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Time for UK regulators to open door to Spacs

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The writer is chairman of Broadstone Acquisition Corp

How many British companies will be able to consider a stock market listing in 2021? Not many, other than a select few in fashionable sectors such as technology. And that’s a problem.

The Covid-19 pandemic has temporarily wiped out whole industries. With their track records destroyed, businesses in those damaged sectors have no hope of achieving a listing.

Equity is what most businesses really need right now, rather than debt. It will be extremely difficult for most companies to get that equity from the public markets — unless, of course, they are already listed. This feels like a gap in the system.

The UK listing rules badly need reform to make it easier for companies to access capital — and for London to preserve its role as a financial centre. The chancellor has noted as much by appointing the former EU commissioner Jonathan Hill to conduct a review on behalf of the government, looking at a number of possible inhibiting factors that make initial public offerings unattractive for businesses.

Yet there is a very simple solution to this problem: Spacs. Special Purpose Acquisition Companies are an easy way for a company to come to market with minimal fuss. As things stand, it is very difficult to list a Spac in London. That’s why I and my business partners went to New York to raise money through Broadstone Acquisition Corporation, even though we are looking for deals in the UK and Europe.

Put simply, a Spac is a pot of money raised from investors that lists on a stock exchange. The money is raised on the promise that it will be used to buy a business which meets certain pre-agreed criteria. Once the target is acquired, that business takes over the listing and begins life as a publicly quoted business.

Investors who back these vehicles are professionals who understand what they are doing. The UK listing rules create a problem, however.

If you have a Spac in the UK you have to suspend the shares at the point you announce a deal, and investors are then barred from trading again until the deal completes — which could be three to five months. This just doesn’t work for anyone.

It also means that investors are locked into your deal. If the target is not quite what those investors were expecting, there’s not much they can do about it. Dealing is suspended. There’s no way out. Under the US rules, there’s the option to sell. That gives investors flexibility. This is why London is losing out.

Investors like Spacs. That’s clearly evidenced by the 156 Spac vehicles that have listed in the US this year, raising $55bn. By contrast, there have been 14 IPOs on the main board of the London Stock Exchange.

Entrepreneurs, family businesses, private equity funds and other business owners like Spacs, too.

A Spac offers the two things an IPO never can: speed and certainty. We all know that IPOs get pulled frequently — and usually for extraneous reasons relating to events that “close the IPO window”. A tweet from a global leader can be enough to kill the risk appetite of equity markets these days.

A Spac takes away that risk for the seller as the money has already been raised. That makes it a more straightforward negotiation. Yes, the team running the Spac needs to go back to investors to get final approval for a deal. But the investors have already entrusted that team to do due diligence. And the team has substantial skin in the game.

An investment banker presenting an IPO can only ever offer a range of pricing. A deal is only as certain as the next day’s news cycle. More to the point, very few businesses are straightforward enough to make great IPO candidates.

Businesses need to change hands from time to time. Companies need equity, and the public markets are a great source of equity capital. Yet it’s much easier to strike a deal with a Spac than with an IPO process — particularly if there is any complexity.

We are about to enter a difficult period in the economic cycle where winners and losers will be starkly divided. The fuel for recovery will be equity. Government rescue schemes have loaded more debt on to corporate balance sheets. The companies that succeed will have the right financial structure to support that success, which means the right balance of equity and debt.

Spacs can be the bridge that helps inject new equity into corporate Britain. We should make sure the rules flex to accommodate this structure, which is just a reinvention of ideas that we have seen before — and that have worked very well.



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IPOs / FFOs

Paper producer Segezha plans Moscow IPO

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Paper producer Segezha is planning an initial public offering on the Moscow exchange, making it the latest in a series of Russian companies looking to tap surging investor demand.

Segezha, which is owned by oligarch Vladimir Yevtushenkov’s Sistema conglomerate, said on Monday that it wanted to raise at least Rbs30bn ($388m) in the IPO. It is seeking a valuation of more than $1.5bn, according to a person familiar with the plans.

