Cash shells or SPACs (special purpose acquisition companies) are purpose-built vehicles with a stock market quote and a board of directors, but no active business and no assets other than a strong management (or advisory) team with specific sector expertise and the funds raised from financial backers (which will typically include management). The structure gives managers a ready-made stock market listing, a cash war chest and an acquisition currency at a time when, owing to global financial circumstances, the cost of financing is high and transactions are difficult to execute.
Cash shells were extremely popular on the AIM market seven years ago, arriving in such numbers that the LSE was forced to tighten the rules to safeguard the market’s reputation. In March 2005 alone, 31 cash shells rushed to list to beat the introduction of the rule changes the following month, which stipulated that a cash shell must raise a minimum of £3 million, a figure deemed high enough to require at least some institutional interest. Other rule changes included tightening up the stated investing policy and a requirement to seek shareholders’ consent annually to the continuance of the policy should it not be substantially implemented within 18 months of listing.
The last couple of years have seen a number of cash shells not only returning to AIM, but, for the first time, obtaining admission to the Official List of the United Kingdom Listing Authority (UKLA) by way of a Standard listing. The timing of the appearance of these cash shells is a function of the regulatory environment of these markets and the volatile nature of the present economic climate. The cash shell structure is designed to take advantage of any dislocation in the market to acquire assets at favourable prices. When asset valuations start to rise, the opportunity for these acquisition vehicles could well disappear.
The regulatory environment for Standard listed cash shells
Access to the Premium listing segment of the Official List, whereby the issuer is subject to onerous eligibility and continuing obligation requirements and is potentially eligible for inclusion in the FTSE indices, is not possible for a cash shell; there are a number of entry requirements that a shell company simply would not be able to satisfy, which do not apply to Standard listing or to AIM applicants. In particular, a Premium listing applicant is required to have unqualified, consolidated, independently audited accounts covering a three-year period; a revenue earnings record in respect of at least 75 per cent of its business for a three year period; and a history of control over the majority of its assets for at least a three-year period.
AIM cash shells are more heavily regulated than those with a Standard listing. In the last two years, management teams and their financial backers have increasingly been making a virtue of the minimal regulatory requirements applicable to cash shells with a Standard listing while raising very significant amounts of money on IPO. The key factor, as had been made explicit in the listing documents, was that a Standard listed issuer was not required to obtain shareholder approval for the acquisition of a target.
While a Standard listing applicant must prepare a prospectus that is approved by the UKLA, it otherwise benefits from the relaxation of a number of rules that are applicable to Premium listed and/or AIM companies. Currently under the UKLA’s Listing Rules, a Standard listed cash shell is not:
In practice, issuers tend to voluntarily commit to certain standards or restrictions in relation to some of the above points, although the UKLA has no power to police compliance with such commitments.
Notable transactions involving Standard listed cash shells Horizon Acquisition Company plc raised £417.7 million on its IPO and Standard listing in February 2010. Horizon achieved its investment goal by acquiring APR Energy, a Florida-based temporary power provider, in June 2011 for £527 million (£221 million in cash and £306 million in Horizon shares). The group retains its Standard listing.
In June 2010 came the IPO and Standard listing of Nat Rothschild’s Vallar plc, raising £687 million to fund acquisitions in the metals and mining industry. June 2011 saw the acquisition by Vallar of PT Bumi Resources Minerals Tbk, an international mining company, and a reorganisation resulting in the introduction of Bumi plc as the new Premium listed parent company. The acquisition price represented a total consideration of £1.27 billion.
Marwyn Management Partners plc obtained a Standard listing in January 2011, raising a relatively modest £6 million. In August 2011, Marwyn acquired AIM-listed Praesepe plc, a gaming company, having raised approximately £40 million to complete the acquisition. Marwyn’s investment objective is to acquire controlling and non-controlling interests in public and private companies, appointing operational managers with a “buy and build” strategy.
The IPO in February 2011 of Justice Holdings Limited launched by, among others, Nicolas Berggruen, the billionaire backer of hedge fund GLG and Pearl Insurance, raised £900 million. Justice Holdings announced in April 2012 an investment of US$1.4 billion for 29% of Burger King. As part of the transaction, Justice merged with the new Burger King holding company, de-listed from the London Stock Exchange and re-listed on the New York Stock Exchange.
Vallares plc, the second of Nat Rothchild’s vehicles, raised £1.35 billion in June 2011 with a focus on oil and gas assets. In September 2011, Vallares announced the acquisition of Genel Energy International for US$2.1 billion. The enlarged group retains its Standard listing.
Practical considerations and recent developments These listings, together with the record of successfully completed acquisitions, represent some of the most significant recent transactions in the London market and clearly show that the cash shell concept, particularly by way of Standard listing, remains compelling in current market conditions. A management team or group of investors thinking of establishing a London-listed cash shell for investment purposes and debating whether to opt for an AIM or Standard listing, should consider the following, in addition to the points referred to above:
Conclusions Ultimately, there are a number of factors which will need to be considered by the management and founders in choosing the most suitable form for a London-listed investment vehicle. Some issuers may consider that a listing on the UKLA’s Official List is attractive to investors, especially when combined with the light-touch regulatory environment, the absence of a sponsor requirement, the absence of an obligation to seek shareholder approval for a reverse takeover and, depending on the issuer’s circumstances, the potential to list with a modest fundraise. However, some issuers may find the requirement to prepare a full prospectus on the enlarged group, vetted by the UKLA, to continue the Standard listing following a reverse takeover to be onerous, although it is open to the issuer to switch to an AIM admission (or indeed, a non-UK market) for the enlarged group instead. For natural resources companies, the potential flexibility in relation to CPR requirements may mean that an ongoing Standard listing for the enlarged group is attractive.
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