While market uncertainty and volatility have affected other sectors of Canadian capital markets, the Canadian Special Purpose Acquisition Corporation (SPAC) market has continued to thrive in the second part of 2015. Since April 2015, when Dundee Acquisition Ltd., the first Canadian SPAC, raised C$112-million in its initial public offering (IPO), Canadian SPACs have raised in aggregate over C$1-billlion. The Dundee offering was quickly followed by IPOs of INFOR Acquisition Corp., Alignvest Acquisition Corporation, Acasta Enterprises Inc. and Gibraltar Growth Corporation. More recently, both Avingstone Acquisition Corporation and Kew Media Group Inc. have filed preliminary prospectuses.
A SPAC provides sponsors with an efficient way to access the public markets, a platform to monetize proprietary deal flow and an opportunity for attractive upside returns. At the same time, a SPAC is attractive to investors as it allows the public to co-invest in a private-equity like structure alongside a group of successful sponsors while providing downside protection through the escrowing of subscription proceeds. The structure also provides investors with a leveraged opportunity to participate in the upside through warrants.
WHAT IS A SPAC?
A SPAC, or “blank-check” company, is a publicly-traded holding corporation with no operating business. SPACs are instead marketed on the strength and experience of its management team, board of directors and advisers, highlighting their experience in building companies, mergers and acquisitions and private equity investing. As a result, a highly regarded and qualified group of sponsors and management is an important element of a successful SPAC offering.
Prior to its IPO, a SPAC may not carry on an operating business or have entered into a written or oral binding acquisition agreement with respect to a potential qualifying acquisition. It is also market practice for the SPAC to include a statement in its prospectus to the effect that it has not identified a qualifying acquisition target and that it has not initiated any substantive discussion with any prospective qualifying acquisition target. A SPAC may, but is not required to, focus on a particular industry, sector or geographical area with respect to its qualifying acquisition.
Pursuant to a long-form prospectus, a SPAC will issue “units” to be listed on the Toronto Stock Exchange (TSX). Each unit is comprised of a share and a share purchase warrant. The gross proceeds raised from the public through the IPO are placed into an escrow account until the consummation of a qualifying acquisition or to satisfy redemptions of shares by shareholders in specified circumstances.
Management shares are issued so that the sponsors hold, on a fully diluted basis, between 23–24 per cent of the equity of the SPAC after the IPO. A majority of the management shares are issued for a fraction of a cent per share while the balance is issued with a warrant for C$10 per unit. The proceeds realized from the sale of the management shares will fund the SPAC’s working capital and the expenses of the offering, including the portion of the underwriting commission that isn’t deferred. Typically, the underwriting commission is six per cent of the gross proceeds of the offering with 2.5 per cent paid on closing and 3.5 per cent deferred until completion of the qualifying acquisition.
While a SPAC is only required to raise a minimum of C$30-million pursuant to its IPO to satisfy the TSX requirements, the average size of the five Canadian SPAC IPOs completed to date is C$220-million, with the smallest raise to date being C$104.5-million.
Once its IPO is completed, the SPAC will seek to conclude a qualifying acquisition. If a qualifying acquisition is not completed within the SPAC’s permitted timeline (typically 21 months, which may be extended up to 36 months with shareholder approval), the escrowed funds, plus interest, will be returned to the SPAC’s shareholders. The holders of the management shares (i.e., the founders) do not have access or rights to the escrowed funds.
Investors may also choose to redeem their shares and receive a pro-rata portion of the escrowed funds in connection with either:
- A meeting to approve an extension of the permitted timeline; or
- A meeting to approve the qualifying acquisition
Shareholders may deposit their shares for redemption prior to the meeting, regardless whether they vote for or against the resolution or not at all. Redeeming shareholders retain their warrants.
The initial SPAC offerings in Canada were very similar in structure and had a more generic focus. However, the more recent offerings have become more bespoke with issuers signaling that they intend to focus on a specific sector and geographical area. For example, Gibraltar Growth Corporation will focus its search on North American consumer-facing business opportunities, Avingstone Acquisition Corporation will focus on hospitality and related real estate opportunities in the Americas and Europe, and Kew Media Group Inc. will focus solely on international media production and distribution opportunities or related sectors, with an emphasis on Canada, the U.S. and the U.K. It will be interesting to see if this trend continues and whether the next wave of Canadian SPACs continue to differentiate themselves by having a unique focus or investment thesis or if we see a return of the ‘generalist’ SPAC.
