Analysis: SPACs splash the cash to salvage deals as market unravels

Senti Biosciences Holdings

16/03/2022 10:00

By Echo Wang and Anirban Sen
    March 16 (Reuters) - SPACs are turning to costly new tactics
to keep investors from jumping ship as market confidence wanes
in the once red-hot alternative to IPOs.
    Blank-check acquisition firms and the companies they acquire
are having to hand over bigger stakes in the ventures to
investors in some cases, often at big discounts. Deal managers
are also seeking backstop financing from investment firms and
plowing in more of their own cash.
    Less than three months into 2022, 13 mergers involving
special purpose acquisition companies have already fallen
through in the United States, according to data from industry
tracker SPAC Research. That compares with a total of 18 in the
whole of 2021.
    In money terms, almost $9.5 million worth of mergers have
been canned this year, according to Dealogic data.
    The main cause of deals being abandoned, market players say,
is the risk of redemptions - where investors exercise their
right to sell shares in the venture back to the SPAC before the
merger is completed, and for the price they paid for them. 
    "Every transaction is worried about redemptions and every
transaction is trying to figure out how to mitigate it," said
Amir Emami, global co-head of SPAC coverage at RBC Capital
Markets.
    The approaches being employed by SPACs include offering
bonus stock to investors who choose not to redeem shares.
    SPACs are shell companies that raise money in an initial
public offering and put it in a trust for the purpose of merging
with a private company and taking it public. Since investors are
unaware of the target company ahead of the IPO, SPACs often
grant them the right to redeem their initial investment as an
incentive to put their money in the trust.
    Yet significant redemptions undermine the viability of such
deals. At the same time, shares of many companies that went
public during the boom last year have fared poor, leaving some
investors nursing losses and making new SPACs look more risky.
    Indeed, the deals are drying up.
    Only 24 SPAC mergers worth $28.3 billion have been announced
so far this year, versus the 93 deals worth $233 billion in the
first quarter of 2021, according to SPAC Research.
    
    'THE ICING ON THE CAKE'
    Measures such as offering extra stock have been successful
in getting some mergers over the line, yet can come at a heavy
financial cost for the SPAC managers, their target companies and
their original investors, who become diluted.
    "With a high number of SPACs still seeking targets and
the skepticism due to the pullback in the market, it has
become harder to persuade target companies to want to engage
with SPACs and have the related management distraction," said
Atif Azher, partner at law firm Simpson Thacher & Bartlett LLP.
    Bonus stocks, or "bonus pools", for investors who eschew
redemptions, are typically comprised of founder shares or
regular company shares that were reserved for the SPAC managers.
    In January, in the $9.3 billion merger of Cohn Robbins
Holdings Corp  CRHC.N  with lottery operator Allwyn, 6.6 million
shares, worth an estimated $65 million, were offered to
shareholders who elected not to redeem their shares.
 urn:newsml:reuters.com:*:nL1N2U10AI
    "The best way to maximize participation by SPAC shareholders
is to bring to market a highly profitable company with exciting
growth prospects at an attractive valuation. The bonus share
reward is just the icing on the cake," Cohn Robbins co-chairmen
Gary D. Cohn and Clifton S. Robbins told Reuters.
    DPCM Capital Inc  XPOA.N , another SPAC, gave shareholders
about 5 million shares for not redeeming their existing holding
in its $1.2 billion merger with quantum computing company D-wave
Quantum Inc.  urn:newsml:reuters.com:*:nL4N2UJ31F
    SPACs are also raising additional financings, known as
private placements in public equity (PIPEs), to get deals over
the line. About a dozen SPACs have raised additional PIPEs in
recent months to mitigate the risk of redemptions. 
    Some of the fundraising is also done via over-the-counter
equity derivative agreements. If investors who buy the shares
choose not to redeem them before merger completion, the SPAC
agrees to buy back those shares from them at a later date after
the merger is safely in the bag. 
    
    MANAGERS PAY MILLIONS
    Some investment firms have also stepped in recent months to
backstop deals. One of them, Atalaya Capital Management LP,  
offered Yellowstone Acquisition Company up to $70 million for
its $777 million merger with airport hanger manager Sky Harbour
in January, five months after the SPAC deal was announced. 
    In other cases, it is the SPAC investors who step up. 
    Shareholders of SPAC Dynamics Special Purpose Corp  DYNS.O ,
for example, including funds managed by Cathie Wood's ARK
Investment Management, Morgan Stanley and T. Rowe Price,
committed $86 million in non-redemption agreements in December
to help it complete its merger with biotech firm Senti Bio, in a
deal valued at $601 million.  urn:newsml:reuters.com:*:nL4N2T53E2  
    Some SPAC managers have also chosen to invest more of their
own money into deals to make up for redemptions. For example,
the parent company of Trebia Acquisition Corp, a SPAC that
agreed to merge with marketing platform System1 Inc SST.N ,
agreed to provide a $250 million backstop in January 2022 for
the $1.4 billion deal to close.
    "Most of the terminations more recently are more market
driven," said Michael Levitt, partner at law firm Freshfields
Bruckhaus Deringer. 
    "They (SPACs) are concerned that the redemptions are going
to be too high, and the target company is not going to have
enough money to meet its minimum cash condition," he added,
referring to the specified amount a SPAC must hold upon the deal
closing.

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Withdrawn/cancelled SPAC mergers YTD    https://tmsnrt.rs/3tpxATT
Withdrawn/cancelled SPAC mergers YTD    https://tmsnrt.rs/3sGH0vb
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 (Reporting by Anirban Sen in Bengaluru and Echo Wang in New
York; Editing by Greg Roumeliotis and Pravin Char)
 ((Anirban.Sen@thomsonreuters.com; (within U.S.+1 646 223 8780;
outside U.S. +91 80 6182 3583) Twitter: @asenjourno;))