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The Spac sponsor bonanza | Financial Times

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In June, a group of investors led by the former Citigroup investment banker Michael Klein reaped more than $60m from a $25,000 investment. The stunning return was achieved in less than two years. More impressive still: it was only a partial sale and their remaining stake is worth about $400m.

The windfall helps explain why special purpose acquisition companies — which raise cash on the stock market and hunt for a private company to take public — have become the hottest product on Wall Street.

Few have replicated Mr Klein’s success, which he achieved after using a Spac to take the data company Clarivate Analytics public in 2019. But many have tried. The prospect of quick riches has attracted all sorts of copycats from hedge fund managers to retired political figures and sports executives

So far this year, 156 Spacs have raised more than $55bn, and 76 Spacs in the US have announced acquisitions with a combined value of $95.2bn, according to the data provider Refinitiv. 

A Financial Times analysis of Spac deals by four prominent sponsors of the vehicle within the last two years shows just how lucrative the structure can be for the sponsors who are paid in the form of a “promote”.

The promote usually involves sponsors taking 20 per cent of the Spac’s equity for a nominal purchase price of $25,000. That stake converts into a smaller slice of equity in the new company when the Spac executes a merger, and can lead to a big pay-off if, like Clarivate, the acquired company prospers. 

The 10 Spac deals analysed by the FT were brought by the following sponsors: Mr Klein; the former Facebook executive Chamath Palihapitiya; the longtime media executive Harry Sloan; and Gores Group, a California-based private equity firm.

The analysis found that promotes for the four sponsors were now worth a combined value of almost $2bn across the 10 deals.

The biggest rewards have naturally come from companies that have performed well on the stock market. However, even those Spac-sponsored companies that struggle can leave backers holding sizeable profits. 

Bill Ackman, the hedge fund billionaire, believes the structure is “one of the greatest gigs ever for the sponsor”.

“You get 20 per cent of the company tax free until you sell the stock,” he told the FT. “That’s why you have so many people doing it.”

Jay Clayton, chairman of the Securities and Exchange Commission, expressed concern over disclosures © Bloomberg

Mr Ackman launched his own Spac this year, Pershing Square Tontine Holdings, which in July raised a record-breaking $4bn. However, he chose not to create founder shares.

“[The] compensation structure [on the standard Spac] creates a misalignment of incentives,” Mr Ackman said. “The massively dilutive nature of founder shares often makes it difficult to complete a deal on attractive terms for the Spac’s shareholders.”

The promote has also caught the attention of Jay Clayton, the chairman of the US Securities and Exchange Commission. He expressed concern about the impact on ordinary investors. “We want to make sure that investors understand those things and then at the time of the transaction . . . that they’re getting the same rigorous disclosure that you get in connection with bringing an IPO to market,” he recently told the CNBC business news channel.

Public investors ‘in the hole’

Founder shares, given out for a pittance, can create a drag for ordinary investors who typically pay $10 for each of their shares in a Spac. After a deal, the company can even fall in value and sponsors with discounted shares may still come out ahead.

“The public Spac investors start, effectively, 25 per cent in the hole,” said Steven Kaplan, a private equity expert at the University of Chicago Booth School of Business, referring to the 20 per cent promote and other standard fees. “Sponsors argue that public investors have the option to not invest. Still their money is tied up. It’s a great deal for the promoters and underwriters.” 

The promote is typically viewed as payment to the sponsor for their efforts in finding the target company and executing the merger. That work often includes installing a management team for the company as well as locating other cornerstone investors for the deal.

For his stable of Spacs, branded Churchill Capital, Mr Klein’s investors include his own firm, M Klein Associates, and other financial backers including Oak Hill Capital and Magnetar Capital, as well as a team of “operating” partners with industry experience such as Ford’s former chief executive Alan Mulally and Apple’s former design chief Jony Ive.

Mr Klein also uses his eponymous firm M Klein and Company as an adviser on all his Spac deals, raking in millions of dollars. Churchill has separately agreed to pay The Klein Group, an affiliate of his advisory firm, almost $50m on the three deals agreed so far. Mr Klein declined to comment.

That is not the end of the list of ways in which Spac sponsors can juice their returns. Typically they get the option to purchase warrants in the Spac, which allow them to buy shares of the merged company at a particular price. If the stock rises to the point that the warrants are in the money — typically this happens at $13 — the sponsor has another inexpensive source of profits in addition to the promote and deal fees.

Virgin Galactic, the space tourism start-up, went public via a Spac created by the former Facebook executive Chamath Palihapitiya © Michael Nagle/Bloomberg

Mr Palihapitiya and the British investor Ian Osborne have seen the value of their stakes increase significantly after their Spac took Virgin Galactic public in 2019. Shares in the space tourism company have surged to about $22 a share, pegging the value of the duo’s promote at more than $370m. 

In an email, Mr Palihapitiya said it would be “inaccurate” to analyse the value of the promote without considering additional cash he had put into the company. He also invested $100m in Virgin Galactic at a cost of $10 a share when it went public.

