spac and de-spac transactions overview
TRANSCRIPT
SPAC and De-SPAC TransactionsOverview
Contents
SPAC IPOs I
De-SPAC Transactions II
2
I. SPAC Basics
What is a SPAC?
4
• Special purpose acquisition company formed and taken public solely for the purpose of effecting a business combination (a “De-SPAC transaction”)
• Typically formed as a DE corporation or Cayman Islands Company
• Formed by a “Sponsor” (usually a financial sponsor or industry veterans) which has demonstrated success in identifying, acquiring and operating growing businesses
• Deadline for De-SPAC transaction specified in charter; usually 18-24months (sometimes with extension if a LOI has been entered into bydeadline), subject to a maximum of 36 months (per exchange listingrules)
Who is involved in a SPAC?
5
• Sponsor
• Underwriters
• Trustee
• Issuer’s counsel
• Underwriters’ counsel
• The SEC
• IPO investors
• Auditors
• Financial statement consultants
• Forward Purchasers
Typical SPAC Capital Structure: Founder Shares / “Promote”
6
• At or near the time of formation of the SPAC (pre-IPO), Sponsor purchases common stock of the SPAC for a nominal amount (usually $25k); these shares are referred to as “Founder Shares” or the “promote”
• Usually, at the time of the De-SPAC transaction, the Founder Shares convert into public shares on a one-for-one basis
• Number of founder shares typically equals 25% of the number of shares being offered in the IPO (inclusive of green shoe), resulting in 20% post-IPO ownership
• Terms often include forfeiture/gross-up mechanics to achieve the desired promote percentage, e.g. if the green shoe is not fully exercised or if additional equity financing is obtained prior to or in connection with the De-SPAC transaction
• In some cases, only Founder Shares vote in director elections prior to a De-SPAC transaction (and in most cases, a SPAC will not hold a shareholder meeting to elect directors until after the De-SPAC transaction)
Typical SPAC Capital Structure: Public Shares
7
• In the IPO, company offers “Units” consisting of one share of common stock and a fraction of a warrant (see next slide) for $10/Unit
• Public Shares and Founder Shares are typically classified into separate classes (e.g. “Class A” vs. “Class B” common stock) but vote together as a single class and are identical except for certain redemption and anti-dilution protections (and in some cases Public Shares do not vote in director elections prior to a De-SPAC transaction)
Typical SPAC Capital Structure: Warrants
8
• Issued to the Sponsor as well as the public, generally on the same terms (see next slide)
• Usually exercisable after the later of (i) 30 days after SPAC completes an acquisition and (ii) 12 month anniversary of IPO closing
• Anti-dilution adjustments for splits/dividends, and sometimes for issuance of equity below a price threshold in connection with the De-SPAC transaction
Typical SPAC Capital Structure: Warrants (cont.)
9
Public Warrants
• A fraction of a warrant (1/2 or 1/3) is included in each Unit sold in the IPO
• Detachable from Public Shares and trade separately after IPO
• Usually subject to redemption
– if stock trades above a certain price (e.g. $18) for a period of time
– Recent deals have a “make-whole” redemption once stock trades above $10 per share
• Exercise typically cash settled
Sponsor Warrants
• Sold to Sponsor to fund the SPAC’s working capital and pre-acquisition expenses
• Purchase price = amount of upfront underwriting discount (2% of gross IPO proceeds) plus estimated offering expenses and post-IPO working capital (often estimated at $2 million)
• Purchase price represents the Sponsor’s “at risk capital”
• Exercise is net share settled
SPAC Capital Structure: Some Recent Innovations
10
Recently, some Sponsors have innovated from the “typical” capital structure to differentiate their SPACs and claim improved alignment between the Sponsor and the public (and/or De-SPAC target) shareholders
• SPACs without warrants; Sponsor’s “at risk capital” Class A shares purchased in a private placement concurrently with IPO
– Thoma Bravo Advantage (Sponsor: Thoma Bravo / Closing Date: January 20, 2021/ Amount raised: $900 million)
• SPACs with a 10% promote
– Ajax I (Sponsor: Daniel Och / Closing Date: October 30, 2021 / Amount raised: $750 million)
• SPACs that seek to mimic carried interest economics for sponsor:
– CBRE Acquisition Holdings, Inc. (Sponsor: CBRE / Closing Date December 15, 2020/ Amount raised: $402 million)
– Health Assurance Acquisition Corp (Sponsor: General Catalyst / Closing Date November 17, 2020 / Amount raised $500 million)
SPAC Capital Structure: Some Recent Innovations (cont.)
