Special purpose acquisition companies (“SPAC’s”) are rapidly becoming the IPO vehicle of choice in the public markets. Most SPACs are seeking high-growth, middle market businesses with Enterprise Values ranging from approximately $250 million to $5 billion. For founders and shareholders of companies that fit this profile, SPAC’s have become a desirable alternative to the traditional IPO process. However, when researching the right SPAC partner for your business, you may be wondering how these deals work. If your Enterprise Value is $400 million, do you have to find a $400 million SPAC? If you don’t know the answer to this question, then the following information will help you understand the full SPAC purchasing power.
There are 2 major factors in SPAC economics with regards to its purchasing power:
1) The size of the SPAC (the money raised at IPO that sits in trust)
2) The size of the Private Investment in Public Equity (PIPE)
Does a $400 million SPAC acquire a company that is valued at $400 million (or less)?
No. There is no maximum size of a target company. In fact, it is typical for a SPAC to combine with a company that is 3-5x times its IPO proceeds, which means that the ownership team will ultimately remain as the majority shareholders with the SPAC investors representing a minority (typically 15-30%) of the post-combination entity.
At SCP & CO Healthcare Acquisition Company, we are looking to find a company with an Enterprise Value (EV) between $750 million and $1.5 Billion. This EV is 3.25x to 6.5 times the size of our SPAC, which raised $230 million, including the full exercise of the overallotment shares.
Where does the money come from if the target EV is 5x more than the SPAC?
It comes from PIPE, which have been a common financing vehicle in the public markets. These additional funds are raised during the process of completing the business combination (the “de-SPAC”), and they are invested directly into the target alongside the original SPAC funds. The PIPE funds are not raised until the SPAC sponsors and the management team, bankers, and board of their desired acquisition have agreed on terms to merge. This process allows institutional investors to become familiar with management of the acquired company and form a relationship with them in a more constructive fashion than the traditional whirlwind road show.
Specifically, a SPAC’s institutional investors are consulted by the SPAC sponsors and presented with the investment thesis of the acquisition company so that they can decide if they want to provide further financing for the deal via a PIPE transaction. This process validates the target before proceeding to enter the public realm and provides SPAC managers with additional counsel and advice on their valuation calculations.
understanding SPAC purchasing power
PIPE investments regularly outsize the original SPAC value. It is common to see PIPE financings of 2x the value of the SPAC which can double or triple the purchasing power of the SPAC. Therefore, if your company is considering an entry into the public markets, and you are reviewing potential SPAC companies to contact, be sure to take the total possible economics into account. A published SPAC value can simply be a down payment on a total transaction value. Understanding the relationship between the IPO value of a SPAC and its potential total purchasing power is an important element in doing due diligence to find the right business combination partner for your company.
If you would like to learn more about SCP & CO Healthcare Acquisition Company, and how we might help your company utilize a SPAC IPO to access the public markets for growth capital, please visit www.shacspac.com and contact us today.