You could call it a SPAC smackdown.
Earlier this week, Simon Romano, the lawyer who spent years "Canadianizing" the special-purpose acquisition corporation (SPAC), faced off against a skeptic or two during a lively panel discussion at the Capital Connection Conference in Toronto.
Five SPACs – publicly traded shell companies that first emerged in the United States in the 1990s – hit the market this year in Canada and raised more than $1-billion. Each has approximately two years to make an acquisition or return the money to shareholders.
"T-bill return, plus a warrant, plus a call on the business. … To me it's like a double-juiced deal," Mr. Romano, partner with Stikeman Elliott LLP, argued on the merits of investing in SPACs.
In other words, if shareholders don't like the M&A transaction proposed by the SPAC, they can vote against it and get their money back – with interest. The warrants give investors the option to buy additional shares at a later date, thus keeping a bird in the hand.
In addition, Canadian SPACs are stuffed with "fantastic management teams" who know the market well, Mr. Romano said.
But moderator Priya Patil, head of business development, diversified industries, with the Toronto Stock Exchange, curbed a bit of Mr. Romano's enthusiasm. "SPACs will be competing with private-equity players, and there is a lot of demand for good deals," Ms. Patil said.
Alan Lever, partner with Toronto-based private-equity firm Torquest Partners, weighed in, essentially arguing that if a SPAC went head to head with a private equity firm in an auction, the shell company would probably lose. Private equity companies can act quickly and close a deal with no shareholder vote, he said. It's akin to a home buyer making an offer on a house with no conditions attached, while a competing bidder has to hobble back to the bank to get financing approval.
"It's a very difficult thing to do to be in a competitive process, in an auction process, where you don't have certainty of close," Mr. Lever said. "So they're running up against private-equity funds that have certainty of close."
On this point, Mr. Romano agreed.
"A SPAC is not going to be very good in an auction. There is this uncertainty about the [shareholder] vote," he said.
So if SPACs can't compete in an auction, what in the world are these guys going to do? Basically, they have to work harder to find deals that others have either missed or don't want to get involved in.
"It has to really find a kind of a proprietary, kind of hard, difficult, interesting deal. Those are the ones we've been looking at so far," Mr. Romano said.
Mr. Lever threw one final dig Mr. Romano's way. If and when a SPAC closes its first M&A transaction, its shareholders may be diluted by up to 20 per cent. That happens when founders exercise their conversion privileges, which allow them to buy stock at drastically reduced prices. It amounts to a hefty fee.
But Mr. Romano fired back, saying that fees for investing in private equity are comparable if not higher.