11
• SPACs with bespoke structures
– Pershing Square Tontine Holdings (Sponsor: Pershing Square / Closing Date: July 22, 2020 / Amount Raised: $4 billion)
◦ No Founder Shares; Sponsor’s “at risk capital” = $65 million of Sponsor Warrants
◦ Increased hurdle for Sponsor Warrants (20% vs. 15% for Public Warrants) and Sponsor agreed not to exercise warrants for 3 years after the De-SPAC closing
◦ Public Units include one share and 1/9 of a warrant (vs. 1/3); anadditional 2/9 of a warrant will be distributed pro rata followingredemptions in connection with a De-SPAC transaction
◦ Minimum $1 billion forward commitment (can be increased by Sponsorup to $3 billion)
Use of IPO Proceeds
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Trust Account
• IPO proceeds deposited into trust to be held as cash or invested in government securities
• Funds released only to fund (i) the De-SPAC transaction, (ii) redemption of common stock (as discussed below), (iii) payment of the deferred underwriting commission, (iv) repayment of loans by Sponsor, and (v) De-SPAC transaction expenses and post-closing working capital
• Trust agreement typically permits withdrawals of interest to fund franchise/income taxes and sometimes permits withdrawal of a limited amount of interest (subject to a cap, e.g. $500,000) for working capital
Underwriting Commission
• Typically an aggregate commission of 5.5%, with a portion (e.g. 2.0%) paid atIPO closing and the remainder deposited in trust account and only paid uponthe closing of a De-SPAC transaction
Use of IPO Proceeds (cont.)
13
Redemption
• SPAC is required to offer to redeem Public Shares for a pro rata portion of the funds held in the trust account in connection with a De-SPAC transaction
• NYSE/Nasdaq listing rules only require redemption offer to be made to holders who vote against the De-SPAC transaction, but SPAC charters usually require offer to be made to everyone
• Redemption requirement does not apply to Founder Shares or warrants
• Redemption also required at outside date for consummating a De-SPAC transaction (or in connection with any vote to extend the outside date) or upon a liquidation/winding down
Forward Commitment
• Sponsor sometimes commits to backstop amounts needed to consummate the De-SPAC transaction (e.g. due to redemptions)
• Commitment may contemplate purchase of Units, Founder Warrants, or Class A common stock (sometimes at a discount from public offering price)
• Sometimes styled as an option of the forward purchaser (or subject to approval of the De-SPAC transaction)
Illustrative SPAC IPO Timeline
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6
• Engage SPAC counsel
• Start on tax structuring
• Formation of SPAC and sponsor vehicles, start on S-1
• GTCR decides oninternal team forSPAC
• Refine marketingstory for investordeck andS-1
• Start process to open bank accounts and prepare financial statements with financial statement consultant
• Investor deck prep continues
• S-1 drafting continues
• Financial statement preparation continues
• Auditor starts audit procedures
• Investor deck prep continues
• S-1 drafting continues
• Audit completed
• S-1 updated withaudited financialstatements
• Investor presentation finalized
• Draft S-1 submitted confidentially to SEC
• Drafting of SPAC underlying documents continues during SEC review
• Stock exchange listing application continues
• GTCR confirms independent board directors and advisors
• Select lead left underwriter and underwriter’s counsel
• Starts work on Testing the Waters (TTW) investor presentation
• Engage auditor, financial statement consultant, financial printer
• Choose stock exchange
Week 7 Week 8 Week 9 Week 10 Week 11 Week 12
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• TTW investor meetings
• S-1 Amendment publicly filed
• Clear SEC comments
• Launch IPO
• Price IPO after 2 day marketing period
