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Reuters: 20 December 2006
Former Media Executives Give New Life to 'Blank Check' Corporations
By Yung Kim
NEW YORK, Dec 20 (Reuters) - A pair of apparel makers found a way to the public market this week through processes that sidestep a bookrunner and a roadshow, even as the number of companies going public in the United States surpasses 2005's levels.
Investors have flocked to U.S. initial public offerings since September, sending shares soaring.
But despite lively market conditions, the cost and time involved with public offerings can be prohibitive for a mid-sized company, said attorney David N. Feldman, founder and managing partner of Feldman Weinstein & Smith LLP and author of a book on the subject.
"It used to be that the time to go public was when the gods of the underwriting world determined you worthy," Feldman said. "But the truth is, a company can benefit from being public early on."
On Tuesday, FOH Holdings Inc., parent company of lingerie retailer Frederick's of Hollywood Inc., took part in a reverse merger, while American Apparel agreed to be bought by a special purpose acquisition company (SPAC).
SPACs, also known as blank check companies, are publicly traded entities that raise money with an IPO specifically to buy other companies.
In a reverse merger, which includes most SPAC deals, a smaller company with listed shares acquires a larger private organization.
SPACs and reverse mergers offer a faster way for companies to raise capital than traditional IPOs, said Jay Ritter, professor of finance at the University of Florida.
In 2006, 37 SPACs offered shares raising almost $2.7 billion compared with 29 worth about $2 billion in 2005 and 1 in 2003 worth $24 million, according to data tracker Dealogic.
SPACs and reverse mergers carried negative connotations during the 1980's, but the transactions have gained some acceptance as the need to access the public market outweighs suspicions, Feldman said.
The U.S. Securities and Exchange Commission has looked into SPACs and reverse merger transactions and regulations governing both, said John Heine, an SEC spokesman.
Under SEC regulations, blank-check companies have 18 months to identify a takeover target, with another six months to close the deal. The companies also need consent from 80 percent of their investors to make an acquisition.
If unable to complete a deal, the companies must return the money raised minus fees and expenses, which can range from 8 percent to 15 percent of the total.
Of 13 blank-check IPOs in 2004, 12 acquired or merged with other companies.
"We are starting to see those SPACs come up to their 18- month time periods, so we are starting to see more announced acquisitions," said Floyd I. Wittlin, a partner with law firm Bingham McCutchen LLP.
In March, for example, Services Acquisition Corp. International (SVI.A: Quote, Profile, Research), which floated shares in 2005, announced a merger with U.S. restaurant chain Jamba Juice in a deal worth about $265 million.
On Tuesday, American Apparel agreed to be bought by Endeavor Acquisition Corp. (EDA.A: Quote, Profile, Research), a blank check company that went public in December 2005, raising about $130 million.
The American Apparel deal is worth about $244 million and will help the garment maker expand, the companies said.
Also on Tuesday, Frederick's of Hollywood Inc. agreed to merge with Movie Star Inc. (MSI.A: Quote, Profile, Research), which allows the lingerie retailer to become a publicly traded holding company called Frederick's of Hollywood Group Inc. Movie Star supplies women's sleepwear, robes and underwear to retailers such as Federated Department Stores Inc. (FD.N: Quote, Profile, Research) and Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research)
Frederick's emerged from bankruptcy in 2003 and is undergoing an "accelerated expansion plan," its CEO Linda LoRe said. "This was much easier and faster and we understood it as an opportunity to take advantage of each others strengths," LoRe said.
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