Continuity Podcast - SPACs: A Trending Way To Go Public

Mathieu:

Hi, I'm Mathieu Rompré.

Yula:

And I'm Yula Economopoulos, and this is the Blakes Continuity podcast.

Mathieu:

Today, we will be discussing the most popular four-letter acronym on Bay Street and in all the M&A world.

Yula:

That's right. SPACs, or special purpose acquisition corporations, are quite a trendy topic these days.

Mathieu:

And to go beyond the trend, we are joined by Norbert Knutel and Jill Davis, lawyers in the Capital Markets group at Blakes.

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Mathieu:

Jill, I understand that SPACs have become a very popular investment vehicle and have raised record amounts in 2020 and into 2021. Can you tell us a little bit more about them?

Jill:

Of course. So, SPACs are an alternative way for companies to go public and start selling their shares on the public market over the TSX or another stock exchange, and it basically flips the traditional initial public offering on its head. So, normally, when a company would go public, they would do all the preparations with an investment bank to become a public company, and then the investment bank would go out and market their shares, and they would need to go and find investors to buy those shares. With a SPAC, we start with the group of investors. So, the investors come in first and gather up a pool of money, and this is why you'll sometimes hear SPACs called a "blind pool" or a "blank cheque" company. They know they want to invest in a company, but they haven't found it yet. So, they go public with this pool of money, and then they go looking for a company to combine with their publicly listed SPAC, and that's the way that the company becomes a public company.

Mathieu:

Why do you think investors and companies might prefer SPACs over traditional initial public offerings?

Jill:

Well, institutional investors really like them because they invest at the IPO of the SPAC, and they get both shares and warrants. The shares are redeemable, so at the time of the qualifying acquisition, or the de-SPACing, if they don't like the look of the company that they're acquiring, they could redeem out their investment and get their investment back. But then they're left with this warrant which trades separately from the shares, and so they have some additional options there, where they could trade that and make a little money, or they could hold onto it, and following the qualifying acquisition, it's exercisable for shares in the resulting company.

For SPAC founders, they're a great option because they typically put out about 20 per cent of the capital, and if they have a successful qualifying acquisition, they can make a very good return on sort of a low at-risk capital. And then companies themselves like them because, unlike a traditional IPO where they put up a lot of time and money preparing for the offering, and then they're left to the whims of the market and how successfully the investment bankers can market their securities, in this SPAC world, those investors come to them with the money, and they just need to negotiate the commercial terms.

Mathieu:

Now, are there any new structures that you're seeing in recent deals either in Canada or the U.S.?

Jill:

Yeah, a lot of the new creative structures we're seeing are really trying to solve the problem of the de-SPACing process. So, that's where a lot of the difficulty and risk comes in with a SPAC. It's pretty straightforward to form it, but getting through that qualifying acquisition can have challenges. So, if a number of your investors redeem, you could be left with not as much capital as you expected to then complete your acquisition.

So, we have been seeing some new structures to deal with this. One in Canada we saw was a SPAC that offered stapled units, so the warrant and shares were attached together, and they didn't separate until the time of the qualifying acquisition. This meant if an investor chose to redeem their units, they didn't get to keep the warrant.

Another interesting one we saw in the U.S., which was sort of trying to achieve the same thing as a stapled unit but gave even more flexibility, is a third of the warrant was attached to the initial unit and was sort of the traditional SPAC way where you got a separate warrant and a separate share trading, but the other two-thirds were held back until the time of the qualifying acquisition. For all the investors who stayed in and didn't redeem their shares, they got to split what was left over of those two-thirds, including the two-thirds that were left over from the other shareholders who left.

And lastly, another structure we're seeing is the use of forward purchase agreements. So, this is where you get some investors who are typically connected with the SPAC founder who agree, before they even know what the qualifying acquisition might be, that they are going to put up X-dollars' worth of money no matter what. And so that gives certainty that, even if you have a large redemption when you're doing your acquisition, the founders know they've got at least a certain amount of money and that gives a little more certainty that that acquisition is going to get done.

