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Have Spacs, Wall Street’s hottest craze, had their day?

Market Beat: Coulson cemented the deal with Gores using yachts in the Bahamas

Paul Coulson of Ardagh

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Joe Brennan
Fri May 7 2021 - 16:11

You've got to hand it to Paul Coulson. The chairman and chief executive of Ardagh Group, maker of everything from beer bottles to cans for cold-brew coffee, certainly knows how to cement a deal in style.

The financier wooed fellow billionaire Alec Gores and his team for more than a week earlier this year on yachts in the Bahamas (Coulson on his own, Gores on a chartered vessel) before agreeing to an $8.5 billion (€7 billion) accord surrounding Ardagh's metal cans.

“I wanted to make sure I felt good about this partnership,” Gores told the Wall Street Journal, which reported on the Caribbean courtship, after months of Zoom calls, in a profile this week of the Israeli-American private equity supremo.

The deal, announced in late February, will see Ardagh merge its fast-growing metal packaging business with a so-called blank-cheque company, called Gores Holdings V, that Gores floated in the New York Stock Exchange (NYSE) last year, after raising $525 million with the aim of buying a business.

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Ardagh, in which Coulson owns an indirect 33 per cent stake, will retain an 80 per cent stake in the resulting company, to be called Ardagh Metal Packaging (AMP), and receive up to $3.4 billion in cash as part of the transaction, due to conclude by the end of June.

The whole transaction is a quick way of securing a separate stock market listing for the beverage cans unit and capturing a valuation premium that metal packaging businesses are attracting on the market over glass. Existing Ardagh shareholders will be offered a chance to convert their shares into AMP stock.

The cash shell that is Gores Holdings V is just one of 13 special-purpose acquisition companies (Spacs) that Gores has set up to carry out reverse-merger IPOs since 2015 – making him the poster boy of what has developed into a frenzy in the past year.

Spacs have been around for decades and known variously as "cash shells", "blind pools" and "blank-cheque companies". Their past has been chequered at times, having been associated with some high-profile penny-stock frauds in the US in the late 1980s.

The sector enjoyed a revival at the start of this century, having become more acceptable following a tightening-up of laws and regulations, before withering away in the wake of the 2008 financial crisis.

The basic model hasn’t changed. It still involves investors advancing cash to “sponsors” of a company, which has no operations, to buy a business. Only this time it has become more of a mainstream proposition, with Goldman Sachs underwriting its first Spac IPO in 2016, while the New York Stock Exchange loosened its listing rules the following year to pave the way for the first blank-cheque company on its bourse.

The initial share price is usually set at $10 each. Spacs generally have two years to do a deal or face liquidation.

Record figure

Spacs raised a record $82 billion in the US last year, a sixfold increase from 2019, according to figures from Dealogic. Indeed, they accounted for half of all money raised in IPOs on Wall Street in 2020. In the first quarter of this year, 298 Spacs raised $95.3 billion in the US, making up three-quarters of all IPOs.

Among them was North Atlantic Acquisition Corporation, spearheaded by Irish packaging industry veteran Patrick Doran and corporate financier Gary Quin, which raised $330 million in January with the aim of buying a European or North American company in the "consumer, industrials or telecommunications industries".

Elsewhere, Irish natural resources and property veteran John Carr is a founding director of a Spac called ESM Acquisition Corporation that raised $300 million in March to hunt for companies geared towards a lower carbon economy.

Hedge fund guru Bill Ackman, tennis star Serena Williams, former basketball player Shaquille O'Neal and ex-House of Representatives speaker Paul Ryan have all become involved in various Spacs in the past year as the frenzy continued. Rapper Jay-Z sold a cannabis company to a Spac in January.

The hottest story in the IPO market has taken place against the backdrop of a general rally by equity markets in the past year, aided by cash that central banks have pumped into financial markets amid the Covid-19 crisis. In a world where traditional stock market flotations of operating companies are a rigorous process and can take years of planning, Spacs can be formed and go public within a matter of months.

They are also being used to secure back-door listings for some businesses, such as shared-workspace WeWork, that have been IPO flops themselves.

However, cracks are beginning to appear. While shares of most Spacs traded at a premium after floating last year, two-thirds of those that have listed in 2021 are now trading below $10.

The CNBC Spac 50 index – which tracks 50 of the largest US cash shells looking for deals – has fallen 18 per cent from its February highs. The S&P 500, meanwhile, has gained almost 7 per cent.

The fear is that with hundreds of Spacs with a combined $1 trillion of spending power, including debt – according to Dealogic estimates – some pretty bad deals may end up being struck in order for sponsors to make money.

Regulator clampdown

Regulators are also beginning to move. The US Securities and Exchange Commission (SEC), which has issued a number of warnings in recent times on Spac marketing, is now reportedly considering clamping down on some of the rosy growth projections being made by blank-cheque companies.

Lawsuits by Spac investors are also beginning to creep up, with allegations of misrepresentations linked to IPOs and claims based on the fiduciary duties of Spac officers and sponsors to investors.

Meanwhile, investments legend Warren Buffett took aim at the Spacs craze during last weekend's annual gathering of investors in his multinational Berkshire Hathaway, calling it "a killer".

Buffett's right-hand man, Charlie Munger, went further. "I call it fee-driven buying," he said of Spacs.

“They’re not buying because it’s a good investment. They’re buying it because the adviser gets a fee. And of course, the more of that you get, the sillier your civilisation is getting.”

But has the market already worked this one out? Only 13 Spacs listed their shares in the US last month after raising $3 billion, marking a massive drop from the 109 blank-cheque companies that raised $35.4 billion in the previous month.

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