Future looks bright for Canadian SPACs

Although they have a long and storied history south of the border, SPACs are a relatively new concept here in Canada

Future looks bright for Canadian SPACs
Although they have a long and storied history south of the border, special purpose acquisition companies (SPACs) are a relatively new concept here in Canada. After first being permitted in Canada two years ago after the introduction of new regulations, six SPACs have been launched and have tested Canadian investors’ appetite with varying success.

SPACs are, effectively, blank-cheque shell companies that raise money in public stock offerings from investors and then seek out attractive private companies for acquisition. A SPAC has around two years to make an acquisition but if a deal doesn’t happen the SPAC must return its capital, plus interest, to shareholders.

If the SPAC is ready to complete a deal, shareholders are given the option to evaluate the proposal. “If they like the deal, the investors will convert their cash into formal shares and the company owns the cash. If they don’t like it, the investors can have their cash back,” says Cam di Prata, co-CEO of the SPAC Gibraltar Growth. “For investors, it’s attractive because they get to play very early with the leadership team and in addition to buying shares they typically get options in the company.”

It’s not been all smooth sailing for Canada’s six SPACs, and the first two to launch were unable to successfully close an acquisition. Three of the remaining six have been able to complete deals and Gibraltar Growth, which was the fifth to launch, expects to close its acquisition of luxury retailer LXR & Co later this month.  “Each SPAC has done very different things. Those differing styles typically reflect the leaderships,” di Prata says. “Everyone plays to their strengths. I would say it’s ‘so far, so good’ for Canada’s SPACs. We haven’t closed our deal yet, but we are well on track to do that.”

The two SPACs that were unable to complete acquisitions both had something in common: they were targeting companies that were publicly traded or already had a public following. di Prata believes that, in these cases, it becomes difficult for the SPAC to prove to investors they can create greater value. Although it may be more difficult to complete a successful acquisition of a company that is already public, di Prata doesn’t think it’s impossible.

“The four SPACs that have been successful made acquisitions of companies that were private and had a good chance to grow further and faster with the leadership team that bought them,” di Prata says. “Being private, they also have greater opportunity to access public capital in the future.”

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