Yula:

Norbert, what's changed recently that has made SPACs more popular, including as a vehicle for companies to go public?

Norbert:

I think the biggest difference in the last 12 to 18 months has been just the understanding of what a SPAC is and an understanding of the advantages that a SPAC brings to a table. While maybe a couple years ago a target as well as the markets might have looked negatively at a SPAC and a SPAC structure, I think now people understand that there are specific advantages that targets can take advantage of and can benefit from while doing a transaction with a SPAC.

The major, I guess, advantage of doing a transaction with a SPAC from a target's perspective is the ability to lock in a price (the value of your target company) early in the process as compared to a typical IPO.
The second advantage is just to speed to the market. Doing a transaction with a SPAC is much quicker than doing an IPO, especially in the U.S. These are technically the two biggest reasons that people look to do a transaction with a SPAC.

The third one is the bench strength that some SPACs bring to the table. When we look at private companies and them going public, sometimes there's a lack of public company experience, sometimes there is lack of management strength, so what certain SPACs can bring to a table for a target for a private business is that some of the founders, the sponsor group, would consider staying around and being part of the business going forward. And that's another big advantage when target companies look to go public and consider also different SPACs is what is the make-up of the sponsor group, the founders and how can they help that private company succeed following the qualifying transaction.

Yula:

What advice would you give sponsor groups considering a SPAC initial public offering and companies considering going public by way of a SPAC?

Norbert:

There are specific features on a SPAC structure that need to be considered in order to make a decision whether a transaction with a SPAC or a SPAC IPO are the right routes for those groups. And some of those features that we always take a deeper dive on is, for example, the redemptions features, dilutions, the permitted timeline, as well as, in the last probably 12 months, the use of a pipe, and when you're looking at a transaction, when should that conversation be had with the different parties involved.

The second part of our conversation with SPACs founders and sponsors who are looking to raise money is just to understand the process itself of a SPAC, which includes first raising the money and then the de-SPAC itself. And we like to usually spend a bit of time talking to SPAC founders and sponsors about the second step, having them understand the process and the steps that will have to be undertaken in order for the SPAC to complete that transaction. And related to that is the work that needs to be done and the team that needs to be in place in order to complete that second part. So, having that conversation early is important. It sets expectations for the SPAC founders but also puts people in place at the SPAC that are needed in order to complete that second step of the SPAC lifecycle.

With respect to the targets, I think the second part of our conversation usually is to not only understand the SPAC structure, but to understand the different SPACs that you're speaking to because not every SPAC is exactly the same.

Just by one way of an example, some sponsor groups are interested in doing a transaction and then remaining part of that business, while others typically are more repeat SPAC founders, which means that they would do a de-SPAC but would not really have an intention to stay around as members of the board or management post-qualifying transaction.

Yula:

So, looking forward, what do you think the future holds for SPACs in the sector? Are there any risks that investors or others should be aware of?

Norbert:

I'm very excited about what the future holds for SPACs and what the sector can do in the next few years. I think the high quality of teams that have come to the market are just an indication of the type of transactions that SPACs are going to do in the next couple of years. As mentioned, the reason why there are SPACs is to bring high-quality private companies to the capital markets. And that's what excites us, is the type of businesses, the type of targets that SPACs are looking at.

Here in Canada, an exciting part of it is that Canadian SPACs, which were once viewed as cannabis SPACs, meaning that a lot of the qualifying transactions were being done in the cannabis space, are also looking at different sectors, different targets, and that's the exciting part in the sector.
For example, Bespoke Capital Acquisition Corp., which is a Canadian SPAC that raised over C$300-million on its IPO, is in the process of completing its qualifying transaction, and it's acquiring a wine business in Napa and Sonoma.

Similar, Canaccord SPAC just completed an acquisition of Taga, which is a company that makes electrical recreational vehicles. So, the differences and the type of businesses that are being brought to the market, that's the exciting story for SPACs.

Mathieu:

Norbert and Jill, thank you for sharing these practical and helpful insights.
Listeners, if you'd like more information on this or any other topic, please visit blakes.com.

Yula:

Until next time, stay well and stay safe.