Outlook for SPACs remains bleak

by MARK RAO / pic by AFP

Efforts to promote special-purpose acquisition companies (SPACs) in Malaysia remain hampered by unresolved structural issues affecting such listed firms on the local bourse.

The future of SPACs in the country looks bleak as structural issues continue to push companies to look elsewhere to launch their initial public offerings (IPOs), Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia told The Malaysian Reserve (TMR).

He said many companies have approached the investment bank for IPOs but none have considered the SPAC method route lately.

“For the time being, the outlook for SPACs in Malaysia is dim as structural issues continue to hinder the growth of these companies.

“The euphoria that first surrounded companies like Red Sena Bhd quickly died down as these issues prevented the completion of a qualifying acquisition (QA),” he said.

SPACs or targeted acquisition companies in Malaysia have generally failed to secure a QA within a set deadline due to arbitraging and valuation issues that remain as structural challenges for SPACs todate.

Chia said these same issues are behind many SPACs’ failure to take-off the ground in Malaysia.

He added that Malaysia’s SPAC market will continue to be sparse and unattractive to prospective companies until the vital structural issues are addressed and rectified.

SPACs are non income-generating businesses that raise funds via an IPO to purchase a generating asset. To trade on Bursa Malaysia Securities Bhd, these companies have to complete a QA within three years of its listing/IPO or face delisting.

Some 90% of the IPO proceeds raised by the SPAC has to be put into an interest bearing trust account, which dissenting shareholders are entitled to a portion of, if voting against the QA. At least 75% of shareholders’ approval is required for the QA to go through.

It is this cashback option that investors can arbitrage on as they can buy into the SPAC at a discount after the IPO launch, and vote against the QA to capitalise on the cashback and accumulated interest.

TMR previously reported that investors could see a cumulative interest returns of more than 10% in addition to the cashback based on a 3.5% – 4% annual interest rate spread over three years.

The structure of SPACs in Malaysia vests its bargaining power in the seller, making it difficult for a targeted acquisition company to purchase an asset at a reasonable valuation, where the QA should have an aggregate fair market value equal to at least 80% of the aggregate amount in the trust account which is made up of 90% of the IPO proceeds raised.

Sellers, thus, have a clear idea as to how much funds that a given SPAC has to make in an acquisition. To date, only two SPACs in Malaysia were successful in completing their respective QAs within the deadline.

Hibiscus Petroleum Bhd became a full-fledged oil and gas (O&G) exploration and production player when it acquired a 35% stake in Lime Petroleum plc on April 2012.

Reach Energy Bhd joined the list four years later when it acquired a stake in the Kazakhstan-based Emir-Oil LLP but other O&G-based SPACs were less successful.

Sona Petroleum Bhd was officially delisted on June last year, while CLIQ Energy Bhd has to pay the RM6.12 million held in its cash trust account to shareholders at the end of the month before delisting.

Rakuten Trade Sdn Bhd head of research Kenny Yee Shen Phin told TMR the reason that both Sona Petroleum and CLIQ Energy failed to complete their QA was due to the high prices of oil during their listing — both companies were listed prior to the 2014 oil price crisis.

“We therefore could see a recovery in O&G-based SPACs in Malaysia as oil prices and listed O&G stocks undergo a correction.

“The high US$100 (RM410) per barrel levels observed in pre-2014 made it difficult for these O&G SPACs to secure decent valuations and prices for potential acquisitions.”

Yee added that the same SPACs can also secure assets at a bargain price during a period of market correction or recession.

Red Sena, who had raised a sizeable RM400 million from its IPO and is the only Malaysian SPAC not involved in the O&G business, is in the middle of seeking shareholders’ approval for the voluntary winding up and liquidation of the company.

The would-be food and beverage-based company cited deal uncertainty and unrealistic valuations behind its inability to complete the QA by the Dec 10 deadline last year.