SPAC boom offers exit opportunities for ME tech scale-ups
While SPACs – also known as ‘blank check companies’ – have been around for decades, funds raised by SPACs are breaking records. According to Umar Saleem and Shivendra Singh from Maven Investment Partners, the backdrop provides significant opportunities for Middle East technology companies with the ambition of scaling-up internationally.
A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Only a few months into 2021, an amount of $96.7 billion has been raised in nearly 300 SPACs in the United States.
As a result, there are over 430 US-based SPACs with total gross proceeds of $140 billion seeking suitable acquisition targets. Assuming a SPAC seeks a target which is 4x to 5x its size, these SPACs have an acquisition fire power in the range of $560 billion to $700 billion.
Leading high growth technology companies, especially those looking to scale up stand to benefit tremendously from listing via a SPAC, as it gives them instant ability to access the deep and mature US equity capital markets.
How SPACS are structured?
Typically, a SPAC is led by a sponsor team that has domain expertise in a certain industry sector. SPAC investors rely heavily on the sponsor team to source the right acquisition target, negotiate a favourable valuation, assist in raising supplemental PIPE capital and secure shareholder approval for the target acquisition.
SPAC shareholders typically end up owning a minority stake in the target and the existing target shareholders exchange their shareholding for listed shares in the SPAC. The end result is a publicly listed target company that has sold a minority shareholding for cash via a secondary sale or a capital increase. This is a very similar outcome to that of a traditional IPO – the key difference being the listing process.
SPACs involving Middle Eastern investors
The MENA region is not unfamiliar with SPACs. In February of this year, Lucid Motors, which is majority owned by Saudi’s Public Investment Fund (PIF), announced a merger with Churchill Capital IV, a $2.1 billion SPAC sponsored by Wall Street deal maker, Michael Klein. The acquisition value of Lucid was $11.75 billion (representing 5.3x enterprise value/ 2022 expected revenues at $10.00 per share; CCIV shares closed at $23.78 on April 1st).
The acquisition was further supported by an additional investment of $2.5 billion from PIPE investors, who are typical longer-term high quality institutional investors. In addition, Anghami, the leading music app in the MENA region, recently announced a merger with Vistas Media Acquisition Company, a deal valued at $219.5 million enterprise value, representing a valuation of 2.5x enterprise value / 2022 expected revenues.
Vistas Media is a $100 million SPAC whose acquisition proceeds were further supplemented by a $110 million PIPE transaction to complete the acquisition.
The opportunity for MENA tech companies
Middle East high growth tech companies with ambitions to scale can benefit from access to capital and enhanced valuation, as US equity markets have the regulatory frameworks and are more familiar with using alternative methodologies to value high growth companies. In the US, it is not unusual to use valuation metric that is based on revenues multiple, to the extent it is appropriate.
On the other hand, many regional equity markets are income and dividend focused, a methodology that is more appropriate for mature businesses than for high growth technology companies. An attractive valuation with better access to capital can be accomplished by using a US listed SPACs.
SPACs versus IPOs
SPAC mergers are alternatives to an IPO process. The key difference is that there is more price certainty with a SPAC merger, as the price is negotiated with the sponsor rather than negotiated with the equity “market” in the case of a traditional IPO. Equity markets are in some instances unpredictable and faceless, while a SPAC sponsor can be viewed as a partner throughout the entire acquisition process and in many instances, in the post-acquisition phase.
In addition, the SPAC listing process is also shorter for the target, as much of the upfront work of an IPO such as listing and raising capital has already been completed by the SPAC sponsors.
Key considerations for SPAC targets
Companies that are considering merging with a SPAC will be held at the same standards of corporate governance and reporting requirements, as all other listed companies in the US. Therefore, it is absolutely critical that target companies have the necessary internal controls, corporate governance, accounting/reporting systems and risk management framework in place as they consider this exit option.
Summary
In summary, the SPAC phenomenon is something the investors in high growth companies across MENA region should seriously consider as a viable exit strategy. In some cases, this is a far superior exit alternative to traditional exits, as it allows regional high growth companies access highly liquid capital markets in the US, which are able to provide the appropriate value for business - particularly companies that are technology driven.
About the authors: Umar Saleem and Shivendra Singh are the co-founders of Maven Investment Partners, a Middle East based boutique advisory firm focused on corporate finance advisory, restructuring and transformation.