• Close IPO• SEC comment letter received
SPAC IPO – SEC Registration
15
• Registered on Form S-1 as with any other IPO
• Will usually qualify as an emerging growth company under Section 2(a)(19) of33 Act
– Initial draft registration statement normally submitted for confidentialnonpublic review under Section 6(e) of 33 Act
• Disclosure
– Focus on structure, De-SPAC strategy, management background andexperience and conflicts of interest
– Initial capital contribution is the main transaction/activity reflected in theSPAC’s audited financial statements to be included in the IPO registrationstatement
– Must state that it has not identified a target for a De-SPAC transaction (will often state that SPAC will not consider any target already identified by the Sponsor)
Securities Act Considerations
16
• SPACs are designed to fall outside the Rule 419 regime for “blank check” companies
– SPAC must file 8-K with audited balance sheet showing assets of at least$5M as soon as practicable after IPO closing (must be updated for exercise of over-allotment option)
• SPACs and their successors are deemed “shell companies” under Rule 405
– Ineligible issuer – may not use free writing prospectuses
– Rule 144 not available until 12 months from filing of Super 8-K (containing comparable information to Form 10)
– Not WKSI eligible for 3 years from closing of initial business combination
– May not register securities on Form S-8 until 60 days after closing of initial business combination
– Certain communication safe harbors not available
Certain Key Documents
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Charter
• Sets forth terms of common stock, use of trust account funds, redemption rights, parameters for De-SPAC transaction (e.g. minimum size), and waiver of corporate opportunities
Insider Letter Agreement
• Sponsor, D&Os and other insiders agree to certain covenants, e.g. (i) agreement to vote for any De-SPAC transaction presented to shareholders (and/or extension of outside date), (ii) waiver of redemption rights, (iii) lock-up on Founder Shares, (iv) forfeiture of a number of Founder Shares if green shoe not exercised in full, (v) indemnification for certain claims against trust account
Pre-IPO Promissory Note
• Loan from Sponsor to cover SEC/FINRA/exchange fees, accounting fees, transfer agent fees, etc.
Registration Rights Agreement
• Covers Founder Shares and private placement warrants
Administrative Services Agreement
• Provision of back-office and admin services by Sponsor in exchange for monthly fee
Stock Exchange Requirements for SPAC IPO
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Nasdaq Capital Market NYSE
Minimum Round Lot (100 share) Holders
300 (at least 50% must hold unrestricted securities with a market value of at least $2,500)
300
Number of Publicly Held Shares
1,000,000 (excluding restricted securities)
1,100,000
Minimum IPO Price per Share
$4.00 $4.00
Minimum Market Value of Listed Securities
$50,000,000 $100,000,000
Minimum Market Value ofPublicly Held Shares uponInitial Listing
$15,000,000 (excluding restricted securities)
$80,000,000
Board Composition Majority Independent Directors Majority Independent Directors
Audit Committee Required, minimum 3 members, all independent
Required, minimum 3 members, all independent
Compensation Committee Required, minimum 2 members, both independent
Required, no size requirement, all independent
Nominating/Corporate Governance Committee
Not required, nominations can be made by a majority of the independent directors
Required, no size requirement, all members to be independent
Code of Ethics/Conduct Required Required (must be posted on company website)
II. De-SPAC Transactions
Who is involved in a De-SPAC?
20
• Sponsor
• Target
• Banks
• PIPE investors
• Counsel to SPAC
• Counsel to Target
• Auditors
• SEC
• Target and SPAC stockholders
Why sell to a SPAC vs. effecting an IPO?
