The fading beauty of SPACs


  • Business
  • Saturday, 12 Mar 2016

Getting the buy-in from shareholders appears to be an uphill task for companies

THE allure of making easy money from special purpose acquisition companies (SPACs) is now starting to wear out.

It is becoming more apparent that shareholders are buying into SPACs for its ‘technical rulings’ in protecting investors.

Investors are buying SPACs with the idea that they can almost make a risk-free return from arbitrage opportunities and the fact that any shareholders who votes a no, gets their money back.

Unless the share price of the SPACs convincingly stay above their respectively cash value (the amount which will be returned to shareholders if a QA is not made in the stipulated time), most shareholders will opt to get their money back rather than to vote for the QA to go through.

This is not helped by the fact that the majority of SPACs listed on Bursa Malaysia are in the oil and gas sector, a sector which investors are running away from.

Thus it wasn’t surprising that when Sona Petroleum Bhd and REACH ENERGY BHD announced their qualifying assets in November 2015, and March this year, both their share prices hardly budged.

There are a few reasons for the lack of excitement, or perhaps more accurately, why investors hope the qualifying acquisition (QA) won’t go through.

On a fundamental and lesser extent, crude oil prices are not expected to hit dizzy heights along with a real oversupply situation. Nobody is queuing up to buy oil and gas assets.

“While it definitely makes sense to start investing during the oil downcycle where cost of production is cheaper there are not many who are not prepared to wait for the long term,” said one analyst who has a trading position in the SPACs.

The bigger and more foreboding reason is that investors see SPACs as a vehicle that enables them to make money as long as they buy the shares below its cash value. It is this cash value, which has held up the share price of SPACs last year.

This is the main reason why hedge funds have emerged as substantial shareholders of the SPACs, namely Cliq Energy Bhd and Sona Petroleum.

CLIQ’s shareholder list boasts of hedge funds and investment names such as Credit Suisse Group AG with a 5.06% and PAG Holdings Ltd with a 5.99% stake.

Credit Suisse Securites Europe owns a 10.61% stake in Sona.

These funds are more likely buying in the SPACs to make a profit, rather than as an investment into the new business.

Cliq is now in the process of being dissolved as it has failed to get the approva from the Securities Commission on its QA.

Cash value holding share price

A SPAC is a firm that is listed with no core operations but is formed specifically for the purpose of making acquisitions from the cash raised via the initial public offering. SPACs have a 36-month deadline to make the QA happen.

The ruling of SPACs clearly states that for an acquisition to go through, the SPACs need to get 75% of the shareholders voting for the deal.

For any shareholder that does not agree with the acquisition, they will get their money back.

This means that even if a SPAC got 95% approval for its QA from shareholders, it will still need to allocate money for the 5% of shareholders who voted a no.

So from a shareholder’s perspective, it is much easier to make money from SPACs by voting down the QA. As long as the share price of the SPAC is below its cash value, why not vote no and be assured of making a profit?

Among the SPACs, Reach Energy has the highest requirement, at some 94.75% of the initial public offering proceeds kept in the trust fund, while CLIQ and Sona Petroleum have kept it at 90%.

Now, most SPACs are trading below their IPO price, because the listing of these SPACs had entailed free warrants along with the mother share.

Thus, although the price of all the SPACs are below their IPO price, investor have made money from the free warrants.

“The investors who bought into SPACs weren’t long term in nature. Most had already made money from the combined value of the mother share and warrants when it was initially listed,” said the analyst.

With the lessons learnt from CLIQ’s impending liquidation and with Sona’s deadline looming, SPACs are starting to realise that the kingmaker in making a QA go through, is not the QA itself, but in actual fact gettint the shareholders to believe in the asset.

If management of the SPACs can rally its investors and convince them that the company will make bigger returns after the QA goes through, then the SPAC has a fighting chance of surviving.

“We used to think that getting SC approval was the hardest. Not in the case of SPACs.

“You need the buy-in of shareholders,” said one observer.

In the spotlight will be Sona which is seeking shareholders’ approval for its proposed QA on March 30.

Sona was listed on July 2013 and will expire end July this year.

In fact, it actually has until March 18 (investors will put in their proxy forms to vote for the EGM), which is next Friday, to rally its investors to agree to its QA.

Sona shares closed at 46.5 sen, which is below its cash value of 48.5 sen.

“For the QA to go through, the share price needs to be convincingly above 48.5 sen.

“Otherwise, shareholders would still rather vote no, and get their money back.

Meanwhile in the case of Reach Energy, should its QA not go through within its stipulated timeframe, investors will get back 94.75% of their money including interests earned.

At Reach’s current price of 68.5 sen, it is trading at a 11.8% discount from its cash value of 77.69 sen. Reach was listed on Aug 2014 and still has more than a year to go.

From a business perspective, an industry observer was of the opinion that the business model of a SPAC would work better if the targeted asset was distressed, or bought at a fire sale sort of pricing.

“Under the SPAC model, it needs to buy the asset really cheap. Thats the only way investors see upside.

“To buy an asset which is at market value, and further down the road inject more capex into the business, shareholders may think twice. They may not want to go through that sort of business risk,” said the observer.

Sona has proposed to acquire a 100% stake in Stag Oilfield assets in Western Australia for US$50mil.

After independent valuers deemed the price tag too high, Sona managed to cut the purchase price by half to US$25mil(RM103.2mil).

At US$25mil, this is just about a quarter of the RM529.2mil sitting in its trust account as at Feb 15, 2016.

However, RM115.1mil of the trust account will be used for working capital and other adjustments.

Meanwhile on March 5, Reach Energy announced that it was proposing to buy a 60% equity interest in Palaeontol BV for a total of US$154.89mil (RM638.2mil).Palaeontol BV is the exclusive owner of Emir-Oil LLP which holds full working interest in an onshore block in Mangistau Oblast in southwest Kazakhstan. The proposed acquisition of the onshore Kazakhstan block means that Reach Energy had dropped a plan to purchase an upstream target in the Asia-Pacific.


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