Mr Palihapitiya, who together with Mr Osborne has raised another $2.1bn through three new Spacs, has separately committed at least $150m to his subsequent merger targets.

The good times ending with ‘Spac-offs’?

There are signs that the promote is becoming less lucrative for sponsors. A consequence of the boom in Spacs is that private companies can now negotiate a better deal. In “Spac-offs”, private companies pit various cash shell suitors against each other. The final deal terms are now increasingly seeing promotes whittled down, to the favour of the selling companies.

When Mr Klein’s Churchill announced in 2018 that it would merge with the private equity-backed Clarivate, it agreed to an unusual provision that it said better aligned itself with other shareholders. Stock belonging to the promote group would not fully vest until Clarivate’s stock price hit $17.50, and lockups were put in place to prevent the investors from dumping the stock straight away. 

That moment in June in which Mr Klein and his partners cashed in more than $60m came after the stock had doubled to more than $20, in part thanks to a deal to buy the intellectual property management and technology company CPA Global. Onex and Barings, the two private equity firms that owned Clarivate before it went public via Mr Klein’s Spac, also sold stock at the same time.

Clarivate’s share price has since risen to $27.69, so the value of Mr Klein’s remaining stake has continued to swell and his investor group still holds shares worth $395m. The group also has separate warrants on top further augmenting their potential profit.

G2153_20X A diagram showing minimal investment can lead to windfall for Spac sponsor

Another successful Spac deal, involving the sports-betting site DraftKings, has soared to as high as $63 a share less than a year after announcing its merger in December. Its backers, serial Spac sponsors Mr Sloan and Jeff Sagansky, made similar concessions in merging their vehicle with DraftKings by giving up a portion of their promote and only letting some of their shares vest at higher stock prices. Still, their promote stake today is worth more than $200m. 

Repeat success has, however, not come easy for most sponsors. A second deal from Mr Klein, in which he closed an $11bn merger with the healthcare group MultiPlan this summer, has not fared as well as Clarivate. MultiPlan’s shares have traded down to below $8, threatening the ability of Churchill Capital to earn all its promote shares. Still, Churchill sponsors have a stake worth almost $80m.

MultiPlan attracted the attention of short-seller Carson Block, who this week revealed he had placed a bet its share price will fall. At the same time, he launched a broadside against the whole Spac phenomenon, which he called “the great 2020 money grab”.

“A business model that incentivises promoters to do something — anything — with other people’s money is bound to lead to significant value destruction on occasion,” his investment firm Muddy Waters wrote.

Whatever the ultimate outcome for MultiPlan, Mr Klein’s ventures have already highlighted the asymmetry of Spac mathematics: the risk in Spacs falls most heavily on outside shareholders even as the return on investment for sponsors looks very promising indeed.



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Pepco and Poundland chains target multibillion valuation in IPO

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South African conglomerate Steinhoff is set to raise up to 4.6bn zlotys ($1bn) when it lists its Pepco chain of discount retailers in Warsaw this month in the latest in a series of asset sales.

Pepco, which operates about 3,200 stores in countries including Poland, Romania and Hungary, as well as Poundland in the UK, said on Wednesday that shares in the offering would be priced between 38 zlotys and 46 zlotys.

In total, Steinhoff and members of Pepco’s management team will sell 102.7m shares or 17.9 per cent of Pepco to the public, valuing the company at between 21.9bn zlotys and 26.5bn zlotys. The final price will be set on May 14, and trading will begin on May 26.

A portion of shares will also be placed directly with some of Steinhoff’s lenders, following an earlier agreement between the conglomerate and its creditors.

Andy Bond, the former Asda chief executive who now runs Pepco, intends to sell more than 1m shares in the IPO, worth roughly €9.7m at the midpoint of the price range, though he will be subject to a lock-up period until the end of 2023 thereafter.

Bond said the company planned to open a further 8,000 stores “over the longer term”, but would also keep “a clear focus on costs and delivering additional efficiencies as we grow”.

Pepco’s listing is likely to be one of the biggest this year on the Warsaw exchange, which has seen a flurry of activity since Poland’s dominant ecommerce platform Allegro raised 9.2bn zlotys last year in the country’s largest initial public offering

Steinhoff will initially retain a stake of about 82 per cent, but the group is looking to sell assets to reduce debt after an accounting scandal in 2017. 

It has already sold Bensons for Beds, another UK retailer, to private equity group Alteri, and has an option to sell a further 15.4m shares in Pepco in the offering if investors show sufficient interest. Goldman Sachs and JPMorgan are advising on the IPO.

Pepco’s business heartland is in central Europe, but the group is planning to expand elsewhere on the continent, such as Spain, and is targeting earnings before interest, tax, depreciation and amortisation of more than €1bn within the next “five to seven years”.

In the year to the end of September, it reported sales of €3.5bn and underlying ebitda of €229m. Ebitda was almost a third lower than in the previous 12 months, as the pandemic forced stores to close across Europe.

Like many other discount retailers, Pepco does not trade online, as the small size of the purchases typically made by its customers makes the economics of ecommerce difficult.

