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As PE interest heats up, watch for more SPAC mergers in 2020


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The finance world sits at a record high for special purpose acquisition companies or blank-check companies. In 2017, 2018 and 2019, more than $10 billion flowed through the once novel path toward becoming a public company. That’s up dramatically from 2016, when $3 billion in value hit the public markets through the vehicle.

There are two big reasons: New rules made it less risky for investors; and it’s much more forgiving than a traditional initial public offering for just about everyone.

A company or financial institution can create a new company, the SPAC, and register it on the public markets, find investors and update the market about performance as it searches for a target company with which to merge. Once it does, the SPAC merges with the target company, potentially cashing out the owners or trading stock as payment. At that point, because the SPAC was public, so now is the target company.

A new rule in 2012 made the practice easier to digest for investors. Under the rule, investors have to make two votes, one to approve the merger and another to keep their money in the SPAC. Before, there was just one vote to approve and roll in the capital.

“They created two votes and changed the structure, which was the beginning of the new SPAC market. The old market was very sketchy,” said Leon Wagner, principal at financial firm LW Partners, during the 2020 ICR Conference. “The new process leads to more clarity at the time of the merger.”

Unlike a traditional IPO, sellers have the potential to reap a lot more of the actual sale value. A seller might get 30 percent of a sale in an IPO, but under an SPAC, the seller can get the full value of the sale, or balance liquidity, and a stake in the new, public company. That’s exactly what’s happening in the SPAC merger of TGI Fridays and Allegro Merger Corp.

David Sgro, COO and chairman at Crescendo, is overseeing the deal. He said Fridays majority owner, TriArtisan Capital Advisors, will take $30 million in cash, and convert the rest of its ownership to shares of Allegro.  Private equity loves this practice, and given the level of private equity in the franchise space, SPACs are sure to continue as a popular path to the markets.

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