Tuna fish and spaghetti with marinara sauce? Perhaps not the first thing we think of when presented with tuna or tomato sauce, but it works. The U.S. markets have hundreds of recently formed SPACs hunting for acquisition targets. These SPACs have raised over $100 billion, which they must deploy in the next 18 to 24 months. Distressed businesses may just be the tuna to the SPACs’ marinara sauce (or vice versa).
A SPAC (special purpose acquisition company) raises funds in the public markets to acquire an unidentified business following the completion of the SPAC’s IPO. The SPAC sponsor is entitled to about 20% of the SPAC shares plus warrants. The SPAC generally has 18 to 24 months to complete an acquisition following its IPO; otherwise, it must return the funds to investors.
Under the right circumstances, (di)stressed businesses may be viable targets for SPACs both outside of a bankruptcy proceeding and even when the target is in bankruptcy. Below is a roadmap of items for SPAC buyers and (di)stressed sellers to consider and address in a SPAC acquisition.
A Road Map for SPAC Buyers and Sellers
SPACs Require More Time to Close and Therefore May Be Expected to Pay a Premium. As compared with bids by other acquirers, who may be in a position to close a transaction speedily, the closing of a SPAC acquisition can take at least four months from the time the parties enter into the acquisition (or merger) documents.
The SPAC will need to make the necessary filings with the SEC in order to obtain SEC approval for the transaction. Approval of the transaction by the SPAC’s shareholders will also be required. To make its bid attractive, the SPAC may be required to pay a premium for the business.
Need for a PIPE. To mitigate against the risk that shareholders redeem their funds in the SPAC before the SPAC acquisition closes, a SPAC will typically obtain committed financing from investors in a PIPE (Private Investment in Public Equity). The PIPE commitments are usually provided when the acquisition agreement is signed by the SPAC and the target.
SPACs may also consider using forward purchase agreements and non-redemption agreements with certain of their shareholders to achieve this same goal. Because distressed sales will generally be subject to higher and better offers, the SPAC will want to build in flexibility when lining up commitments from its PIPE investors.
SPAC’s Ability to Provide Funding to Target Pre-Closing. In a distressed scenario, the target company may have exhausted its liquidity and require fresh capital urgently. In addition, the SPAC will likely be required to post a 10% deposit either as part of its bid in a bankruptcy sale or upon signing of the acquisition documents.
However, the funds raised by the SPAC in its IPO are available to the SPAC only at closing of the transaction with the target. Therefore, the SPAC sponsor or an affiliate of the SPAC sponsor may need to step in to help raise the necessary funds or provide the funds directly.
SPAC’s SEC Filings to Include Target’s Financial Statements. The SPAC’s filings with the SEC will need to include two or three years of PCAOB-compliant audited financial statements of the target. The parties will need to ensure that these audited financial statements are ready when the SPAC needs them for filing.
SPAC Shareholder Vote Is Usually a Formality. Whereas distressed sellers abhor any element of conditionality in the distressed sale process, and may perceive the requirement of a SPAC shareholder vote to be a risk, this requirement has actually proven to be a mere formality in virtually all cases. The SPAC sponsor typically owns 20% of the outstanding shares and will commit to support the transaction.
SPAC Should Expect the Consideration Payable to Be Cash. Distressed deals are generally done for cash. However, In a non-distressed deal, the merger consideration payable by a SPAC is typically the SPAC’s stock with only a small amount of or no cash.
Because the SPAC’s ability to use its stock is likely to be limited in a distressed context, the SPAC might prefer other alternatives where it can use its stock as a form of currency. Of course, if the distressed transaction is interesting to the market, it may enable the SPAC to raise additional funds.
Target’s Management Team. The SPAC sponsor should persuade the target’s management team to meet with the SPAC’s investors (or prospective investors) both to attract new shareholders to the SPAC and also to convince existing shareholders not to redeem their shares. These meetings are an important part of the process of introducing the target company to the investor community.
If the SPAC, the target and their advisers are open about addressing these issues early on in the distressed sale process, the SPAC and the target may find that they are the spaghetti and marinara sauce for each other’s tuna fish.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Michael Levitt is a New York-based partner in Freshfields’ global transactions group, where he focuses on financing and capital markets, including SPACs; cross-border M&A transactions; public and private debt and equity securities offerings and related capital markets; and acquisition finance and private equity transactions.
Madlyn Primoff is a partner in the restructuring & insolvency group at Freshfields in New York, where she specializes in helping companies, lending groups, financial institutions and private credit investors overcome the complexities around the Chapter 11 bankruptcy process, out-of-court restructurings, and related litigation matters.