The group said last week that sales had risen 4.4 per cent in the six months to the end of March, thanks to the opening of more than 200 new stores. However, on a like-for-like basis, sales were down 2.1 per cent.



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Honest Company’s market debut marks a comeback

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When the Honest Company lists on the Nasdaq exchange on Wednesday, it will be the culmination of a long recovery for the baby and beauty products group co-founded and fronted by the actress Jessica Alba.

The company priced its initial public offering on Tuesday at a valuation of $1.4bn, having worked to shake off much of the reputational and financial damage from a series of product lawsuits and recalls.

Honest, founded in 2011, had been valued as high as $1.7bn in 2015 before controversy over some of its claims to be using only natural ingredients in its products. In 2017, the company also recalled baby wipes because it found mould in some packages, and baby powder over concerns it may cause skin or eye infections.

Sales slid and Honest lost its status as a “unicorn”, a private company worth more than $1bn.

“Our rapid growth,” Alba wrote in a confessional passage in the IPO prospectus, “was compromising key business functions.”

Honest has never been profitable, but its revenue rose from $236m in 2019 to $300m in 2020 as the pandemic fuelled a run on cleaning products and other household staples. That took sales back to the level the company last enjoyed in 2016.

Losses narrowed last year to $14m from $31m in 2019.

Honest has previously said it expected to price its offering between $14 and $17 a share. At $16 each, it raised $413m, a majority of which will go to existing investors who are selling some of their stake.

Alba had been inspired to launch the brand after the birth of her first child left her scrambling to find household products she deemed safe to use around her daughter. She pledged to hold the company to an “honest standard of safety and transparency”.

Honest markets its products as natural, boasting that “we ban over 2,500 questionable ingredients”. It is one of many consumer goods makers seeking to tap into buyers’ appetite for household products seen as non-synthetic and sustainable.

The company still flags “health and safety incidents or advertising inaccuracies” as a continued risk factor in its prospectus. In January the brand issued a voluntary recall for one of its bubble baths, out of concerns that it could cause infections.

Ahead of the IPO, the company said two weeks ago that Alba would be stepping down as chair of the board when the company lists, handing the role to James White, former chief executive of Jamba Juice. She will remain the company’s chief creative officer, on a salary of $600,000 a year and, according to the prospectus, key to the company’s future success.

“Jessica Alba is a globally recognised Latina business leader, entrepreneur, advocate, actress and New York Times bestselling author,” it said. “Our brand may . . . depend on the positive image and public popularity of Ms Alba to maintain and increase brand recognition.”

Alba’s 6.1 per cent stake after the IPO was worth about $90m at Tuesday’s offer price.

The 3.8 per cent stake held by chief executive Nick Vlahos was valued at $57m. Vlahos has been steering Honest’s recovery since 2017, when he replaced co-founder and serial entrepreneur Brian Lee.

Honest secured a $200m investment from the consumer-focused private equity group L Catterton in 2018. The group is selling about half of its current 37.1 per cent stake in the offering, enough to recoup that investment, leaving a 17.4 per cent holding worth another $252m.

Morgan Stanley, JPMorgan and Jefferies are leading the offering.



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Oxford Nanopore/IPO: sequencer has Woodford in its DNA

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The stampede of pandemic winners to the stock market inspires wariness. Oxford Nanopore, which plans to go public this year, is one such beneficiary. The spinout from Oxford university is responsible for a fifth of the international sequencing that tracked coronavirus mutations.

That has drawn attention to a company with a lot of potential in a wide range of applications. An initial public offering could value it at significantly more than the £2.5bn price tag from a private funding round on Tuesday.

Started in 2005, Oxford Nanopore has benefited from the support of long-term shareholders. However, the backing of Neil Woodford is a complicating factor. The funds business of the prominent UK asset manager folded in 2019 following dire performance.

A successful float would benefit Schroder UK Public Private, the “patient capital” investment trust Woodford formerly ran. But there will be anger from former investors in his defunct income fund. Its 6 per cent stake in Oxford Nanopore was bought by Nasdaq-listed Acacia Research, which put a valuation of just $111m on it in its latest accounts. Woodford, who announced a controversial plan to restart his career in February, is working with Acacia as an adviser.

Oxford Nanopore’s decision to join the London market rather than Nasdaq will also hamper the valuation. But assume, as Jefferies does, that sales more than doubled to £115m in 2020. Even if Oxford Nanopore was valued at half the multiple of peers like US Pacific Biosciences, it would be worth £3.6bn.

That is less than a tenth of the size of San Diego’s Illumina, the global leader. Oxford Nanopore argues its sequencing technology — which monitors changes to an electrical current as nucleic acids are passed through a tiny hole — beats traditional camera-based approaches. Sequencing can be done quickly and cheaply by miniaturised devices. Accuracy has been a weak point, but is improving.

Investors should focus on the science, setting aside market froth and the Woodford connection. At the right price, Oxford Nanopore’s plan to facilitate the analysis of “anything, by anyone, anywhere” would be worth investing in.

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