Question: Leading media outlets around the world have been talking about SPACs as these alone raised USD 83 billion in 248 IPO listings in 2020. Let us begin by simply explaining SPACs for our listeners.
Raja: According to data compiled by NASDAQ, there were 34 SPACs in 2017, 46 in 2018 and 59 in 2019. In 2020, the number exploded to 248, accounting for more than half of all IPOs. In 2021, is expected to see, as many as 100 more each month.
SPAC, as in 'Special Purpose Acquisition Company' is actually a shell company with no business operations and is created mainly to raise capital, through an IPO, to make acquisitions. SPAC is popularly known as a 'blank check company'.
Once publicly listed, the funds raised remain in a trust while the SPAC looks for acquisition targets — usually, a private company. Management generally has 18-24 months to identify a target company.
Once a SPAC identifies an acquisition target and completes the deal, the SPAC no longer exists, and the newly joined company trades under a new ticker symbol. If they make no acquisition during the two years, the trust dissolves and investment money returns to the investors. You see, in most cases, SPAC require to raise additional capital, through “PIPE” (private investment in a public entity) transaction. This is required to fund the growth plans of the acquisition targets.
Are you with me so far?
Question: Yes, so as an investor I put my money in a SPAC without really knowing how it will be used?
Raja: Precisely, and that’s the reason SPACs are also known as “blank cheque companies”.
You are basically placing your trust in a founder-management team with solid domain expertise and experienced in M&A and running companies and creating value for investors.
The investors do have the right to vote (for and against), for the acquisition targets and in case, they don’t, they can redeem their investments.
Question: Ok. What are some of the key benefits versus risks of a SPAC as a channel/route for overseas listing?
Raja: Let us look at the benefits first.
A SPAC transaction can be completed in a few months, much more quickly than a traditional IPO, avoiding exposure to market fluctuation. So, quickness of time is a huge factor here.
Since the SPAC goes public as a shell company, required financial disclosures are easier than those for an IPO, since SPAC is only a shell company.
Risks clearly are around the ability of the SPAC to complete the acquisition within the defined time period and the investors voting in favour of the acquisition.
Grant Thornton research indicates that 31% of companies reported material weakness in financial reporting after 1 year post SPAC listing. This is compared to 20% in case of other public companies according to Marketwatch.
Question: What are the opportunities for Indian corporates in tapping into overseas listing through SPAC’s. How should Indian corporates prepare themselves for SPAC listing?
Raja: Recently, as in Feb-21, Renewpower got merged into a US SPAC, marking the largest SPAC deal from India in recent times.
SPAC structures are not new to India and, in the past, there have been Indian companies who have merged themselves into US SPAC’s and got listed. Examples are Videocon and Yatra.
While SPAC offers alternative and quicker route for Indian corporates for listing in the US, the extent of preparation and is similar to what a normal US listing would entail.
Some of the key areas of focus that an Indian corporate should consider are:
- Capital raise planning including the amount of capital to be raised, both primary and secondary transaction.
- Valuation analysis and what sort of valuations they can expect in US capital markets.
- Early engagement with current stakeholders like shareholders, PE/VC investors etc
- Selection and appointment of investment bankers, accounting firm, legal firm, investor relations etc
- Identification of the SPAC to be merged with. Quality of sponsor and SPAC is key here
- Vendor due diligence covering due diligence by an independent firms on the financial, accounting, tax, legal, financial controls etc
- 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.
Question: Are there areas of concerns for Indian corporates that they should consider before SPAC listing?
Raja: Clearly, the classical question is whether one should remain private or go public.
Going public brings in tremendous advantages in terms of valuation, branding and ability to tap into global investors but also, tremendous responsibilities and onerous liabilities as well. Hence, preparation is key also importance of mindset and culture of transparency and good corporate governance. In my views, tax and regulatory aspects have to be well evaluated and analysed by the company.
You see when you do a reverse merger of Indian company with US SPAC, tis becomes an outbound merger. However, such outbound merger is not tax neutral both at the Indian target shareholder level and at the Indian target level, where its assets are transferred to the SPAC. Hence, the associated tax costs compared to the benefits need to be carefully evaluated.
Further, compliances with Indian Foreign Exchange Regulations and RBI (Reserve Bank of India) rules are very important. In my view, key for success is robustness and soundness of the business model and future growth potential of the company and that’s the key for sustained valuations and growth for the company.
Our Grant Thornton Indian and global team of overseas listing and SPAC experts are there to evaluate, plan, prepare and execute this listing process.
Be quick to seize this opportunity but don’t be in a hurry.
