Special purpose acquisition companies (“SPAC’s”) are rapidly becoming the IPO vehicle of choice in the public markets. Most SPACs are seeking high-growth, middle market businesses with Enterprise Values ranging from approximately $250 million to $5 billion. For founders and shareholders of companies that fit this profile, SPAC’s have become a desirable alternative to the traditional IPO process.  However, when researching the right SPAC partner for your business, you may be wondering how these deals work.  If your Enterprise Value is $400 million, do you have to find a $400 million SPAC?  If you don’t know the answer to this question, then the following information will help you understand the full SPAC purchasing power.

There are 2 major factors in SPAC economics with regards to its purchasing power:
1) The size of the SPAC (the money raised at IPO that sits in trust)
2) The size of the Private Investment in Public Equity (PIPE)

Does a $400 million SPAC acquire a company that is valued at $400 million (or less)?

No. There is no maximum size of a target company.  In fact, it is typical for a SPAC to combine with a company that is 3-5x times its IPO proceeds, which means that the ownership team will ultimately remain as the majority shareholders with the SPAC investors representing a minority (typically 15-30%) of the post-combination entity.

At Ggp & CO Healthcare Acquisition Company, we are looking to find a company with an Enterprise Value (EV) between $750 million and $1.5 Billion.  This EV is 3.25x to 6.5 times the size of our SPAC, which raised $230 million, including the full exercise of the overallotment shares.

Where does the money come from if the target EV is 5x more than the SPAC?

It comes from PIPE, which have been a common financing vehicle in the public markets. These additional funds are raised during the process of completing the business combination (the “de-SPAC”), and they are invested directly into the target alongside the original SPAC funds.  The PIPE funds are not raised until the SPAC sponsors and the management team, bankers, and board of their desired acquisition have agreed on terms to merge. This process allows institutional investors to become familiar with management of the acquired company and form a relationship with them in a more constructive fashion than the traditional whirlwind road show.

Specifically, a SPAC’s institutional investors are consulted by the SPAC sponsors and presented with the investment thesis of the acquisition company so that they can decide if they want to provide further financing for the deal via a PIPE transaction.  This process validates the target before proceeding to enter the public realm and provides SPAC managers with additional counsel and advice on their valuation calculations.

understanding SPAC purchasing power

PIPE investments regularly outsize the original SPAC value.  It is common to see PIPE financings of 2x the value of the SPAC which can double or triple the purchasing power of the SPAC.  Therefore, if your company is considering an entry into the public markets, and you are reviewing potential SPAC companies to contact, be sure to take the total possible economics into account. A published SPAC value can simply be a down payment on a total transaction value.  Understanding the relationship between the IPO value of a SPAC and its potential total purchasing power is an important element in doing due diligence to find the right business combination partner for your company.

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If you would like to learn more about Ggp & CO Healthcare Acquisition Company, and how we might help your company utilize a SPAC IPO to access the public markets for growth capital, please visit www.shacspac.com and contact us today.

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Divest a high-growth subsidiary or business unit

When an established business owns and operates a division whose growth rate is vastly higher than the parent company, or the traditional corporate decision-making process is moving too slowly to keep up the pace necessary to properly manage this division, or the unit has strategic importance, but its financial results are dwarfed by the parent, the parent could look to optimize shareholder value by divesting the asset. For large organizations contemplating the exit of a business unit or subsidiary, there are traditionally three options:

• Outright sale to a financial or strategic buyer
• Spin-off to shareholders
• Corporate carveout via an IPO (including a SPAC IPO)

Oftentimes, an outright sale is not financially feasible, if the expenses of the subsidiary are integrated with the parent company too closely to allow the NewCo to operate profitably.  Spin-offs allow the company to divest a business unit by making that unit its own standalone company. Rather than selling shares in the business unit publicly, current investors are given shares in the new company. The business unit spun off is now an independent company with its own shareholders, and the shareholders now hold shares in two companies. However, the shareholder demographics may be incompatible with a spinoff. For example, large organizations like IBM and Pacific Bell have shareholders who value slow, stable growth and a dependable dividend.  They may not value owning a high-beta stock whose return will only be based on achieving above-average market performance. Utilizing a SPAC IPO for a corporate carveout may be a financially beneficial alternative.

What Is a Corporate CarveOut?

