INTRODUCTION
On the 11st of March, Grab Holdings, a Southeast Asian ride-hailing and food delivery app, announced its intention to go public in the US through a merger with the Special Purpose Acquisition Company (SPAC) Altimeter Growth Corp., the financial vehicle from Altimeter Capital Management.
The Singapore-based firm, well known as a tech leader company in Asia, has surged rapidly since its creation in 2012 to become the dominant ride-hailing app in this region. The purchase of Uber’s South East Asian operations in 2018 reinforced the unchallenged position of Grab in this almost-monopoly market. The company also recently developed its business towards food and beverage delivery and financial services for e-commerce merchants. The new equity fund raising through this SPAC merger will allow the company to raise between $3bn to $4bn from private investors. This amount should finance a series of investments supporting the expansion especially in Vietnam, Philippines and Indonesia, countries in which Grab’s main competitor Gojek is much present.
While Grab is still at an early stage of its development - most analysts betting on a breakeven by 2023 -, this SPAC merger could value the firm at around $40bn. If the deal is completed, it would be the biggest one involving a blank-check company.
As the deal flow has been skyrocketing within the past few months, we thought it could be interesting to explore more into detail what a SPAC is and how SPAC mergers have become serious substitutes to traditional IPOs.
WHAT IS A SPAC?
A SPAC is a shell company with no commercial operations, formed with the goal to raise capital through an Initial Public Offering (IPO) to acquire another company which already exists.
A SPAC is formed by investors, or sponsors, who have expertise in a specific industry sector and, in most of the cases, already have at least one deal target in mind, which is not disclosed. Because investors do not know the use of proceeds of the money, a SPAC is also known as a "blank check" company. The capital raised through the IPO goes to an interestbearing trust account, which is only disbursed upon acquisition or liquidation of the SPAC, scenario in which the money goes back to investors. The lifespan of a SPAC is usually of two years, after which the company is either liquidated or becomes listed on one of the major stock exchanges. The sponsors usually receive around 20% stake in the final, merged company.
Even though the first SPACs were created in the early 2000’s, it is only very recently that the number of IPOs made through blank check companies surged very quickly. The amount of capital flowing to them went from $1.8bn in 2014 to an extraordinary $83.3bn in 2020. This incredible raise was largely encouraged by famous investors promoting this type of transaction. For example, Pershing Square’s investor Bill Ackman backed 3 SPACs in 2015 including the IPO of Burger King, which ended up with a payment of $1.4bn cash to its former shareholders. The remaining 71% of Burger King’s value were paid in shares so 3G Capital Management - Burger King’s former owners could keep a stake in the newly formed entity.
Moreover, this phenomenon of SPACs becoming more and more attractive is a consequence of the abundance of uninvested capital that is sleeping since the first half of 2020. It is also driven by the low-interest rate environment in which we are currently living in as it encourages investors to bet on even riskier assets.
ADVANTAGES
SPACs offer multiple advantages to investors & the target alike. The biggest advantage that SPAC offers when compared to traditional IPOs is its relatively shorter time frame. A traditional IPO takes around 12-18 months of time whereas a SPAC can be completed in just 4-6 months. This gives the management much more time to focus on increasing the shareholder value. This quicker process also makes sure that the target company is shielded from swings in the broader market segment & hence, the valuation of the company is not very volatile which can be the case with a traditional IPO. Another key advantage that SPACs offer over traditional IPO is the alignment of interests. In the case of a traditional IPO, the underwriters (banks) have Over-allotment options & greenshoe options which give them certain powers & the banks can use them to their benefits. Since the underwriters of a SPAC are actually the sponsors, they essentially share the same long-term incentives as the company. It can be thought of as an M&A process rather than a transaction. Although negotiations can be difficult, once the merger is completed, they are all on the same team. Some SPACs also offer experienced leadership teams that the target company can use for strategic direction after going public. For investors, SPAC also offers the flexibility to opt out of a target and hence redeem their shares, something a VC fund doesn’t allow.
RISKS
Although the advantages of SPACs are numerous, they remain dangerous instruments with great risks. First, SPACs are a way to bypass the process of IPO, and therefore, a way to bypass the regulations associated with it. Companies can enter the stock market without having to allow regulators to look into their accounts. This is a first factor of risk: investors can’t be sure of the financial health of the company in which they are investing. The fact that the investors don’t know in which company they are investing is also risky: they might want to take their money back if the target company doesn’t fit their expectation. Because of these reasons, SPACs can be considered as a tool with a great risk of creating a bubble: from the beginning, a SPAC relies on the trust of the investors in the people who are conducting it, and if this trust goes away, the entire SPAC is at risk. Like all assets who rely on trust, SPACs come with the risk of a brutal explosion of the bubble. A small breach in investor confidence can spread to all investors and result in a failure of the bag to acquire its target. This failure can also happen after the acquisition, if the investors are not happy with the target or are uncertain about its results.
This happened with Nikola in June 2020. The hydrogen truck manufacturer entered the stock market through a SPAC (VectoIQ), and its value was multiplied by 4, reaching almost $30 billion (more than Ford). Later, the investors learned that Nikola was still in a R&D phase and had still not manufactured only one working hydrogen truck, which resulted in a drop of the share, bringing the valuation of Nikola back to $6 billion. Nikola’s example highlights how trust can be built on almost nothing and disappear as fast as it has appeared.
CONCLUSION
We saw that SPACs had their advantages, as well as their risks. Their success nowadays can be explained by the high liquidity of the market and by the search of investing opportunities in a time where they are lacking. Whether SPACs will still be used in normal times, and whether they will survive successive bubbles, is still a question to be answered. The exportation of SPACs is also uncertain: will it find adepts across the Atlantic, or will it remain mostly used in the United States, where the risk culture has made it born? In France, the SPAC founded by Xavier Niel and Mathieu Pigasse, which raised €300 million, indicates that SPACs also have their enthusiasts in the old continent.
Authors: Aisha Jinsi, Anubhav Narwal, Titouan Guillon, Youssef Nammour, Alexis Bernet, Hector de Vergeron
Contact: alexis.bernet@hec.edu
Date: 02-April-2021