Acasta deal raises the question: Are SPACs useful?

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When Tony Melman and Belinda Stronach launched a special purpose acquisition corporation, or SPAC, called Acasta Enterprises, the pair recruited a lineup of Bay Street all-stars as directors and advisers.

Acasta is using every one of those connections to get Canada's first successful SPAC deal over the finish line this week. The Acasta team should take satisfaction from closing a complex transaction that will see them launch a $1.1-billion company.

But there's a larger lesson from this experience: It is far more difficult for a SPAC to buy a business than seasoned financiers expected when six of these companies were launched with much fanfare last year. As the market for initial public offerings (IPOs) recovers in 2017, it's worth asking if SPACs are worth the effort and the expense.

Acasta created the country's largest SPAC by raising $402-million in July, 2015. This November, the company put that cash to work by offering to buy two private-label consumer products companies and an aircraft leasing firm, instantly transforming Acasta into a legitimate private equity company – a sector Mr. Melman knows well, as he was a senior executive at Onex Corp. before becoming Acasta's founder and CEO.

The structure of SPACs gave Acasta shareholders the right to both vote on the transaction – they approved it this week – and redeem their shares for the IPO price of $10 each. When the dust settled, 70 per cent of Acasta shareholders did opt to cash out, redeeming a total of $285-million.

The decision reflects the two types of folks who buy SPACs. Some are fundamental investors – mutual funds, pension plans and individuals – who take a buy-and-hold approach. Others are hedge funds – sometimes called the SPAC mafia – who play these deals for quick profits.

A hedge fund that bought into the Acasta IPO received a share and half a warrant for its $10. Once Acasta announced its transaction, that hedge fund could redeem an Acasta share for $10, and still hold the warrant, which gives the right to buy additional Acasta shares at $11.50 for the next five years.

Acasta warrants are currently trading at $1.20 each. By redeeming, members of the SPAC mafia get their original investment back, with interest, and still own equity that's going to increase in value if Acasta prospers. That's a trade a hedge fund will do all day long.

Paying out shareholders left Acasta scrambling to raise money to buy the three businesses. Founders chipped in an additional $30-million. The remaining 30 per cent of Acasta shareholders, the buy-and-hold crowd, came through with another $134-million by purchasing more Acasta shares through a private placement done at the IPO price of $10 each.

This is where connections count. Acasta's board and advisers feature current or former executives of Air Canada, Canadian Pacific Railway Ltd., General Electric Co., Royal Bank of Canada and Bank of Nova Scotia. Sources close to Acasta said the company's backers opened their own wallets to support the three acquisitions, and helped lobby Acasta's fundamental investors, mainly mutual-fund managers, to stick around and take part in the private placement.

This whole process has proven time consuming and expensive. Fees paid to investment banks on the original Acasta IPO alone ran to $22-million, and 70 per cent of those shares ended up being redeemed. Mr. Melman is looking ahead, rather than backward, in talking about the deal; in a press release, he said: "We are excited about our future, in building the consumer products and commercial aviation platforms, and launching our private equity business."

But as we move forward, there should be a note of realism about what SPACs can and cannot achieve. Of the four Canadian SPACs that have announced transactions, only Alignvest Acquisition Corp. has announced an acquisition that won broad support – it is buying a U.S. wireless telecom company.

Like Acasta, Dundee Acquisition Ltd. is going to its backers for more money in order to close its planned acquisition of a student housing company. And Infor Acquisition Corp. opted to cancel the first transaction it announced – the firm is still looking for a deal. SPACs can become growth companies, but their backers have come to realize the hard work starts after the IPO.