Taking The Measure Of SPACs

Looking to sell? Try a SPAC. Looking to get back in the game? Also try a SPAC.

With traditional acquirers less eager than ever and the IPO market moribund, LBO shops in need of exits are turning to special purpose acquisition companies as viable options. At the same time, increasingly popular SPACs have drawn a stamp of approval from large underwriters eager to support LBO pros who might face difficulty raising a traditional buyout fund.

Chicago-based LBO shop Madison Dearborn Partners has led the SPAC-exit parade, posting up two consecutive exits to vehicles raised by Nathan Leight and Jason Weiss of New York-based buyout firm Terrapin Partners. Madison Dearborn sold Great Lakes Dredge & Dock Corp. in 2006 and a division of paper company Boise Cascade in late 2007 to Aldabra Acquisition and Aldabra Acquisition 2, for $160.0 million and $1.6 billion, respectively.

Following Madison Dearborn’s cue, earlier this month Ohio-based Kirtland Capital Partners sold Essex Crane Rental Corp. to Hyde Park Acquisition Corp., a New York-based SPAC, for $210 million. In February, Kohlberg & Co. sold Critical Homecare Solutions Holdings Inc. to MBF Acquisition Company, a Florida-based SPAC, for $420 million.

Once considered the black sheep of the buyout family, SPACs are gaining a new sense of glamour. Not only are they presenting themselves as attractive exit strategies for LBO-backed portfolio companies, but they’re also proving themselves to be vehicles for veterans looking to raise new pools of capital. Tom Hicks, once a colossus in the buyout world before his firm cratered under the weight of bad telecom bets, returned to the world of acquisitions in 2007 by launching a SPAC. Hicks’s vehicle, called Hicks Acquisition Co. I, raised a then-record $550 million; it has yet to strike a deal. Michael Gross, a founder of Apollo Management, launched his own $500 million SPAC, which announced a $1 billion deal last week.

Most recently, LBO firm J.W. Childs & Co. decided to turn to the SPAC market in lieu of raising a new institutional fund. The firm is dealing with a struggling portfolio and high-ranking personnel departures, both of which spell trouble for shops looking to tap the traditional market of limited partners. A SPAC would allow the firm to establish a fresh track record, according to a source familiar with the shop.

If J.W. Childs follows through with the SPAC plan, it would join an increasingly crowded field. Last year, SPACs raised more than $12 billion, twice the total of 2006 and 2005 combined. Strengthening the vehicle’s popularity is the entrance of prominent underwriters to the space: Citigroup, Deutsche Bank, Merrill Lynch, Morgan Stanley and JPMorgan participate in what’s become 20 to 30 percent of the IPO market. Even Goldman Sachs entered the ring last week, underwriting a $350 million SPAC formed by former Fisher Scientific CEO Paul Montrone.

The growing SPAC community is hungry for deals. As publicly traded entities built to acquire a company and adopt its line of business, they have a short window of time in which to buy. If no deal is struck, the money goes back to investors. Because the credit crunch has brought deal flow to a standstill, well-capitalized SPACs looking for targets are finding willing sellers in buyout firms seeking to harvest their portfolios.

However, because of a few drawbacks, many buyout firms haven’t fully adopted SPACs as an exit method yet. For one, valuations aren’t often negotiable: SPAC deals are priced like IPOs, and prices are based strictly on trading patterns of comparable companies, said Joe Marren, managing director at boutique investment bank Sagent Advisors. Further, SPACs, with their limited time frame, aren’t well-positioned to participate in auctions.

But most importantly, SPACs need shareholder approval before deals can close, casting some doubt on the all-important certainty of close. A SPAC’s ability to seal a deal hinges on a shareholder’s “contingent value right,” or the right to tender its shares in lieu of approving the deal. This can allow SPAC investors to drive up the price for a deal. Madison Dearborn experienced that in its second SPAC exit. When shares of Boise Cascade’s acquisition vehicle, Aldabra Acquisition 2, traded above the offer price for the target, Madison Dearborn had to pony up an incentive in the form of minimum stock price protection in order to secure a majority vote, a source familiar with the matter said.

Although there may be less certainty of close, SPAC sales do present a greater certainty on pricing than do traditional IPOs. Typical public offerings take four to five months to orchestrate. SPACs, however, have already raised their capital and therefore have no fear as to where the market might be, said Cal Hackeman, managing partner with accounting and consulting firm Grant Thornton. LBO shops are nicely positioned to sell to SPACs, he said, since the buyout firm has cleaned up the company and readied it for its next round of capital.—E.G.