Special purpose acquisition companies (SPACs) are enjoying rapidly growing popularity as more and more companies choose to go public via SPACs. SPACs have long flourished in the United States, and now they are also going public in Germany and throughout Europe. But how can an initial public offering (IPO) via SPAC be achieved?
A SPAC is a hybrid of IPO, private equity, mergers and acquisitions, and financing. The so-called sponsors set up a SPAC as an investment vehicle, which – without conducting any operating business itself – collects capital from investors during an IPO in order to acquire a promising company later. Since the SPAC is still an empty shell at the time of the IPO, the disclosure obligations in the context of the prospectus disclosure (a decisive time factor in a traditional IPO) usually must be fulfilled within a short period of time. The proceeds raised in the IPO are then deposited into an escrow account while the sponsors search for a company to acquire within 12 to 24 months.
1. The de-SPACing
The process by which the empty shell company becomes a publicly traded company with an operative business is called de-SPACing. Once a target company has been identified for acquisition, the de-SPACing process begins with the signing of a letter of intent that typically includes exclusivity agreements. In parallel with due diligence and preparations for the IPO, a business combination agreement (BCA) is negotiated, along with additional agreements. After the parties sign the BCA, the transaction is marketed to the SPAC shareholders and new investors, often in combination with a pre-signing private investment in private equity financing and market sounding. SPAC investors must agree to the proposed transaction and can still decide whether to drop out or exercise the existing option right in exchange for paying in capital.
From the perspective of the target company, the takeover by a SPAC is initially an M&A transaction, which allows greater predictability of proceeds and terms compared to a traditional IPO, because of the ability to negotiate the BCA. Through a merger with the listed SPAC, at the end of the process the target company is listed on the stock exchange, and both the legacy shareholders and the SPAC investors hold listed shares.
The hype around SPACs is fuelled by the fact that the competitive US capital market has enabled active sponsors to collect astonishingly high investor commitments. Courted stock market candidates have been able to take advantage of SPACs’ competition for target companies and resulting high valuations.
2. Relevance and attractiveness of SPACs in Europe
Stock market candidates are now regularly examining the possibility of going public via a de-SPAC transaction. At the same time, more European SPACs are targeting European destinations. Nevertheless, conducting SPACs in the US appears attractive for European targets for two main reasons:
- The US capital market offers larger volumes and higher valuations.
- The actual IPO and the entire handling is organized by experienced US investors and their advisors. This makes the process more like an M&A transaction and less like an IPO for the target company. In addition, the sponsors handle the marketing. However, one should not completely ignore the fact that the sponsors regularly receive a 20% share of the capital raised, which can lead to high hidden costs.
3. Concrete design options
Despite all the advantages offered by a de-SPAC transaction, the structural implementation for a German operating company is not trivial, especially if production and management are to remain in Germany after the transaction. The goal is to create a structure that is compatible with the requirements of the US capital market.
As a first step, the target company establishes a subsidiary (usually Dutch), which later becomes TopCo. Unlike German shares, Dutch shares can be traded directly on a US stock exchange. TopCo in turn establishes a subsidiary, the so-called MergerSub, in the SPAC’s jurisdiction. A Cayman SPAC is often used for a transaction with a European connection. The MergerSub is merged with the SPAC based in the Cayman Islands. In return, the shareholders of the Cayman SPAC receive shares in TopCo. TopCo then takes over the stock exchange listing of the SPAC. Thereafter, the shareholders of the target company contribute all shares in the target company to TopCo in exchange for the issuance of new shares in TopCo (thereby transforming TopCo into a Dutch NV). As a result, the target company is listed on a US stock exchange as a subsidiary of the Dutch NV.
From the perspective of the target company and its shareholders, a de-SPAC transaction requires the ability to plan, implement and maintain such a multinational structure in practice. This is only possible with good planning, a great deal of discipline and the right advisors for capital market, legal and tax. All of these factors should be taken into account when considering which route to the capital market is the right one.