Special-purpose acquisition vehicles,
companies with no product, earnings or sales that make
takeovers, are Wall Streets growing source of fees now that the
market for subprime-mortgage securities has dried up.
The trouble is that investors who have spent $18 billion
since 2003 on U.S. initial public offerings by such shell
companies would have been better off holding a mutual fund that
tracks the Standard %26amp; Poors 500 Index.
While some special-purpose acquisition companies do rise,
such as the 98 percent gain last year by the units of Nicolas
Berggruens GLG Partners Inc., the average annual return of the
past five years has been 5.8 percent, according to SPAC
Analytics, a Turks %26amp; Caicos-based independent research service.
The S%26amp;P 500 advanced 13 percent annually in the same period.
“It seems as if everybody is raising a SPAC, David
Rubenstein, co-founder of the Washington-based private-equity
firm Carlyle Group, said last month at an industry conference in
Dubai. “The jury is still out as to whether these are good
things other than for the investment bankers who raise them.
The securities industry raised $11.7 billion last year for
the special-purpose acquisition companies, an almost fourfold
increase from 2006, data compiled by Bloomberg show. Billionaire
dealmakers Ronald Perelman and Nelson Peltz plan to bring in a
combined $1.25 billion before the end of March with SPACs.
Hicks Sale
The surge in SPACs coincides with a decline in leveraged
buyouts. LBOs all but disappeared in the second half of 2007 as
borrowing costs almost doubled from June to December, Merrill
Lynch %26amp; Co. data show. U.S. buyouts fell to $103.2 billion in
the second half from $322.4 billion in the first six months of
the year as the subprime-mortgage market collapsed.
SPACs sell units, usually one share of common stock and one
warrant, and use the money to buy a closely held company. They
were dubbed blank-check companies because they don’t disclose
their targets before the IPO. Any takeover must be approved by
at least 70 percent of the SPACs shareholders. If a purchase
isnt completed within a set time, usually two years, the money
is returned to investors, minus incurred operating costs.
Thomas Hicks, the leveraged buyout pioneer and owner of the
Texas Rangers of Major League Baseball, raised $552 million for
Hicks Acquisition Co. I in September.
“I plan to use the vehicle to try to build three or four
or five significant companies over the next five to 10 years
because its permanent capital, Hicks, 61, said in an
interview from his office at Hicks Holdings LLC in Dallas.
“Once you make an acquisition, that entity has the ability to
continue growing both internally and by acquisitions because it
will be very lightly leveraged compared to leveraged buyouts.
Sluggish Performance
Hicks Acquisition has declined 1 percent in American Stock
Exchange composite trading since the IPO. Hicks Acquisition has
yet to announce a takeover.
SPAC shares often languish until a deal is disclosed.
Returns for blank-check companies that have announced but not
completed a purchase have averaged 14.6 percent a year, while
those still looking have gained 4.6 percent, according to SPAC
Analytics.
After a purchase, the shares trade on the fundamentals of
the operating company such as earnings and sales growth. SPACs
that have completed their initial transaction rose by an average
of 3.7 percent a year.
Services Acquisition Corp. International, sponsored by
former Blockbuster Inc. Chief Executive Officer Steven Berrard,
raised $138 million in June 2005 in an IPO underwritten by
Broadband Capital Management LLC. In March 2006, the SPAC said
it would buy juice-smoothie retailer Jamba Juice Co.
Bankers Fees
Services Acquisition climbed 56 percent from the
announcement until the closing date the following November.
Since the deal was completed, San Francisco-based Jambas shares
have dropped 77 percent amid rising costs and sales that fell
short of forecasts.
Wall Street earned more than $770 million by selling shares
of 64 SPACs last year, up from 36 offerings in 2006. The fees
helped securities firms offset a 1.2 percent decline in revenue
from conventional IPOs, data compiled by Bloomberg show.
Underwriting also puts banks in line for advisory business when
SPAC clients are ready to pursue takeovers.
Citigroup Inc., the largest U.S. bank by assets, managed
its first SPAC IPO in 2005 and ranked No. 1 last year among
blank-check underwriters, Bloomberg data show. The New York-
based firm earned $302.8 million in fees, ahead of second-ranked
Deutsche Bank Ags $92 million. Deutsche Bank is based in
Frankfurt.
`Cash Vehicle
Citigroup probably will report a fourth-quarter loss of
$4.2 billion, or 83 cents a share, after writedowns of subprime-
related securities, according to a survey of 17 analysts by
Bloomberg.
