The use of Spacs, or special purpose acquisition companies, has grown significantly over the past year as an alternative to the traditional IPO and are grabbing the attention of investors, but is the UK ready to embrace this latest trend?
According to Nick Whitehead, senior manager at Zedra, a Spac is basically a shell company that is listed on an exchange and exists solely to acquire or merge with other companies.
“The Spac raises funds through an IPO, then uses the funds raised to merge with (or be acquired by) an unlisted operating entity. As a result, the acquired entity will become publicly traded by way of the transaction, rather than undertaking its own IPO,” he explains.
Spacs have been particularly popular in the US, raising a total of $83.4bn in 2020. This popularity exploded in the first three months of 2021, with Spacs raising $87.9bn before the end of March, according to data from Spac Research.
Downing Ventures’ head of ventures and partner Warren Rogers says that these blank cheque companies are now starting to gain traction in the UK and Europe, but have slightly different structures that might be a little less appealing for investors.
“One of the main differences between the US and UK Spac models, at this moment in time, is that UK Spac sponsors are unable to cash out their capital if they decide they don’t want to continue to invest in the target acquisition – this being one of the key advantages stateside,” explains Rogers.
Changing the rules
Exchanges in Amsterdam and Frankfurt have so far been the location of choice for those listing Spacs because there is less red tape restricting how deals can be done. This has sparked fears by some that the UK could miss out.
But Rogers says that moves by the UK chancellor, Rishi Sunak, to improve the City of London’s appeal as a leading financial hub should change this.
“In a post-Brexit environment, Amsterdam is taking over as Europe’s key trading hub, with several Spac deals already in the works, so the UK needs to act fast to enable innovation within the listings regime,” he says.
“As part of British chancellor Rishi Sunak’s 3 March budget, a review of the UK listing regulations was released, with the intention to help build back the City of London as a leading financial hub and the beating heart of an agile new economy focused on innovation and technology. Hopefully, this shake-up will enable British investors to inject capital into the market and help catapult some of the fantastic home-grown technology companies into a wider arena.”
The FCA UK Listing review, carried out by Lord Hill, states that the main barrier for Spacs listing in London is rules which “can require trading in a Spac to be suspended when it announces an intended acquisition”.
It added: “The rule regarding trading suspension is seen as a key deterrent for potential investors in UK Spacs. It exposes investors to the possibility that they will be ‘locked into’ their investment for an uncertain period following the identification by the Spac of an acquisition target, even if they wish to exit – due to differences of view over the target or for other reasons.”
See also: FCA Spac changes to have ‘significant impact’ on UK advice M&A
According to the FCA, this rule was last reviewed in 2018 when it was removed for commercial companies but remained in place for Spacs.
Whitehead adds: “We are seeing UK entities exploring this transatlantic opportunity as a viable option for their fundraising and expansion. We are seeing the UK reacting accordingly with the news that Chancellor Sunak will be commissioning a review of UK stock market rules and regulations in a bid to enable high-growth tech companies and produce SPACs with better acquisition opportunities. Without a doubt, Spacs will soon become a more frequent transaction seen in the UK markets too.
“With London very much open for business, a long history of success for tech and fintech companies and now, another technique available to access funds and promote growth – we’re set to enter a new phase in global expansion, with Spacs leading the charge.”
See also: Schroders boss urges City to back Rishi Sunak’s shake-up of listing rules
A chequered past
But despite potential changes to the regulatory landscape and the improving “London as a listing location” branding, Spacs in the UK have a history that could make some investors nervous.
Often referred to as ‘reverse mergers’, these vehicles were used largely by smaller tech companies during the early dot com era.
One of the most notable cases involved a company called Knutsford, which was supported by the well-known tech talent of Julian Richer and Archie Norman, and property gurus Nigel Wray and Nick Leslau. The shell company’s shares were valued at 2p each, but a frenzy among investors rapidly saw that increase significantly in a very short space of time.
Rumours at the time suggested the shell company was on the verge of making a huge deal, but unfortunately that deal came in the form of WILink.com, a tech company that saw its share price plummet nearly 100% within weeks of the deal being struck.
There are also signals emerging from the US, which is deep in the trend, that Spacs are, once again, starting to come unstuck.
ATI Physical Therapy announced a merger with a Spac in February 2021 and the agreement reportedly closed in mid-June with five buy ratings and no calls from brokers to sell. The deal attracted a lot of attention, but over two days, the shares plummeted more than 50% following a downward revision of its revenue projections.