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• Higher Price. SPAC may offer higher price if the Sponsor believes traditional IPO process would not enable investors to properly value the target
• Earlier Price Certainty. Valuation negotiated at time of signing (though subject to renegotiation if the merger is not approved by SHs or there are too many redemptions) rather than at end of SEC registered IPO process
• Management Projections in Marketing. Marketing materials, including proxy statement/prospectus, typically contains management projections, unlike in traditional IPO where projections are rarely provided to investors
• Structuring Flexibility. More flexibility to negotiate transaction structure, allocation of post-closing risk/upside, and governance rights
• Sponsor strength. Sponsor and its directors and officers offer prospective targets valuable skills and relationships
Disadvantages of Selling to a SPAC
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• Dilution. Equity diluted by Founder Shares, warrants, and any discount provided in connection with forward commitment or PIPEs
• Limited Funds for Purchase Price. The SPAC has a fixed amount of funds in trust to pay the purchase price and if there are redemptions, those funds would be reduced (absent PIPE or other commitment to fill the funding gap)
• Significant Rollover Required. Compared to a sale of a company in an M&A transaction, the seller is often required to retain a significant equity stake in the De-SPAC company
• High Costs. Costs can exceed IPO costs (no roadshow and reduced underwriting commission, but significant structuring costs in arranging and consummating merger and backstop financing); costs exceed M&A transaction because full disclosure document (comparable to IPO prospectus) is required
Disadvantages of Selling to a SPAC (cont.)
23
• Uncertainty. Risk of redemptions / adverse shareholder vote create execution risk; no meaningful recourse for a breach
• Timeline. Can be slightly faster than an IPO, but will take at least 1-2 months to negotiate merger and line up backstop financing, and then at least 2-4 months for proxy process
• Conflict of Interest between SPAC Sponsor and Public Shareholders. Because the SPAC Sponsor normally holds Founder shares (purchased for nominal investment) and warrants, and may have an interest in consummating a deal to develop a track record, the SPAC Sponsor will have interests that differ to some extent from the interests of Public Shareholders and target shareholders
• Capital Structure Issues. The SPAC often has warrants which creates a more complicated capital structure
• Co-Investment Issues. Depending on pro forma ownership among sellers of target, SPAC Sponsor and PIPE investors, may need to negotiate lock-ups, registration rights, governance, tag-along, drag-along, ROFR/ROFO provisions
De-SPAC Transactions: Basic Requirements
24
• Transaction Size. Stock exchange rules require that target FMV is at least 80% of the value of the trust account (typically target will be at least 4x the size of the SPAC in order to mitigate the dilutive impact of the Founder Shares)
• Shareholder Approval. Almost always required due to structure (charter amendment, election of directors, stock exchange “20% rule”, etc.)
– Note: Assuming Sponsor votes the Founder Shares in favor of the deal, only 37.5% of the Public Shares are required to achieve a majority vote
• Redemption Offer. Discussed above; offer generally made in connection with SH vote
• Timing. Outside date set forth in the charter (usually 18-24 months). Extension requires redemption offer.
Key Terms / Issues – Available Capital
25
• Possibility of redemptions creates risk that SPAC will not have sufficient cash tofund De-SPAC purchase price, expenses, and/or post-closing working capital
• Solutions: minimum cash closing condition; obtain backstop financing atsigning (if possible) and include closing condition relating to the fundingthereof
• Backstop financing alternatives:
– Execute on forward purchase commitment delivered in connection withSPAC IPO (if available)
– Sale of new common shares to third party investors concurrently with De-SPAC closing (i.e. a PIPE)
◦ Customary for investors to receive an OID on investment (consistent with forward purchase commitment discount)
◦ Investors will seek registration rights, at a minimum
– Other PIPE financing (preferred or convertible preferred / notes)
– Debt financing
Other Key Terms / Issues
26
Closing Certainty
• No reverse break fee (not a permitted use of trust account funds)
• Solutions – at signing, obtain voting support commitments from substantial number of SPAC shareholders (as practicable); backstop financing (if there is a minimum cash closing condition)
– Note: Some SPAC investors may seek arbitrage opportunities and hold-up value; pre-closing amendments are common
Selling Shareholder Rights
• Target shareholders may seek governance/liquidity rights as with a normal sponsor-backed IPO
• Governance – director nomination rights, access/info rights, limited veto rights
• Liquidity – demand registration rights
Negotiation of Sponsor Economics / Forfeiture of Founder Shares
• Target may negotiate for a recut of the Sponsor’s economics (note: Sponsor may additionally seek PIPE financing placement fees, etc.)
