The rise of SPACs (Special Purpose Acquisition Company) in the US capital market has taken investors and companies by storm and opening up massive opportunities for M&A and exits of PE-backed companies across the world.
Although SPACs have existed for a long time, they have recently gained more acceptance and the momentum is expected to continue.
In 2020, there were close to 250 SPACs, raising more than $83 billion, with an average size of $334 million. In the 1st 3 months of 2021, the capital raised was US$ 90 Billion.
Examples of companies that went public in 2020 through SPACs include Draft Kings and Virgin Atlantic. Top industries historically have included media, technology, manufacturing, retail, and services, but we are seeing activity across the industry.
There has been a purposeful frenzy around SPAC-routed listings in the US. Sponsors are setting up and planning SPACs and the availability of substantial liquidity in the market is enabling the platform to consolidate high-quality assets globally. In India too, the frenzy has started to catch up with the companies and investors.
The concept: How SPACs work
A SPAC (Special Purpose Acquisition Company) is public and popularly known as a “blank check shell company”. The SPAC has a defined window of time, typically 18 to 24 months, to acquire a private company and take the private company public.
SPACs have no existing business operations or even stated targets for acquisition. They exist to facilitate a business combination with an operating company. In the event, the SPAC is not able to complete the acquisition within the defined time period, the capital raised is returned back to the investors with interest.
SPACs are priced as a “unit” which includes a “common share” and a “warrant”, either a fraction or whole. Most transactions require additional funds which often come in the form of the SPAC raising additional capital through “PIPE” (private investment in a public entity) transaction.
A SPAC transaction can be completed in a few months, much more quickly than a traditional IPO, avoiding exposure to market fluctuation. Since the SPACs go public as a shell company, required disclosures are easier than those for an IPO, because a pool of money doesn't have any business operations to describe.
In 2021, Renewpower got merged into a US SPAC for US$ 8 Billion, making it the largest SPAC deal from India in recent times.
SPAC structures are not new to India and, in the past, there have been examples of India focused SPAC entities such as Trans-India Acquisition, Constellation Alpha Capital, Phoenix India Acquisition, etc.
In 2015, Silver Eagle Acquisition, a SPAC acquired 30% stake in Videocon d2h for approximately USD 200 million. In 2016, Yatra Online Inc, the parent company of Yatra India, listed on NASDAQ, by way of a reverse-merger with another US-based SPAC, Terrapin 3 Acquisition.
Preparing for SPAC listing
While SPAC offers an alternative and quicker route for Indian corporates for listing in the US, the extent of preparation is similar to what a normal US listing would entail.
A well thought out strategy is therefore crucial for Indian corporates to craft out and some of the key areas of focus are covered below:
1: Capital raise planning including the amount of capital to be raised, both primary and secondary transaction.
2: Early engagement with current stakeholders like shareholders, PE/VC investors, key management, key customers etc. around overseas listing and setting out the roadmap, strategy, and timelines.
3: Selection and appointment of investment bankers, accounting firm, legal firm, investor relations, PR and branding
4: Identification of the SPAC to be merged with. Quality of sponsor and SPAC is key
5: Due diligence by independent firms on the financial, accounting, tax, legal, financial controls, governance framework, board of directors, business strategy and plans. This should cover the assessment of gaps and roadmap to implement the gaps.
6: Prepare to be a public company, in terms of infrastructure and financial reporting. Financial reporting is required under US GAAP and hence, initiating the process of preparing financials under US GAAP, which would cover analysis of key accounting differences, disclosures.
7: Board diversity and ESG focus. The recent trends and importance around ESG and board diversity is becoming crucial, and corporates would need to implement the new board structure and composition.
8: Tax and regulatory aspects have to be well evaluated and analysed by the company while staying compliant with the Indian Foreign Exchange Management Act (FEMA) and RBI (Reserve Bank of India) rules.
End of the day, what is critical is the robustness and soundness of the business model and the future growth potential of the company.
After all, when the stakes are high, it's a well-crafted strategy and execution plan that essentially decides your success.