Debate hosted by Valor Econômico on 20 October on SPACs

The theme of SPACS was debated on Tuesday 20 October at the live forum “SPAC – Special Purpose Acquisition Companies:  A New Way to Finance Economic Recovery: The North American Experience”, held by Valor, with sponsorship from Felsberg Advogados.

Transactions involving the Special Purpose Acquisition Company (SPAC) are seen by experts as a new way to finance the economic recovery and capitalize companies’ cash through the capital market. There are currently 160 SPACs in the United States looking for new companies to invest in.

Common in the American market and still non-existent in Brazil, SPACs are publicly traded companies created with the specific purpose of making acquisitions of other companies, buying part of their capital, generally around 20% of the shares. In practice, they raise funds from investors with a commitment to finding good assets. Hence, they are also known as ‘blank check companies’.

The pandemic has accelerated the search for these operations. Altogether, 147 transactions were carried out through October this year in the U.S., mainly on Nasdaq, totaling more than USD 56 billion. This is four times the amount undertaken in 2019. In 2013, these operations did not even reach USD 1.5 billion, according to a survey by SPAC Research, which specializes in this sector.

“It is possible, for example, to go public on Nasdaq, with the incorporation of another company, without an IPO and at the same time launching BDRs in Brazil on B3. This would be a great alternative for the Brazilian Postal Service when it is privatized,” observed Thomas Felsberg, partner and founder of Felsberg Advogados. The lawyer indicated that this type of transaction tends to interest energy generation, infrastructure, and agribusiness companies.

In Brazil, Minerva Foods, the largest beef exporter in South America, tried to take advantage of the wave and signed a non-binding letter of intent with an American SPAC, for the investing of USD 300 million to acquire 23.3% of the shares of its subsidiary outside Brazil. However, that operation did not proceed.

HPX Corp., a SPAC structured in the U.S. by Brazilians Bernardo Hees (former CEO of Kraft Heinz and Burger King), Carlos Piani (former CEO of Equatorial Energia) and Rodrigo Xavier (formerly of Merrill Lynch and Vinci Partners), raised USD 220 million in July on the New York Stock Exchange (NYSE), in an offer of 22 million units priced at USD 10 each.

“It’s simpler, faster and has more flexible rules than an IPO “

– Lee Hochbaum, partner at Davis Polk & Wardwell LLP

In the view of Lee Hochbaum, partner at Davis Polk & Wardwell LLP, who participated in the event, it is natural that these transactions reach Brazilian companies. Assets that would interest American SPACs include those in the financial and commodities sectors. “We will certainly have at least one hundred operations that will involve Brazil in the coming years,” says Hochbaum.

This type of operation can also be part of the pre-IPO stage of a company, which usually gives more consistent credentials to the transaction, since the company would be issuing constant financial reports to the market. “SPACs generally have 18 to 24 months to complete a transaction. Enough time for the market to assess the performance of the investee,” says Rick Lacher, managing director of Houlihan Lokey Mergers & Acquisitions Group, who participated in the debate.

“It is possible in our economic scenario to find a Brazilian SPAC wanting to incorporate this experience”

– Thomas Felsberg, partner at Felsberg Advogados

For Ricardo Lacerda, founder and president of investment bank BR Partners, the benefits of SPACs are to accelerate several phases of creating value for a company in a listed vehicle, before starting operations. “This makes it possible to raise capital prior to an acquisition or exit from a judicial reorganization. This timing can be crucial for the survival of companies,” he says. Still, the risk is that this vehicle amounts to a blank check. “It is necessary to have absolute confidence in the capacity of the managers to use the resources.”

Lacher warns that, for these operations to be attractive to both sides, it is necessary to stick to some fundamental characteristics. One is to find a company of relevant capital size on the open market. It must be an attractive business with the use of automation, green technologies, or financial technologies, for example. Another important aspect is having a team of managers that inspires investor confidence.

The easing of rules for Brazilian Depositary Receipts (BDR) can also help boost this market in Brazil, says Felsberg. “If the American SPAC targets the Brazilian company, these SPAC shares, after the merger is made, can be traded through a BDR in Brazil”, he explained.

In the Brazilian market, the prospects are positive for the emergence of SPACs, evaluates Felsberg, although the country’s image is currently not at its best abroad. However, the level of development of the local financial market, with “highly qualified professionals, who make interesting transactions”, can boost the segment. “So, it is possible in our economic scenario to find not only SPACs to invest in Brazil, but also perhaps a Brazilian SPAC that wants to incorporate this American experience.”

For the complete article in Portuguese, please see here.