• Target may seek implementation of return thresholds for conversion or forfeiture of a portion of the Founder Shares to mitigate dilution
SEC Filings Required in a De-SPAC Transaction
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Proxy Statement (or Joint Proxy / S-4 Registration Statement)
• Filed in connection with SH vote and, if applicable, issuance of any stock consideration
• Disclosure is comparable to a merger proxy combined with Form S-1 (can also be compared to an S-4 without the ability to incorporate by reference)
– Required to include 2-3 years of audited financial statements (audited to PCAOB standard), plus unaudited interim financial statements
– Will need to comply with pro forma financial statement requirements for recent/pending target M&A transactions
• SEC review was historically lighter than in a typical IPO, but the Staff has indicated they are focusing on reviewing proxy statements for de-SPACs more closely (especially with increased frequency of SPAC transactions)
Super 8-K
• Filed within 4 business days of De-SPAC closing
• Must contain all Form 10 information (Reg. S-K compliant business section, MD&A, etc., together with audited financial statements)
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SPAC Market Trends
Recent SPAC Market Activity and Trends – SPAC IPOs
Source: Deal Point Data and PrivateRaise
SPAC IPOs Once on Fire Have Come to a Halt
► ~415 SPACs filed IPOs
in 2021 seeking
~$110 billion of
proceeds
► A dramatic slowdown
of SPAC IPOs started
in April 2021
SPAC IPOs BY YEAR
$75
$110
34
$9
46
$10
59
$12
248
416
2017 2018 2019
Gross Proceeds Sought ($B)
2020 2021
Deal Count
SPAC IPOs IN 2021 BY MONTH
125
$23$32
$42
8091
11
$3
22
$4
20
$3
33
$7
32
$6
Jan
2021
Feb
2021
Mar
2021
Apr
2021
May
2021
Jun
2021
SPAC Count
Jul
2021
Aug
2021
Gross Proceeds ($B)
K I R K LAN D & E L L I S 1
Recent SPAC Market Activity – SPAC M&A
SPAC M&ARemains Strong Given the Recent Drop Off
► Nearly three times as
many announced deals
2020 than all of 2019
► Over 500% increase in
aggregate 2020 deal
value relative to all of
2019
► Median deal value of
~$1.49B in 3-month
period endingAugust
2021, which is up from
~$632M during the
same period last year
Source: Deal Point Data and PrivateRaise
DEAL COUNT AND VALUE ($B)
$157
$509
18
$18
17
$13
35
$31
98
210
2017 2019 20212018
Deal Value ($B)
2020
Deal Count
DEAL COUNT BY MONTH
1 2 2 1
74 3 1
4 63 3 1 1 3
0 1
10 11 914 15 13
1917
43
33
1923
2629
20
Jan Feb Mar Apr
Deal Count 2019
May Jun Jul
Deal Count 2020
Aug Sep Oct Nov Dec
Deal Count 2021
K I R K LAN D & E L L I S 2
SPAC M&A Update
S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L
August 2021
SPAC M&A update
C O N F I D E N T I A L
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C O N F I D E N T I A L
SPAC M&A market – highly active but pricing pressure is reducing proceeds at close
◼ SPAC stock price performance post announcement of most de-SPAC mergers has been challenged, triggering material
redemptions – however, 98% of announced SPAC mergers are still closing
◼ 77% of the 138 announced SPAC mergers yet to close are trading below $10 per share, the price at which the PIPE and merger
are priced, and only 4% are trading above $11 per share, the breakpoint where SPAC investors enjoy a 10% return and have
little incentive to redeem
◼ Recent average redemption rate of SPAC trust capital is around 50% and rising
◼ PIPE investors are honoring subscription agreements and funding their commitments
◼ Post-closing, SPAC stock prices are tending to fall further giving investors little incentive to commit to PIPEs
◼ Stock prices for SPAC mergers closed in 2021 are DOWN 11% (mean) and 19% (median) from announcement
◼ IPOs in 2021 are UP 12% (mean) and 5% (median) from pricing
◼ PIPE sizes have decreased about 40% in Q3 from H1: now $206mm (mean) and $121mm (median)