The structure of the offering will allow Sistema to retain control of the company.

Russian companies are rushing to go public in response to high demand for emerging market assets and in case geopolitical tensions with the west make it harder to list.

The stimulus-fuelled global stock market boom and a rebound in commodity prices have helped Russia’s market recover quickly from the pandemic.

The Moscow exchange’s benchmark index hit record highs in March and Russian central bank rates remain near an all-time low. Last year, the bourse doubled its number of retail investors to 10m as homebound traders moved away from bank deposits.

In March, discount retailer Fix Price held the largest Russian IPO since the US and EU imposed sanctions against Moscow in 2014. Ecommerce site Ozon, which is co-owned by Sistema, has more than doubled its valuation to about $12.5bn after going public in New York last year.

But the sell-off of the rouble on tensions with the US and the military build-up on the Ukrainian border has underlined that going public remains precarious.

GV Gold, a midsized goldminer whose key shareholders include BlackRock, said late last month it would postpone its IPO — the third time the company has announced a listing then backtracked — because of “elevated levels of market volatility in both the global and Russian capital markets”.

Segezha, which reported nearly $1bn of revenue last year and operating profit of $242m, is the fifth-largest producer of birch plywood in the world and is in the top two for production of heavy duty “multiwall” paper packaging.

Prices for its products have rebounded during the recent economic recovery, while 72 per cent of its revenue comes from export sales in foreign currencies — allowing it to take advantage of the weak rouble at its mostly Russian cost base.

“Bringing Segezha Group to the public markets will crystallize the value of our investment, raise funds that would allow Segezha Group to continue to pursue its investment projects and provide investors with the opportunity to share in the company’s strong growth and benefit from attractive returns,” Sistema chief executive Vladimir Chirakhov said in a statement.

JPMorgan, UBS, and VTB Capital are joint global co-ordinators and joint bookrunners on the IPO. Alfa Capital Markets, Gazprombank, BofA Securities, and Renaissance Capital are joint bookrunners.



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Spac boom under threat as deal funding dries up

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A crucial source of funding for blank-cheque company deals is drying up, pointing to a slowdown for one of Wall Street’s hottest products after a record-breaking quarter. 

Advisers to special purpose acquisition companies, which float on the stock market and then go hunting for a company to buy, say they are struggling to find so-called Pipe financing to complete their planned acquisitions. Pipe is short for private investment in public equity.

Institutional investors such as Fidelity and Wellington Management have ploughed billions of dollars into Pipe deals since the Spac boom emerged last year, providing a route to the public markets for businesses ranging from established software and entertainment companies to speculative developers of flying taxis and electric vehicle technology. 

But people involved in arranging the deals say Pipe investors are overwhelmed by the sheer volume of transactions and put off by rising valuations. 

“There is a lot of indigestion,” said one senior bank executive. “The pendulum has swung to where if you’re in the market with a Pipe right now, it’s going to be really hard and painful. A Spac goes back into the ocean if you can’t get a Pipe done.”

Spacs raise money when they first list on the stock market but they typically require more capital to fund their acquisition. Large institutional investors also act as a form of validation of the target company’s business prospects and its valuation.

There have been 117 deals announced this year, but the growing backlog in Pipes could prove to be a big roadblock for the 497 blank-cheque companies that are still looking for a deal, according to Refinitiv data.

Only about 25 per cent of Spacs listed since 2019 have completed deals so far. Sponsors typically have two years to complete a merger, otherwise they have to return the capital they raised to investors.

Several market participants said the slowdown would lead to a “flight to quality” and put downward pressure on the valuations of acquisition targets, which have skyrocketed in recent months.

Almost all of the executives the Financial Times interviewed said they were seeing Spac deals recut to offer more favourable terms to Pipe investors. One said: “It’s called the buy side for a reason.” 

Because Pipe investments are considered illiquid — the money is tied up at least until the deal closes and there may be a lock-up period after that — investors can usually get favourable terms. They can see the deal before it has been announced to the public and are almost always able to buy in at the Spac listing price of $10.

