January 10, 2020
De-SPAC Process – Meeting Minimum Cash Condition
Through the SPAC/PPETM business combination, the combined entity ends up with two currencies: equity and cash. The definitive agreement for the business combination may include a minimum cash requirement.
In this third post of the series on De-SPACing, let’s look at a few examples of backstopping and/or adding cash on the balance sheet of the combined company.
Debt Financing in Connection with the Consummation of the Business Combination
Debt financing is one of the investment vehicles that can be used by the combined company, as it considers its options in ensuring the minimum cash condition is met.
As an example, Pivotal Acquisition Corp. (PVT) and MGG entered into a commitment letter, where Pivotal may borrow (and MGG will lend) up to $150 million of 5-year convertible notes. However, the principal amount would be reduced if more than $80 million remains in the trust account after redemptions. This transaction has a minimum cash closing condition of $175 million. The Convertible Notes would pay interest at a rate of 8% per year, with 4% being paid in cash and 4% being paid in additional Convertible Notes.
PIPE
A private investment in public equity, often called a PIPE deal, involves the selling of publicly traded common shares or some form of preferred stock or convertible security to private investors. It is an allocation of shares in a public company not through a public offering in a stock exchange.
PIPE deals are used by SPAC entities to bring cash on the balance sheet of the company post combination, as many SPAC investors are yield investors, who will redeem even when the combination is a great deal due to their charter limitations. However, PIPE often becomes a detriment of the share price of the new public company.
When a PIPE is announced below $10.00, a SPAC can (and should) expect a complete redemption of the trust account, which calls in to question the float and listing eligibility. Such transaction will most likely result in a nearly non-existent float.
Warrants Tender – Before and After Combination
In the case that the Warrants holders do not wish to retain their Warrants following the Business Combination as they see the possibility of receiving a more liquid security and/or to reduce the potential of market overhang on the trading of the Shares created by the significant number of outstanding Warrants, the SPAC can tender the warrants into the public market. In the case of a successful warrants tender, the company receives cash to be used for organic growth or M&A activities.
The considerations above show the flexibility of SPAC/PPETM De-SPAC process to tailor the equity and cash needs for a healthy start of the combined company in the public market.