Special Purpose Acquisition Company (SPAC) – Definition
Special Purpose Acquisition Companies (SPACs) are generally used for third-party company acquisitions, and are a convenient way of raising finance for that purpose.
In order to list a SPAC on the London Stock Exchange, the step by step process begins with an Initial Public Offering (IPO).
This will give sponsors the opportunity to attract investment from those seeking to generate returns via an acquisition or another asset.
The IPO process
To begin the process, units of share (cash shell) and one/two warrants undergo an Initial Public Offering (IPO).
This would almost always see that 100% of gross proceeds are held in trust, and with SPACs in particular, the sponsor subscribes for founder securities and purchases additional warrants.
With regards to the cash shells, sponsors will purchase founder shares and these will represent the ‘first loss’ capital in the case of no acquisition.
A portion of the underwriting fee is paid upon closing with the balance deferred.
Common practice dictates that an over-allotment option is usually in favour of underwriter.
In order to source their target company, the sponsor will use their industry knowledge and make use of their business network.
It’s normal practice for the completion of an acquisition to take an average fixed period of 24 months. However, longer timelines can prove to be attractive investments in weaker markets.
Merger and Acquisition – M&A
At this stage the company will raise debt as well as using proceeds and issuing equity to ensure that an acquisition of a particular target can be funded.
A Special Purpose Acquisition Company will need shareholder approval, which will often mean undertaking a roadshow for investors and shareholders.
The cash shells need board approval only.
In order to become a normal operating company, it has to ‘de-SPAC.’ This involves paying a deferred underwriting fee and having the business operating under a public listing in order that it can create value for sponsors and investors.
Should the business combination not be executed within the agreed timeline, then liquidation occurs.
In that eventuality, proceeds are returned to shareholders minus any expenses.