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Reuters: 6 November, 2007
By Eve Oppenheim
More Special Purpose Acquisition Companies (SPAC) since 2003
Special Purpose Acquisition Companies (SPAC) have been increasing in size and number of registrations since 2003.
A SPAC company is formed by a management team in order to make an acquisition of an operating business within 18 to 24 months of the IPO. SPAC’s sell units to investors made up of a share of common stock and one or two warrants. Management buys 20% of the units at a heavily discounted price and the underwriter usually takes a 10% share of the amount raised. Eighty percent of the investors must approve the proposed acquisition or the money is returned to shareholders.
They were originally known as ‘blank check companies’, though registration requirement changes have been made in order to protect investors from fraud.
This type of equity financing is used when the IPO market is slow and small companies need funding. The investor benefits from dual holdings of common stock and warrants and the right to refuse the acquisition target and retrieve their investment.
A SPAC investment comes with costs and risk, however. Management takes a 20% share of the company and must compete for acquisition targets with private equity firms and other investors. There is no guarantee that a successful acquisition with result. SPAC shares and warrants may also trade in an illiquid market.
Hedge funds have invested in SPAC’s, reportedly including Amaranth, and more recently SAC Capital, which bought 9% of Endeavor Acquisition (EDA).
SPAC’s list on the American Stock Exchange, trade over the counter, and also have been listed on the AIM exchange in the UK.
SPAC’s raise funds from investors through IPOs of which 90-99% are put into escrow. The funds are released when an acquisition is made.
Companies recently acquired by SPAC’s include GLG Partners (a hedge fund bought by Freedom Acquisition Holdings); Navios (a shipping concern bought by International Shipping Enterprises); Jamba Juice (acquired by Services Acquisition) and American Apparel (bought by Endeavor).
Typically, a SPAC raises between $60 to $80M (10M units selling at $6-8 per unit) but recent SPAC launches have raised more than $100M.
Activist investor, Nelson Peltz registered a $750M SPAC called Trian Acquisition I Corporation on November 1st. On October10, real estate developer William Mack filed a $300M SPAC called NRDC Acquisition Corporation, and James Dondero (founder of Highland Capital Management) filed a $250M SPAC called HCM Acquisition Company. Other recently formed SPAC’s include Sports Properties Acquisition Corporation, a $200M SPAC launched by Hank Aaron, and Hicks Acquisition Company, a $480M SPAC from Thomas Hicks, founder of Hicks, Muse, Tate & Furst.
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