Merging company

Spac negotiators soften terms to stem investor flight

Customers of the pharmaceutical company Gelesis take its pills for weight loss.

Group executives had another concern when Gelesis merged with a blank check company: losing investors.

Before the merger closed, the deal team softened the terms to entice investors not to flee. Yet 99% of investors withdrew their money anyway, allowing Gelesis to raise just $105 million instead of the planned $376 million. The Boston-based drugmaker then laid off 140 marketing employees.

The generous investor provisions for the Gelesis merger are another sign of how the once-hot market for special purpose acquisition companies (Spacs) has collapsed. Power shifted from executives making deals to the investors needed to back them. Even then, some investors balk.

Spacs are front companies that raise funds from investors and list on the stock exchange. Their sponsors then look for a private company to go public through a merger. Investors who financed Spac’s IPO have the option of withdrawing their contribution before the merger if they do not like the chosen target company.

These transactions are becoming more and more difficult to carry out. Nineteen mergers have been canceled this year, compared to three in the same period last year, with many failing due to a combination of high investor redemptions and insufficient liquidity from private investors through a structure known as the pipe name.

Spac investor redemptions hit 81% in March, according to Dealogic. Adding uncertainty to the market, the US securities regulator last week proposed sweeping reforms for Spacs.

Pill maker Gelesis merged in January with Capstar Special Purpose Acquisition Company. The Spac vehicle was led by Steven Hicks, a 28-year veteran of the radio industry and founder of investment firm Capstar Partners.

The terms offered to investors included a $15 million backstop deal, in which capital is put in place to replace investor withdrawals. The deal team also tried to entice investors by giving up around 2 million shares of the sponsor group consisting of Capstar Partners and Pimco, giving them free access to investors.

The deal also included an earn-out clause in which investors would receive additional shares if the company’s stock price traded high enough for long enough after the merger was completed.

“There’s very little leverage and Spac’s sponsors really want a transaction to go through,” said Anna Pinedo, partner and co-head of global capital markets at Mayer Brown, a law firm . “They are very responsive and understand the need to be flexible.”

Gelesis, whose shares have fallen 45% since its merger, declined to comment. Capstar did not respond to a request for comment.

Negotiators offer investor-friendly deals in almost every deal, desperate to close their deals or risk abandoning the merger.

“A number of Pipe investors feel like they’ve been burned, so hedge funds that are still interested arguably have their pick of the best deals with the most attractive terms,” ​​said one. lawyer specializing in mergers and acquisitions.

The terms “help some deals get picked and proceed to signing,” the attorney added, while others “just die on the vine, because they don’t get traction.”

In the heyday of blank check vehicles in 2020, some sponsors made billions, usually by taking a 20% stake in Spac for a nominal price of $25,000 that turns into a smaller stake once the merger is complete. .

Column chart of the number of Spac mergers withdrawn showing that Spac agreements are increasingly canceled

Sponsors are now forgoing some of these benefits in an attempt to win over investors. The forfeiture of the Gelesis deal took supportive investors back to $4.30 per share, a steep discount from the typical $10.

“It is clear that Spac accepted this type of support agreement shows that it was very difficult to find investors who had the slightest confidence that the [deal valuation] was even nearly correct,” said Michael Ohlrogge, a New York University Law School professor who studies Spacs.

Other traders offer bonuses to investors in exchange for not redeeming their shares.

Spac’s planned merger for Lanvin Group, the fashion arm of Chinese conglomerate Fosun International, offers a bonus pot of 3.6 million shares that will be split among non-redeemable shareholders. Former Goldman Sachs chairman Gary Cohn introduced a similar term in his blank check deal to go public with lottery operator Allwyn.

“It’s the prisoner’s dilemma,” said a lawyer who specializes in mergers and acquisitions. “Ideally you want everyone to redeem but you to get the bonus, but there is an inflection point.”

In some cases, negotiators are more direct and simply put money on the table.

Hong Kong-listed digital media company Hypebeast agreed to a Spac merger this week that would give it a second listing in New York. Non-redeemable shareholders will receive a quarterly cash dividend of $0.05 per share until the deal – which is backed by NFL star Tom Brady, tennis champion Naomi Osaka and other celebrities – be concluded.