A carveout is the partial divestiture of a business unit in which a parent company sells a minority interest of a subsidiary to the public through an IPO. Since shares are now public, a carve-out also establishes a new set of shareholders in the subsidiary, who can fully appreciate the current value and future growth prospects of the company. While the parent company retains an equity interest in the entity, a carve-out effectively separates a subsidiary or business unit from its parent as a standalone company. The new organization has its own board of directors and financial statements. The parent company can still offer strategic support and resources to help the business succeed.

Utilizing a SPAC IPO for a Corporate CarveOut

Special purpose acquisition companies (“SPAC”) are tailor made to be the vehicle for a carve-out IPO. Most SPACs are seeking high-growth, middle market businesses with Enterprise Values ranging from approximately $250 million to $5 billion.  Nearly every SPAC has a specific industry focus with an accomplished board of directors well suited to guide and advise the management team of the target.  The divesting company saves significant time and effort by using a SPAC to IPO, rather than handling the process themselves. The cash value of the transaction is negotiated beforehand, and the sellers receive higher valuations and greater liquidity than a traditional IPO.  Public companies may look at this model as an alternative to a traditional spin-off, IPO or sale of a division, with this structure offering the benefit of an anchored public market valuation for the division. Below are several examples of companies that have successfully utilized a SPAC IPO for a corporate carveout:

Case Study 1: EVBox Group Acquired by TPG Pace Beneficial Finance in a successful corporate carveout via Spac ipo

An example of a carve-out going public via a SPAC is EVBox Group, a leading global provider of smart charging solutions for electric vehicles in Europe. In December 2020, TPG Pace Beneficial Finance Corp. (NYSE: TPGY.U) announced a definitive agreement to purchase EVBox Group from its parent company, ENGIE S.A., a multi-national utility with headquarters in France. As a result of the carve-out IPO, EVBox Group will now operate as an independent publicly traded company. EVBox enabled ENGIE to quickly step into the electric charging market, but ENGIE now plans to focus its efforts towards design and operation of EV charging infrastructures. TPG Pace raised $350 million in its October 2020 IPO in order to seek a business combination target that combines attractive business fundamentals.  The proceeds raised by the SPAC, and an additional Private Investment in Public Equity (“PIPE”) of $225 million, combined to make the purchase of EVBox at an implied $969 million enterprise value.

Case Study 2: Ardagh Group completes Corporate carveout via SPAC IPO with Gores Holdings V Inc.

The first known completed carve-out going public via a SPAC is the acquisition of the metal packing business owned by Ardagh Group by Gores Holdings V, Inc. On February 23, 2021, Gores V announced a deal with Ardagh whereby the SPAC would combine with the metal packing business of Ardagh (AMP) which would go public as a separate NYSE-listed company. Cash will be funded from Gores V ($525 million), PIPE investors ($600 million) and $2.3 billion of new debt issued by AMP. The cash proceeds will be used to reduce debt at Ardagh, and Ardagh will retain an ~80% stake in AMP and will receive up to $3.4 billion in cash. Ardagh disclosed that following closing it would offer its shareholders the opportunity to exchange their Ardagh shares for a portion of the 80% retained stake in AMP. The combined company is expected to have an enterprise value of approximately $8.5 billion at closing and the valuation represents 10.5x AMP’s projected 2022 Adjusted EBITDA.

Case Study 3: Sage PLC CarveOut Announces Business Combination with FinTech SPAC

A third example of a carve-out going public via a SPAC is Paya, a leading integrated payments and commerce solution provider. Recently, FinTech Acquisition Corp III (NASDAQ: FTAC) approved a business combination with Paya. Previously, Paya was carved-out of global accounting software provider Sage PLC. Prior to the carve-out, the business operated as Sage Payment Solutions. As a result of the carve-out, Paya introduced a new senior management team, invested in new technology and product capabilities, accelerated organic growth, and executed three highly strategic acquisitions. Paya operates today as a leading pure-play integrated payments platform. FinTech Acquisition Corp. III was a SPAC formed for the purpose of entering into a business combination with a focus on the financial technology industry.  The SPAC raised $345 million in its IPO, and its Paya transaction was valued at $1.3 billion.

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If you would like to learn more about Ggp & CO Healthcare Acquisition Company, and how we might help your company utilize a SPAC IPO to complete a corporate carveout for your organization, please visit www.shacshac.com and contact us today.

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