But earlier this year, Pipe investors were clamouring to get in on Spac deals. The group of institutions that backed Churchill Capital IV’s acquisition of electric carmaker Lucid paid a 50 per cent premium to the Spac listing price to get a stake, almost unheard of at the time.

The recent reversal has Pipe investors negotiating lower valuations for businesses, giving them larger stakes for the same amount of money, and better pricing terms.

“There’s only so much illiquid exposure investors are going to want to take,” said another bank executive who has worked on numerous Spac deals.

The Pipe slowdown is bad news for banks, which are unable to collect on advisory fees if they cannot sell a deal to investors.

It is also starting to affect the pipeline of Spac launches, lawyers and bankers said. In the first seven days of this month, only four blank cheque companies have gone public. That compares with 41 during the first week of March and 28 in February, Refinitiv data shows. 

“Where we had been at a crazy, mad, rush pace in January and February, we’re kind of at a standstill right now on the IPO side,” said Ari Edelman, partner in Reed Smith’s corporate practice.

For those that already went public and are looking for a target, he added, “the hope is this is just a bump in the road. And then ultimately the deal gets done.”



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UK-backed vaccine maker warns of export restrictions in IPO filing

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Valneva, the French Covid-19 vaccine maker backed by the UK government, has filed for a US initial public offering seeking to take advantage of investor appetite for biotechnology during the pandemic. 

The Paris-listed company, with a market cap of more than €1bn, filed to raise $100m in American Depositary Shares, the day after Vaccitech, the Oxford spinout that owns the platform behind the AstraZeneca vaccine, published its filing

Valneva has a deal worth up to €1.4bn to supply Covid-19 vaccines to the UK, manufacturing the doses in a Scottish factory expanded with government funds. The UK has already agreed to buy 100m shots and has an option to purchase 90m more by 2025. Valneva has already received almost £100m from the government. 

But in its filing, Valneva warned that any restrictions on importing or exporting vaccines out of the EU could have a “substantial” risk to its operation. The vaccine is due to be manufactured in the UK but put into vials and packaged in the EU, it said. 

Shortfalls in supply of vaccines to the EU have led to tensions between the UK and the EU over importing shots and raw materials for the current approved jabs from Oxford/AstraZeneca and BioNTech/Pfizer.

Valneva’s filing comes after it announced positive early stage trial results for its Covid-19 earlier this week, planning to launch a later stage study this month and apply for a UK approval in the autumn.

The phase 1 and 2 study showed the shot elicited more antibodies in the participants receiving the highest dose than are usually seen in recovered Covid-19 patients, with over 90 per cent producing significant levels of antibodies. The jab also induced a response from another key part of the immune system, the T-cells. 

The vaccine, which uses a whole inactivated virus, a more traditional approach than the currently approved shots, could be used as a booster for the vaccinated or to tackle variants of the virus.

Valneva said even though it would be approved much later, it could have a competitive advantage against its rivals. 

“We believe that, if approved, our vaccine, as an inactivated virus vaccine, could offer benefits in terms of safety, cost, ease of manufacture and distribution compared to currently approved vaccines and could be adapted to offer protection against mutations of the virus,” it said in the filing. 

But it also said that it did not yet have the rights to use the strain of virus in the vaccine on the commercial market. It is in the process of negotiating a commercial agreement with the World Health Organisation and the Italian National Institute for Infectious Diseases. 

Valneva is also developing vaccines for Lyme Disease and chikungunya, a virus transmitted by mosquitoes. Total revenue was €110m in 2020, down from €126m in 2019, as sales of its travel vaccines were hit by restrictions on travel during the pandemic. 

It made a loss of €0.71 per share last year, after it had to make a €7.4m writedown, partly because of the limited shelf life of the products. Valneva also had to renegotiate a debt financing agreement last year as it was at risk of not meeting the minimum revenue covenant.



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