‘Ottawa’ Assessing the two Canadian SPAC Deals That Have Been Announced
Let’s hope there’s more of a “wow factor” about the next transaction announced by special purpose acquisition companies (SPACs) — a class of company, that’s only been around locally for about 18 months.
So far, the two deals that have been announced — INFOR Acquisition plans to acquire a unit of Element Financial while Dundee Acquisition plans to acquire CHC Student Housing, a micro-cap company whose shares are listed on the TSX-Venture Exchange — seem different from what some investors were hoping for when they piled $340 million into those two companies in the early part of last year. Since then, four other SPACs have raised about $800 million of capital and are presumably out looking for targets.
In short, the two SPACs which have announced deals have, despite lots of searches, not been able to acquire a private company of the quality that Onex Corp. manages to find on a regular basis.
But one veteran SPAC investor who has sought opportunities in both Canada and the U.S. said some perspective is required. “If this was in the U.S. there would be the same sort of reception as has occurred so far,” he said, noting that “maybe 10 per cent of the deals in the U.S. are really attractive, real screamers.”
The complexity of a SPAC structure helps explain the lack of screamers says this investor. One key factor is that it’s not clear how much capital will remain in the SPAC once a deal is announced because shareholders, if they don’t like the deal, can elect to get their investment back. Private equity firms don’t deal with such matters: they just write a cheque and own the company.
Another key factor is that it takes a long time, at least three months, for the SPAC acquisition to get over the line. After being announced, lots of documents are filed, shareholder meetings are called with the prospect the deal may not go ahead.
What’s intrigued the market is that both Canadian SPACs are essentially buying public companies. To be perfectly accurate, Element Financial’s commercial-finance business unit, the entity INFOR is buying, is not yet public but will be once Element divides itself into two public companies in October. SPAC’s aren’t normally required to buy public companies.
Another element of intrigue is that the deals seem different in scale from what was contained in the documents filed at the time of the two initial public offerings last year. Back then Dundee said the focus will be “primarily on acquiring established companies that we believe are fundamentally sound”… and companies with an enterprise value between $200 million and $800 million.” CHC Housing doesn’t have such an enterprise value.
INFOR also had lofty ambitions. Again it had a focus of seeking out a target with an enterprise value of “up to $1 billion,” though it allowed for the possibility of a larger transaction that it would do with partners.”
On that score, INFOR’s deal is closer to the mark. When the split was announced Paul Holden an analyst at CIBC pegged a value of $2.40-$3 a share on the business – or $1.2 billion based on the number of shares outstanding.
Finally on both deals the promoters have given up part of the so-called promote fee that in normal circumstances would have been earned. In INFOR’s case it has given up at least 70 cent of its fee, about three times the give-up at Dundee.