◼ Nevertheless, because there are so many SPACs that need to find a deal, SPAC merger activity remains high
◼ 404 SPACs with $126bn of trust capital looking for merger targets
◼ Current average of 5 mergers announced per week
◼ 138 announced mergers with ~$35bn of PIPE commitments in mid-August vs. 152 and $40bn+ at the beginning of July
◼ With higher risk of poor aftermarket price performance and smaller PIPEs, there are fewer circumstances than earlier in the year
where merging with a SPAC is more compelling than raising capital through either an IPO, EPP or strategic sale
◼ Nevertheless, for some companies, particularly those in early stage where use of projections and need for a public currency are
vital, a SPAC merger continues to be the most attractive alternative
◼ J.P. Morgan is a market leader in SPAC M&A and PIPE placement and can provide comprehensive advice to clients comparing
a SPAC merger to an IPO, a cross-over EPP, or a strategic sale
Source: Company filings, Dealogic, FactSet, J.P. Morgan SPAC database
1
C O N F I D E N T I A L
SPAC M&A update – Key takeaways
2
Source: Company filings, Dealogic, FactSet, J.P. Morgan SPAC database; data as of 08/06/2021
Current
trading
performance
◼ Approximately 138 currently announced and pending de-SPAC transactions
◼ 77% trading below $10.00 per share
◼ 19% trading between $10.00 and $11.00 per share
◼ Only 4% trading above $11.00 per share
◼ 2020 closed transactions currently trading +21.3% (mean) / -1.9% (median) from announcement
(48 deals)
◼ 2021 closed transactions currently trading -10.7% (mean) / -18.6% (median)
from announcement (92 deals)
◼ Compares to 237 US IPOs YTD, currently trading +12% (mean) / +5% (median) from pricing
PIPE market
◼ Estimated $35bn of illiquid PIPE commitments associated with pending transactions;
◼ Down from ~$40bn in early July
◼ $5.2bn (and rising) committed to deals with shareholder votes scheduled for the remainder of
August
◼ PIPE sizes have decreased from $328mm (mean) / $200mm (median) in 1H 2021 to
$206mm (mean) / $121mm (median) in 3Q to date
◼ Estimated 50-60 PIPE deals currently in market (14 active J.P. Morgan deals) with
very large pipeline set to launch in September
◼ Buyers’ market – Public market discounts quoted at 30-40% to peers vs. indicative IPO
discounts of 15-20%
C O N F I D E N T I A L
SPAC M&A update – Key takeaways (cont’d)
3
Source: Company filings, Dealogic, FactSet, J.P. Morgan SPAC database; data as of 08/06/2021
Redemptions
/ closings
◼ Redemptions continue to tick upward: 42.6% (mean) / 52.1% (median) redemptions in
July/August vs. 19.4% (mean) / 10.3% (median) in May/June
◼ 1 standard deviation range from 9.8% to 75.3% for last 30 closed transactions (since 7/1)
◼ Minimum cash condition waived by seller in 8 deals in 2021
◼ 3 transactions revised valuation post-announcement, and 2 transactions terminated in 2021
◼ To date, no pending de-SPACs have failed to obtain shareholder vote in 2020-2021
SPACs
searching for
deals
◼ 404 SPACs searching representing $126bn of equity capital and $600bn+ of
“buying power” (assuming 5x multiple on SPAC capital)
◼ Number of SPACs searching has remained relatively constant since March
◼ Average of 4-5 SPAC IPOs priced per week in Q2 and Q3 to date
◼ Average of 5 announced M&A transactions per week in Q2 and Q3 to date
◼ SPAC IPO market remains challenging as well, with Sponsors being asked to bring up
to 50%+ of capital to support new deals
◼ $96bn of SPAC IPOs in Q1; $13bn in Q2; and $6bn in Q3 to date
J.P. Morgan
market
position
◼ JPM has achieved #1 SPAC M&A league table ranking for 1H 2021, with 33
transactions YTD and $103bn of deal value
◼ Extremely narrow margin among Top 3 advisors (JPM/Citi/GS) with deal count ranging from 33
to 34 transactions and total volume from $104-121bn