the funds held in escrow and the promote is shared between them.

Shares held by the founders, including preferred shares and warrants giving right to ordinary shares, are not listed; in case of completion of the initial business combination, their preferred shares will be converted into listed ordinary shares fungible with the shares held by the investors.

4. Protected investors

The term “blank check company”, which is often used when referring to a SPAC, shall not mislead the public: far from writing a blank check to the founders, investors in a SPAC are in fact more protected than inves­tors in a classic IPO. Indeed, capital raised from investors during the SPAC IPO is held in a trust account or a secured deposit account and may only be released for purposes of the completion of the initial business combination or, failing that, the liquidation of the SPAC.

In the absence of a de-SPACing within the given time period, the SPAC is liquidated, and all investors are reimbursed at the IPO offering price, before the founders. In case of a de-SPACing, the investors not wishing to support the proposed initial business combination may ask for the buyback of their shares by the SPAC at the IPO offering price.

The investors of a SPAC only take a real risk from the de-SPACing, if they support the proposed initial business combination and wish to remain shareholders of the SPAC. As from this date, they bear the same risk as any shareholder of a listed company and may still leave the company, thanks to the liquidity resulting from the listing, at any time after the completion of the IBC by selling their shares on the market or over the counter.

5. A structuring M&A transaction

The purpose of a SPAC is to carry out an initial business combination, which may concern a single target company or asset, or several targets and assets at the same time, in order to become an operating company. To that purpose, the SPAC team shall conduct a narrow screening of the assets and companies of the sector when defining its project, without yet identifying a precise target. Discussions with the target may start only after the SPAC IPO, in compliance with applicable rules on insider information – the SPAC being a listed company.

The initial business combination may take any possible forms (share deal, asset deal, contribution, merger, etc.). Depending on the SPAC structure and governance, the initial business combination shall be subject to (1) the approval of the special meeting of the investors voting by a 2/3 majority, based on SPAC Mediawan’s structure, or (2) the only approval of the board of directors voting by a qualified majority, including the vote of its independent members, and shall give rise to an information of the investors through the publication of a dedicated notice, based on SPAC 2MX Organic’s structure. In any cases, if the initial business combination takes the form of a merger or any other transaction form requiring a decision from the shareholders, the initial business combination shall be subject to the approval of all SPAC shareholders, keeping in mind that the founders will hold 20% of the voting rights at shareholders’ meetings.

In addition to the funds raised at the time of the IPO which will be used to pay the initial business combination price (minus the amount to be paid to shareholders requesting the redemption of their shares), the SPAC may seek customary M&A financing sources (bank financing, etc.), complete a private investment in public equity (PIPE) with cornerstone investors, request its main founder to subscribe new shares under a forward purchase commitment, if any, raise debt or additional funds on the market, or pay all or part of the acquisition price with new shares.

With around 400 U.S. SPACs currently searching for targets and starting to look at the Old Continent, French SPACs, and more generally European SPACs, could use a competitive advantage from a foreign direct investment screening standpoint when bidding on a European target company conducting its business in a strategic business sector, especially in a Covid-19 or post-Covid-19 context which led European Union and EU Member States to strengthen their control of foreign investments.