Morgan Stanley, the second-biggest securities firm by
market value after Goldman Sachs Group Inc., and No. 5 Bear
Stearns Cos. Also reported losses during the worst U.S. housing
slump since the 1991 recession. All the companies are based in
New York.
Citigroups SPAC clients include Hicks; Jonathan Ledecky,
the former CEO of Washington-based U.S. Office Products Co.; and
former hedge-fund manager Berggruen.
Berggruen, 46, raised more than $1 billion in the IPO of
Liberty Acquisition, the largest SPAC to date. His previous
SPAC, the $528 million Freedom Acquisition Holdings Inc., took
New York-based hedge-fund manager GLG Partners public on Nov. 2.
GLG units rose 31 percent since the deal was announced in June.
“We felt in this environment that having a cash vehicle
would really give us a competitive advantage, said Jared
Bluestein, chief financial officer of New York-based Berggruen
Holdings Ltd. “The ability to do deals without a high degree of
leverage will always be an attractive opportunity for both
buyers and sellers.
Blank Checks
Fees for underwriting SPACs are 6.6 percent of assets
raised, compared with the 6 percent average for all IPOs in the
U.S., Bloomberg data show. SPAC share sales accounted for 21
percent of dollars raised last year in the U.S. IPO market.
Since the start of 2003, 144 blank-check companies have
sold shares, raising $18.1 billion with 13 of the deals coming
before 2005, according to SPAC Analytics.
As the largest Wall Street firms began underwriting SPACs,
it attracted bigger names and prompted investors to pile more
money into the vehicles. The average capital raised in 2007 IPOs
was $183 million, up from $76.4 million in 2005, SPAC Analytics
data show.
Perelman and Peltz
Perelman, the 65-year-old chairman of skin-care company
Revlon Inc., has filed to raise $500 million for MAFS
Acquisition Corp. The New York-based investor also brokers deals
through his closely held holding company, MacAndrews %26amp; Forbes
Holdings Inc., and M%26amp;F Worldwide Corp., which trades publicly.
Peltz, whos known for putting pressure on the managements
of companies including ketchup-maker H.J. Heinz Co. to improve
shareholder value, is seeking $750 million for New York-based
Trian Acquisition I Corp. The IPO is scheduled for Jan. 21.
Peltz, 65, separately won clearance from regulators last week to
buy a stake of New York-based insurance broker Marsh %26amp; McLennan
Cos.
Peltz and Perelman declined to comment.
Other newcomers to the SPAC club include Barry Sternlicht,
the 47-year-old founder of White Plains, New York-based Starwood
Hotels %26amp; Resorts Worldwide Inc.; mergers advisory firm Lazard
Ltd., run by Bruce Wasserstein, 60; and rival bank Greenhill %26amp;
Co. Lazard and Greenhill are based in New York.
Different Than LBOs
“Were looking to back proven people, said Whitney
Tilson, who manages about $160 million at T2 Partners LLC in New
York. “It’s a much better deal than investing in your typical
LBO fund. In your typical LBO fund youre locked up for 10 years
and you cant give thumbs up or thumbs down on a deal by deal
basis.
Buyout firms raise money privately, returning profits from
their deals to investors over seven to 10 years. LBO funds range
from several hundred million dollars to the record $21.7 billion
gathered by New York-based Blackstone Group LP last year.
Since SPACs sell shares with the goal of buying an existing
company they havent yet identified, IPO investors are betting
on the ability of the executives to find a suitable target.
Context Capital Management LLC, a hedge-fund firm with
about $700 million of assets, is creating a new pool to buy
SPACs. The company, which has offices in San Diego and Stamford,
Connecticut, aims to raise $300 million, said William Fertig,
Contexts co-founder and co-chairman.
Credit Risk
“The market opportunity is enormous because the asset class
has grown so dramatically, he said. “It could be a billion-
dollar opportunity.
Even if a SPAC cant find a business to buy, investors will
most likely break even since almost all the money raised is held
in a trust account, Fertig said.
“There is very little credit risk associated with a SPAC
because most of the proceeds are held in trust, he said.
SPAC founders have much to like about the deals since
they’ll own part of a publicly traded company once a purchase is
completed.
“It’s a great deal for the sponsor because they get 20
percent of the company, said Steven Kaplan, a finance
professor at the University of Chicago Graduate School of
Business. “If a deal doesn’t go through, everyone gets their
money back. That’s pretty good: heads I win, tails Im even.
To contact the reporter on this story:
Elizabeth Hester in New York at
