In Blank Checks Firing Blanks (Breakingviews.com via NYTimes.com), Lauren Silva Laughlin and George Hay write about the recent performance of blank check companies, otherwise known as special-purpose acquisition corporations or SPACs. Blank checks are shell companies that raise money from the public in order to acquire a business the identity of which is not known at the time the capital is raised. The trick is that a deal must be consumated before a certain date or the funds must be returned to the investors.
Many of the blank checks raised in 2007 are running out of time to complete an aquisition. While some 2007 SPACs did manage to seal a deal, it seems most were unable to do so because of the turmoil in the markets and were forced to liquidate:
About 40 of 66 SPACs that started in 2007 have been liquidated or will probably end up being liquidated, according to SPAC Research Partners.
It turns out that those SPACs forced to liquidate have outperformed those that actually completed a transaction:
And SPACs that sat on cash and safe investments have actually outperformed those that did deals. Take the GSC Acquisition Company, established by GSC Group, a debt-focused investment firm. The SPAC’s bosses tried to acquire Complete Energy, a power producer. But the deal wasn’t completed in time, and GSC Acquisition was liquidated last month.
Investors received around $9.80 a share in cash, just shy of the $10 they paid in its initial public offering two years earlier.
Investors in SPACs that did deals haven’t been so lucky. Shares of Aldabra 2 Acquisition Corporation, for instance, have plunged more than 75 percent since that SPAC bought Boise Cascade’s paper, packaging and transportation business and changed its name to Boise Inc. in February 2008.
From a deep value investor’s point of view, SPACs present an interesting investment opportunity. The value analysis is simple enough: Most trade at a discount to net cash. The difficulty is in assessing which will actually return the cash and which will spray it away on an acquisition. In making such an assessment, it helps to have a large activist investor sitting on the register. Cue Daniel Loeb and Third Point LLC. Third Point’s most recent 13F filing shows a number of SPACs in Loeb’s portfolio, including the following (via Market Folly):
- Liberty Acquisition Holdings (LIA): 11.75% of Loeb’s portfolio
- Victory Acquisition Corp (VRY): 5% of Loeb’s portfolio
- Trian Acquisition (TUX): 4.95% of Loeb’s portfolio
- Triplecrown Acquisition (TCW): 4.35% of Loeb’s portfolio
- Global Brands Acquisition (GQN): 2.4% of Loeb’s portfolio
- Global Consumer Acquisition (GHC): 1.8% of Loeb’s portfolio
We haven’t looked at any of these in detail, but they might present a happy hunting ground for the liquidation value investor. We’ll return to these stocks if there’s further turmoil in the market.
[Full Disclosure: We do not have a holding in any of the securities listed above. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]
[…] is an interesting graph. It show a comparison of compound average returns from shells and Special Purpose Acquisition Companies (SPACs), which we previously discussed in the post, Blank checks: Fertile fishing grounds for liquidation […]
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While the liquidation value argument is a key one that virtually eliminates downside. The really nice part of these companies is that if you buy the stock with the equity warrants either through purchase of the units or as seperate transactions you can virtually create a bet that has no downside risk (except potential fraud) and unknown upside. You do this by investing the gain from potential liquidation into the warrants.
The warrants act like rocket fuel if a transaction is done. You’ll notice if you dig into these things that the founders typically all hold warrants that were issued at significant discounts. Marty Whitman would call these discount securities. Also, with the hedgies like Loeb, Klarman, and others riding shotgun. You’ve got a very good chance that if a deal is going to get done it will be a good deal at a discount price significantly adding to the attractiveness of an investment in the warrants and the stock.
An example would be GHQ which has a deal set up to purchase Iridium Holdings for 5 times EBITDA through an all equity transaction which while dilutive will leave you holding shares of a company with no debt, a pile of cash, and a company valued at 5 times EBITDA when the comps are trading at higher multiples with leverage. All-in-all not that bad of a deal.
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thats a very interesting investment strategy, i’m going to have to look into that and get back to you. would be interesting to pigghback Baupost into a SPAC.
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LIA is not doing a deal. LIA is Liberty Acquisition Holdings Corporation. They have an international cousin set up by the same founders called Liberty Acquisition Holding (International) Company (Bloomberg Ticker: LIACS NA) that is doing a deal with a U.K. based insurer. These are different companies with similar names.
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It’s a YTM thing….
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In Canada, it’s different. “Capital pool companies” have two years to commit to buy a business or else they’re delisted, not liquidated. They may even stay listed by transferring their shares to a shell-company list called the “NEX Board.”
It shows you the difference between Canadian and American securities regulations. As a general rule, Canadian regs are tougher on the person, while U.S. regs are tougher on the company.
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If I remember correctly Seth Klarman holds some SPACs as well. Need to go dig up his portfolio and take a look.
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LIA looks to be doing a deal. Wonder if Loeb is displeased about that, or actually believed in the acquirers’ ability to do a knockout deal?
http://online.wsj.com/article/SB124628459346568125.html
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