After a promising year 2020, the market of Special Purpose Acquisition Companies (SPACs) seems to be on the rise.
Born in the United States of America, SPACs, companies without operational activity whose shares are listed on the stock exchange with the aim to acquiring or merging with a company operating in a predefined sector of activity sector, are very successful. Since the 1990s, three generations of SPACs have been created in the US with the view to make them compatible with the evolution of the securities law. As a result of this success, in 2020, 268 initial public offerings of SPACs have been completed in the United States, raising more than 80 billions USD.
1. In Europe and in particular in France, although the SPAC phenomenon is new, market actors show an extensive interest in this innovative structure and its particularities
In France, three SPACs have so far been created. The first one is the company “Mediawan”, registered in December 2015 and listed in April 2016, founded by Xavier Niel, Matthieu Pigasse and Antoine Capton in order to create a leading television production company in Europe. The second one is the company “2MX Organic”, registered in September 2020 and listed in December 2020, again founded by Xavier Niel and Matthieu Pigasse, as well as Moez-Alexandre Zouari. This SPAC is dedicated to the production and distribution of sustainable goods.
More recently,Tikehau Capital, the global alternative asset management group, announced last April that its first SPAC Pegasus Europe (“Pegasus”), has successfully raised EUR 500² million in a private placement. Pegasus becomes the largest European SPAC to date and will start trading on Euronext Amsterdam today. Tikehau Capital launched Pegasus back in February, alongside co-sponsors Financière Agache, Jean Pierre Mustier and Diego De Giorgi. Mustier and De Giorgi will act as operating partners. This initiative is part of Tikehau Capital’s ongoing effort to build-out its global product offering relying on its strong global network and footprint. Pegasus, and SPACs in general, are a natural extension of Tikehau Capital’s business, providing companies with new ways to access capital and allowing investors to have access to differentiated investment vehicles.
The particularity of SPACs is that they are listed on the professional segment of the regulated market of Euronext Paris. Each one of these initial public offerings (IPOs) has been made through the admission to trading and direct listing of preferred shares and warrants (representing for each SPAC an amount of 250 million EUR, increased to 300 million EUR with the full exercise of the extension clause).
Once the SPAC is listed, the founders (or sponsors) determine one or more acquisition or merger projects. Each project is then submitted to the shareholders’ vote at the shareholders, general meeting in order to protect the investors. Depending on the result of the vote, three situations can be distinguished:
Approval of the project submitted
In case of approval of the project according to the pre-fixed majority rules, the SPAC can then proceed with the contemplated transaction. Nevertheless, the shareholders having rejected the project benefit from an option to sell their shares. In this perspective, investors in SPACs benefit from a certain protection. They also have the opportunity to conserve the warrants they hold if any, which will allow them to gain profit in the potential good performance of the combined entity to which they were opposed.
The rejection of the project submitted
In case of rejection of the project, the SPAC will have to give up the contemplated project. The SPAC can nevertheless consider a new project.
The absence of acquisition or merger within the time limit
If the SPAC does not complete acquisitions within two years following its listing, either because the SPAC does not obtain the required majority for the project(s) submitted or either because the projects have not been completed prior to the deadline, the SPAC will be liquidated and delisted. It may be possible for the sponsors to request an extension of the time limit to the shareholders’ meeting subject to offering investors a redemption of their shares. The funds initially raised will then be repaid to the investors on a prorata basis of their investments. The sponsors will bear the costs related in particular to the creation and the listing of the SPAC, beyond the reputational impact.
2. Beyond their peculiar functioning, SPACs offer significant advantages in favour of the various participants to the transaction, which justifies the interest they generate
On the sponsors’ side
First of all, as the placement is made by qualified investors, most often in the form of an international private placement, there is no public offering, which shortens the IPO timetable and lowers the risks of the transaction.
Concerning the documentation, the process is reduced thanks to a listing on the professional segment. In particular, as this is an admission prospectus, there is no translation of the summary into French, no requirement of a letter of completion (lettre de fin de travaux) from auditors (commissaires aux comptes), no certificate from investment service providers. The Autorité des marchés financiers (AMF) has not issued any new specific regulations for these companies as SPACs are fungible with existing regulations, as disclosed in its publication dated 15 April 2021.
From a business point of view, SPACs offer the opportunity to raise a significant amount of capital on the financial market in order to carry out the contemplated acquisition or a merger. This type of transaction can be very lucrative for sponsors who will in particular hold a significant stake in the SPAC and benefit from pre-determined governance rights, for a relatively small initial investment. The return on investment will also be faster than for other alternatives available.
On the target companies’ side
The main advantage for target companies is that they can be automatically listed as a result of being acquired by SPACs. They can access the financial markets in an accelerated way and avoid the traditional IPO process, and at a reduced cost in comparison to a traditional IPO.
The valuation of the target company will also be more certain in comparison to an IPO, where the valuation is subject to market demand.
Beyond the protection they benefit from as mentioned above, investors will also be able to benefit from the security and the liquidity of the listing market with interesting perspectives of capital gains.
3. Nevertheless, there are some constraints to be taken into consideration for this type of structure
On the sponsors’ side
As mentioned above, a SPAC is a specialised acquisition vehicle which raises capital on the stock market in order to complete one or more acquisitions. These acquisitions will have to be finalized within a limited period of approximately 24 months following the listing of the SPAC, and the investment will have to represent a minimum of 75–80% of the capital raised. Moreover, it should be noted that once the SPAC has been listed on the stock exchange, the transfer of shares will in principle only be possible between qualified investors.
For more efficiency and attractiveness, several challenges must be faced by sponsors who want to create their own SPAC. The first challenge is to ensure that the investment and the team of founders is as attractive as possible to attract potential French or international investors. For example, the SPAC Pegasus Europe, listed on Euronext Amsterdam, is the result of a combination between investment professionals and banking personalities: the asset management group Tikehau Capital, the financial firm Agache (holding company controlled by the Arnault Group), Jean-Pierre Mustier, the former CEO of Unicredit, and the investment banker Diego De Giorgi.
It is also important to be able to attract investors that are able and willing to lock a certain amount of funds during a period of two years. For example, Mediawan shares were only reserved to institutional investors able to invest a minimum of 1 million EUR.
Finally, for sponsors, one of the main considerations will be the governance of the company prior to and after the acquisition or the merger as well as the mechanism of profit sharing to the founders.
On the target companies’ side
For target companies, the negotiation of transactional agreements and related documents can be long. Moreover, the shareholding of sponsors and their political rights are in principle significant.
Finally, in the event of an acquisition by a SPAC created in the United States, the target company will have to comply with the US stock market requirements.
The future of SPACs is promising, and with the growing enthusiasm for these new investment vehicles, competition is brewing between the European financial markets. Many SPACs are destinated to be created in Europe, and the US SPACs will increasingly turn to the European markets in order to acquire target companies. The Dutch market is currently the most active in this respect with six SPACs to date, including the SPACs ESG Core Investments and SPAC Pegasus Europe recently launched.
Although the emergence of French SPACs is slow in comparison of our neighboring countries and the United States, they are likely to become increasingly important. It should be noted that the multiplication of SPACs across the Atlantic is starting to be accompanied by investigations from regulatory authority and litigations from investors as activists in particular.