What is a Special Purpose Acquisition Company (SPAC)?
A special purpose acquisition company (SPAC) is a company with no commercial operations, formed strictly to raise capital through an IPO for the purpose of acquiring an existing company, although that company is unknown at the time of the IPO. Essentially, they provide an alternative path to an IPO. This is usually through an experienced management team and/or a private equity firm (together the “Sponsors”), with two years from the IPO date of the SPAC to find and approve a company to merge with, or face liquidation.
SPACs have been around for decades, but used to be viewed as a last resort for a company to IPO. However, they have recently been growing in popularity. This is driven by tier 1 sponsors now launching SPACs (Apollo, Pershing Square, Ribbit…) and high-quality/high profile companies (Multiplan, Nikola Motors, Open Lending, Virgin Galactic…) merging with them. Additionally, both investors and potential targets are getting more and more comfortable with how the economics of a SPAC work and see their advantages, particularly when volatility or uncertainty is high. In 2019 SPACs raised a record amount of IPO money and today there are over 120 SPACs with over US$30 billion of capital on the hunt for a target. In addition, over 20 companies have gone public through SPACs so far this year, accounting for over 40% (versus 20% historically) of the IPO volume in the US.
Why the popularity?
The IPO process is long and the outcome is uncertain and current unease amongst investors adds further complications. Advantages that SPACs can provide include:
- Speed and certainty, though a faster timeline and a fixed price (negotiated between the company and the SPAC team).
- The ability to market the company’s projections with public investors at the moment of the merger, which is particularly relevant for high-growth companies, especially in a post-COVID world where performance may not reflect the company’s potential.
- The potential for greater proceeds than a company could achieve through an IPO.
- Added value from their management team/sponsor, which will remain as a shareholder after the merger.
However, there are big ifs to these benefits:
- The dilution effect for company owners and investors through the sponsor’s “promote” (20% of the SPAC proceeds) and warrant structure.
- An inherent conflict of interest in the value of payback for sponsors is tied to the price paid for a merger.
- The two points above can affect the capacity of a SPAC to fairly value a target. However, as pricing is the result of a negotiation between the target and the sponsors the outcome will be known quickly and there are ways to bridge the gap.
- SPAC IPO investors have the right to redeem their investment and traditionally a significant portion do so (keeping the warrant for free). This puts the Company at risk of not getting the cash amount raised by the SPAC. (However, this is being addressed by (i) the SPAC having the commitment of its PE sponsor to replace investors leaving, (ii) the attractive prospects of the target – which can be marketed with numbers – and (iii) fundamental investors increasingly investing in SPACs).
When thinking about going public, the IPO is still a great way to go, but SPACs offer an alternative. To ensure a successful listing, you need a great company that will succeed in the public markets, independently of how it gets there.
A solution for Mexican corporates looking to raise capital and IPO?
Today, there are five outstanding LatAm-focused SPACs. Two of them have identified their potential target, the other three are still looking and have raised US$500m of capital. Two are focused on Brazil and one is pan-regional. Needless to say, SPACs are still nascent in our region. However, a SPAC’s attributes are particularly relevant for markets like ours where execution risks are high and market windows tend to close rapidly (and remain so for a long time). As such SPACs offer an alternative worth considering for Mexican companies willing and ready to be listed, but not willing to go through the uncertainties of an IPO.
For Mexico-based companies to successfully IPO through a SPAC they need to have:
- A solid plan for the use of proceeds (even partial monetization of current shareholders).
- An appealing future trajectory (that can be marketed).
- Aligned corporate governance
- Sponsors (PE and executives) that are active and experienced in our region to structure and launch the SPACs. These sponsors can leverage the experience of their peers in the US and take advantage of public investors’ appetite.
