A SPAC has no commercial operations, only set up by investors to raise capital through an IPO, which is then used to acquire one or more existing target companies
By RAHIMI YUNUS / Pic source carsome.my
BURSA Malaysia remains open to listings of special purpose acquisition companies (SPAC) although the demand for such investment vehicles has fizzled out locally while other jurisdictions, especially in the US, are seeing a boom amid the Covid-19 pandemic.
Malaysia had a head start on SPAC listings, also called blank cheque companies, with Hibiscus Petroleum Bhd the first SPAC to go public in July 2011.
However, the SPAC momentum has died with only two of the five SPACs managing to successfully turn into full-fledged businesses while three others flopped and returned cash raised to shareholders in the past decade.
The necessary framework for SPAC IPO on Bursa Malaysia remains in place per the listing requirements for SPACs as set out under the Equities Guidelines issued by the Securities Commission Malaysia.
“We have noticed the increasing trend in certain markets that point to a resurgence in fundraising via the ‘blank-cheque’ or SPAC vehicles.
“While there have been informal inquiries and conversations around SPAC IPOs developing in the industry, Bursa Malaysia has not received any formal applications coming through,” the stock exchange told The Malaysian Reserve (TMR).
A SPAC has no commercial operations, only set up by investors to raise capital through an IPO, which is then used to acquire one or more existing target companies.
Singapore Exchange recently announced new rules that enable SPACs to list on its mainboard effective Sept 3, 2021.
Among key features include a minimum market capitalisation of S$150 million (RM462.44 million) and “de-SPAC” phase must take place within 24 months of IPO with an extension of up to 12 months subject to fulfilment of prescribed conditions.
Hong Kong and Indonesia have also advanced with plans on SPACs regulations.
Regulators in Malaysia might need to consider several rule changes to its bourse framework to attract more private companies, especially notable technology start-ups to list, including SPAC option, or risk losing out on them.
Certain quarters argued the classic example is Grab, a company born in Malaysia but had moved to Singapore and is now working towards a US$40 billion (RM165.46 billion) listing via a SPAC in the US.
Carsome Sdn Bhd, another locally-based company that has transformed into a regional car e-commerce marketplace, is also looking at going public in the US — with SPAC an option.
Bloomberg recently reported Patrick Grove, the co-founder and CEO of Internet company Catcha Group, has been in talks with SGX for a potential SPAC listing, following the introduction of the new rules by the exchange.
In Indonesia, the authorities have made several new listing guidelines to cater to technology firms.
An equity and capital market expert told TMR it might work for Indonesia in keeping their homegrown companies onshore with GoTo and Bukalapak choosing a domestic market listing instead of elsewhere.
Overall, the expert said it is not about SPAC structure but the need to have a friendlier framework to enable tech-related companies and unicorns to be listed here.
“SPAC structure turns out to be challenging because of all the safeguards taken in the process to protect minority investors. Ultimately, it kind of makes it not commercially viable,” the expert said.
He added one of the features that attracted private companies to consider the SPAC route is the dual-class share structure, which allows major owners and shareholders, such as the founders, to maintain control of the company without having a majority stake.
Bursa Malaysia said a key reason why SPACs are a suitable means for technology startups to pursue an IPO is that most of these companies are at growth stage and are largely unprofitable and do not have a profit track record but have strong growth prospects.
“The ability for SPACs to successfully raise funds lies to a large extent on the quality and strength of its board members and management who must demonstrate a strong level of experience and expertise in their chosen sector,” the exchange said.
MIDF Amanah Investment Bank Bhd head of research Imran Yassin Mohd Yusof said one of the key constraints for SPACs in Malaysia has been the opportunity for arbitrage.
This stems from the fact that most SPACs normally trade at a discount to its cash value per share, which is the cash raised during the IPO that is then held in a trust account.
“This allows for investors to purchase SPAC shares which are typically priced lower than the cash that will be returned to shareholders should the SPAC could not find or acquire a qualifying asset (QA).
“This arbitrage opportunity will drive some of the investors to dissent on voting to acquire the QA causing the SPAC to fail and return back the cash raised. Therefore, it will be very difficult for SPACs to succeed,” Imran Yassin told TMR.
Another constraint is on valuation as there is some sort of a floor given that QA acquired must be equivalent to 80% of the cash held in the trust account.
This gives vendors the edge in any negotiation and there is great tendency for the sellers of a QA to ask for very high valuations.
“We believe that to ensure a more vibrant SPAC market, these two constraints will need to be studied further to find a more equitable solution to all parties, protecting investors’ interest while giving a fair chance for the SPAC to succeed at the same time,” he said.
There have been some 427 SPAC IPOs in 2021, raising US$124 billion, according to SPAC Track, though the growth rate has decelerated compared to the earlier part of the year.
The five SPACs listed on Bursa Malaysia were Hibiscus (July 2011: oil and gas [O&G]), Cliq Energy Bhd (April 2013, liquidated: O&G), Sona Petroleum Bhd (July 2013, liquidated: O&G), Reach Energy Bhd (August 2014: O&G), and Red Sena Bhd (December 2015, liquidated: food and beverage).
Of the five SPACs, only two were successful in acquiring suitable QAs, a prerequisite step for SPACs to graduate into a proper listed company.
The failure of the three SPACs could be somewhat attributed to the decline of the O&G industry due to the fall of oil prices during that very period, where two out of the three failed SPACs were involved in the O&G industry.
“The SPACs failed to obtain shareholder approval for the assets which were proposed to be acquired, despite the time and effort undertaken by management to identify and negotiate to acquire such assets,” Bursa Malaysia stated.
The listings witnessed how certain investors had different motives and acted on an opportunity, with many of the SPACs trading at significant discounts to their cash value given the prolonged period taken by management to identify and acquire the right assets.
“So much so, certain investors saw the opportunity to buy cheap prior to the general meeting convened for shareholders to vote on acquiring the QAs,” the exchange noted.
The local bourse added these investors went on to vote against the acquisitions during the general meeting and eventually made a profit by collecting a higher cash value in the trust account once the SPAC was wound up and cash was distributed back to shareholders as the SPACs failed to complete their acquisition plans within the allowable time frame.