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We have also seen the emergence of advisory boards in the last four SPACs. An advisory board is intended to assist and provide advice to management and the directors of the SPAC in matters relating to sourcing and effecting an attractive qualifying acquisition and growing that platform business following the acquisition. The advisory board is typically made up of experienced advisers and deal makers who subscribe for some of the management shares and therefore put their own money at risk similar to the sponsors. In our view, this should be viewed as a positive development as it provides the SPAC with additional expertise and access to proprietary opportunities that might not otherwise be available to the SPAC.
Gibraltar Growth Corporation was also the first Canadian SPAC that offered a full warrant as part of its IPO unit as in previous offerings each unit was comprised of a half-warrant. This mirrors the U.S. experience where the market exhibits considerably more variety with respect to the structure.
The last three sector-focused SPACs have also signaled an intention to focus their search for a smaller target as its qualifying acquisition and consequently are looking to raise less money as part of their IPOs. For example, Kew Media Group Inc. is seeking to raise C$70-million.
As certain expenses that are covered with the proceeds from the sponsors’ investment in the SPAC remain fixed, the purchase price per management share is slightly higher in Kew Media Group Inc. than in the other offerings. Nevertheless, the founders of Kew Media Group Inc. are expected to hold approximately 24.41 per cent of the voting interest (assuming no exercise of over-allotment option) after the IPO, which would be slightly higher than the previous Canadian SPACs.
We expect further evolution of the Canadian SPAC structure as it matures, including possibly other exemptions to the TSX rules to allow the Canadian SPAC to compete in the global market.
The market is keen to see the first qualifying acquisition by a Canadian SPAC. There are certain structural advantages that make a SPAC an attractive qualifying acquisition partner. As a listed public company, a SPAC offers a target that is private, an alternative to the traditional initial public offering. In addition, market uncertainty as well as costs of legal and underwriting fees, combined with the extensive time and attention required of management to execute an offering may make an IPO unattractive to certain companies. Through the SPAC structure, the financial and opportunity costs of the capital raise have already been absorbed by the SPAC.
In addition, from an operational perspective, the target company may benefit from the managerial expertise and experience of the SPAC’s sponsors, management and directors who may continue with the business following the acquisition. The target may also obtain access to board members and management familiar with the day-to-day operation of a Canadian public company.
In connection with a qualifying acquisition, the SPAC must pre-clear with the TSX the information circular relating to the shareholders’ meeting to approve the qualifying acquisition, which must include prospectus level disclosure of the resulting issuer. In addition, the SPAC must prepare and file a prospectus containing disclosure regarding the SPAC and its proposed qualifying acquisition with Canadian securities regulatory authorities. The resulting issuer must satisfy the TSX original listing requirements.
A qualifying acquisition must have an aggregate fair market value equal to at least 80 per cent of the aggregate amount then on deposit in the SPAC escrow account (but not all of the cash has to be used in the transaction). The SPAC may issue additional securities or structure the transaction with leverage.
IMPROVED SPAC — TSX EXEMPTIONS
The SPAC rules adopted by the TSX in 2008 (but not relied upon until this year) required amendments in order to bring them in line with the evolving U.S. and U.K. SPAC regulatory regimes. As a result, the TSX granted certain exemptions to Dundee Acquisition Ltd., which have since been relied on by all subsequent SPAC issuers.
One TSX exemption permits sponsors to now vote their management shares with respect to a qualifying acquisition. As sponsors of a SPAC hold approximately 23 per cent of the votes, this increases deal certainty for the SPAC, its investors and the target. The TSX also now permits a limit on redemption by any Class A shareholder (together with joint actors) to 15 per cent of the outstanding Class A Shares. This limits activist shareholders, most commonly hedge funds, from accumulating a large block of shares and using the redemption mechanics to affect the qualifying acquisition process. We believe that these changes will be beneficial to the Canadian SPACs as they move towards completing their qualifying acquisitions.