Infor deal with ECN Capital is making heads spin

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SPAC pioneer Infor Acquisition Corp. just took all the fun out of running a special purpose acquisition corporation by giving up virtually all of the founding shareholders' $60-million in potential profit as part of the sector's precedent-setting debut deal.

Infor, one of six Canadian SPACs that collectively raised $1-billion over the past year, announced plans on Monday to be acquired by ECN Capital, a specialty lender that is being spun out of Element Financial Corp.

It's the first Canadian SPAC transaction to be announced, with a value of $220-million, and it's making heads spin in financial circles.

The structure of the Infor deal was something of a surprise. SPACs were pitched as blank cheque acquisition companies: The typical approach is to buy a private company, fix it up, then sell it or take it public.

This game plan has been around for two decades in U.S. markets, and came to Canada last year in the wake of regulatory changes. Rather than making an acquisition, Infor proposes being gobbled up by Element, a public company. If the goal was to be a minority investor in Element, Infor shareholders could have done without the SPAC.

Infor founder and chief executive officer Neil Selfe has a simple explanation for this turn of events: Infor looked at more than 40 potential transactions since going public last year, and the investment in Element was by far the most attractive opportunity.

While Mr. Selfe's explanation makes sense, the experience does not bode well for other SPACs. Infor's founders include some of the best-connected players on Bay Street – the list includes CI Financial chairman Bill Holland, ex-Ontario Teachers' Pension Plan fund manager Brian Gibson and former CIBC banker Richard Venn. So the question that's being asked runs along these lines: "If this crew can't find attractive private company targets, who can?"

That's more than an academic question, as the clock is ticking on all the Canadian SPACs. These companies must return the cash they've raised to backers if they cannot do a deal within two years of IPOs.

The more pointed question about Infor's deal revolves around the financial concessions the founders are willing to make as part of their campaign to win approval of the Element deal when fellow shareholders vote on the plan. As you would expect on Bay Street, the focus is on compensation.

SPACs are structured to give the founders a significant slice of potential profits on an acquisition – this is often referred to as a "promote" fee.

Under the terms of Element's offer, the founders' share or promote would have totalled $60-million. But Infor's news release states that to achieve a "shareholder friendly" transaction, the founders will give up 80 per cent of their upside. The founders' equity will be swapped for $12-million in ECN Capital shares.

Founders have taken a haircut to get SPAC deals done in U.S. markets, but Infor's founders are taking a massive concession in order to get shareholder approval of the Element deal. Again, the question being asked on Bay Street runs along these lines: "If Infor's all-star team is giving up 80 per cent of their upside, how much will other SPAC founders need to concede to get a deal approved by shareholders?"

From Element's point of view, this transaction makes perfect sense. The company already owned a 7-per-cent stake in Infor, dating back to the IPO last year, and acquiring the SPAC brings $220-million of relatively low-cost capital just as ECN Capital makes its debut, with acquisition-fuelled growth plans.

For Infor shareholders, this is an unexpected ending. Rather than owning a controlling stake in a business that was previously private, they're being offered a minority position in an already public company. However, the relatively strong performance in both companies' share prices since the transaction was announced show there's investor support for the plan.

For the rest of the SPAC sector, the Infor deal is sobering news. It shows that it will be far more difficult to invest the money raised over the past year than SPAC backers expected. And for Bay Street financiers, this first deal shows that making a SPAC work may mean sacrificing what looked like a lucrative payday.