Examples in Mexico
- The first SPAC in Mexico we are aware of was issued in August 2017 by Vista Oil & Gas S.A.B. de C.V. (Vista Oil & Gas), sponsored by Riverstone. Half of the portfolio was listed on the Mexican Stock Exchange, while the remaining 50% was listed on international markets in accordance with the applicable regulations. The offering raised US$650mn and was priced at P180/s. This vehicle was launched with the intention of raising funds to acquire one or more companies engaged in the energy sector in Mexico, Colombia, Argentina and Brazil. Please see http://www.vistaoilandgas.com for more information. The ADR (VIIST) has traded down from about US$5.46 on September 9th, 2019, reaching a high of US$8.40 on December 19th, 2019, and is currently trading at US$2.52/ADR. The local share is trading at P$60/s, a 67% decline in peso terms.
- In March 2018, Promecap Acquisition Company, S.A.B. de C.V. (Promecap) listed the second SPAC on the Mexican Stock Exchange, also at P180/s. In this case, 79.02% of the portfolio was listed in Mexico, while the remaining 20.98% was listed on international markets, in accordance with the applicable regulations. The purpose of this vehicle was to invest resources in family-owned companies, private equity and public companies engaged in fast-growing sectors. On March 14th, 2020 they announced the US$200 million acquisition of Acosta Verde (mid-sized shopping centers, mainly in the north of Mexico) and its listing on the BMV. (Acosta Verde had previously had to abort its IPO). The stock has not traded, and remains at about P180/s, even though shopping centers have been hard hit by the pandemic. https://www.promecapac.com/investors and https://www.grupoav.com/public/index.php
- DD3 was a special purpose acquisition company formed for the purpose of effecting a merger, acquisition, or similar business combination and was sponsored by DD3 Mex Acquisition Corp., an affiliate of DD3 Capital Partners, run by former Goldman partner Martin Werner. On March 13th, 2020, Betterware de Mexico S.A. de C.V. (Betterware) announced that it had completed its business combination with DD3 Acquisition Corp. (“DD3”) and became the first Mexican company to be directly listed on the NASDAQ Stock Market. Unlike Vista and Promecap, Betterware has been a huge success. The stock has traded from $10/s to the current US$18/s, and reached a high of US$19.63 earlier this month, driven by very strong growth numbers in 2Q20. https://ri.betterware.com.mx. Betterware is about to list on BIVA according to press reports. The success of Betterware may encourage other Mexico-focused SPACs to launch, and more companies to consider the SPAC route instead of IPO.
In this challenging macro environment, SPACs, backed by sponsors with regional credibility, will provide public investors with the comfort of a trusted intermediary, which could be a key to re-opening access to equity markets for Mexican companies. Furthermore, readiness is everything, and for the SPAC, public readiness initiatives need to happen as soon as the target is identified. On the other hand, companies hoping to become SPAC targets need to be ready now, rather than beginning to think about it when they receive the first call from a SPAC leadership team. Preparation, both to acquire and be acquired, will go a long way to ensure the success of the transaction.
If you require further information or advice, please contact the Miranda IR team and we would be happy to help.
This note draws on BTG Pactual’s informative and extremely useful guide to SPACs in LatAm.
S&P Dow Jones Indices Announces Preliminary Results of the Index Review for the S&P / BMV IPC
On September 4th, 2020, S&P Dow Jones Indices (“S&P DJI”) announced the preliminary results of the semi-annual index review for the S&P / BMV IPC, the index of the 35 most liquid companies in the Mexican market. Grupo Cementos de Chihuahua S.A.B. de C.V. will return to the index, having dropped out in April, and Telesites S.A.B. de C.V. will also form part of the index, replacing Banco Santander Mexico B and Regional, S.A. de C.V. This is significant as companies forming part of the S&P / BMV IPC often experience an increased demand and benefit from an increase in share price, whilst dropping out of the index usually has the opposite effect. Looking at data from July 31st, Regional drops out as it did not reach the minimum market value of MXN 30 million in daily traded volume, averaged monthly over the last 3 and 6 months.
If any changes are needed after the distribution of the preliminary results, they will be updated and communicated in the final result announcement that will be sent on Friday, September 11th, 2020. These changes will be effective prior to the start of operations on Monday, September 21st, 2020.