Special purpose acquisition companies – SPACs – have emerged as a robust option for raising capital and bringing businesses to the public markets. Yet SPACs aren’t always simple. Working with experienced subject matter specialists to ensure proper financial and tax structuring and preparation can mean the difference between a successful deal or losing out. Sportico sat with Grant Thornton’s Melanie Krygier, Partner, M&A Tax Services; Jason Pizza, National Managing Partner, Transaction Accounting and IPO Readiness Services; Jason Sandberg, National SPAC Audit Leader; and Micah Dekofsky, Media & Entertainment Audit Services Leader, to get their insight into how SPACs and targets can best prepare for success.
Sportico: Why are companies increasingly turning to SPACs to go public, forgoing the traditional IPO?
Jason Pizza: A big advantage is timing. Between underwriting, roadshow and marketing, a traditional IPO takes anywhere from six to 18 months. Because the SPAC has already gone through the underwriting process, the going-public process is half to one-third the time – three to six months. Companies can get into the marketplace quicker, achieving their ultimate goal of liquidity and setting the right value for their business.
Melanie Krygier: We’ve also seen recently that investors in potential SPAC target companies may be wary of potential tax increases. This may be driving some of the movement to SPACs as investors want to seek liquidity events faster to lock in taxable capital gains at current lower rates.
Jason Sandberg: The word a lot of people use is flexibility. SPACs are a negotiated deal which is appealing to the sellers. They can have an earn-out as a component of the deal, which is something you don’t see in a traditional IPO.
Sportico: What is the reception for sports and media businesses around SPACs?
Jason Sandberg and Micah Dekofsky: The SPAC structure itself is industry agnostic. Sectors that tend to be more attractive are those that have the potential for high-growth in the near term and are dependent on attaining scale quickly to achieve optimal economics, or are industries that can benefit from consolidation. Sports, gaming and media are industries in transformational stages that can benefit from the opportunities SPACs provide, such as ease of access to liquidity in capital markets, while monetizing highly sought-after brands with built-in, loyal audiences. Another factor that may be driving the frenzied SPAC activity is the increasing private market valuations which leave capital market transactions as the only reasonable exit strategy.
Sportico: What should companies be doing to increase their chances of SPAC success?
Melanie Krygier: Preparation is key. We expect there to be a tremendous amount of competition for acquisition targets in the months and years ahead. There were hundreds of SPACs raised in 2020 and early 2021 and that activity coincides with private equity having plenty of dry powder. The acquisition targets for both overlap significantly. Having the foresight to plan for any potential roadblocks and mitigating those in advance of the due diligence phase is going to pay dividends in the end. From a tax point of view, make sure you’ve got tax reporting functionality fully stood-up within the organization to meet all of the reporting requirements of a public company. Pre-acquistion tax diligence on the target side is a worthwhile investment to identify and mitigate risks to the extent possible, since SPAC transactions can be quite tenuous.
Jason Sandberg: All things equal from a value perspective, investors are looking for a target company that has the infrastructure in place to be a public company. From a regulatory perspective, that means having financial reports that meet Public Company Accounting Oversight Board standards. In our experience, companies that take the initiative with financial and tax due diligence to make themselves ready for acquisition are more attractive targets. SPACs have a finite amount of time to vet a target and obtain board approval, so preparation removes significant hurdles.
Sportico: Another component to SPACs is the reception from stock market investors. Why are they taking to SPACs today?
Jason Sandberg: Having worked on SPACs since 2007, we’ve seen a clear evolution in SPAC structure over the past 15 years. Today the current structure provides full optionality for equity holders to redeem, whether or not there’s a majority vote to approve the merger. That level of investor protection has strengthened the structure and given it a lot more acceptance in the equity markets.
Sportico: What risks are involved with SPACs that have to be considered?
Jason Pizza: SPAC sponsors fund the underwriting process. For that investment, sponsors may expect to own up to 20% of a target company. However, until the negotiations occur, sponsors don’t know what their financial stake will be. That equity result is a gamble on their part. A SPAC often has to sell itself to its target operating company, because the target may have the choice of going public through multiple SPAC options. The division of equity is often part of those negotiations. Then, SPAC shareholders have two separate decisions – to vote to approve the merger and then whether to redeem their holdings for the original per-share IPO capital. If too many investors redeem their holdings, there may not be enough cash to facilitate the deal as originally negotiated. In addition, there may need to be further negotiations and/or require additional private investors to fund the deal.
Melanie Krygier: Some transactions can fall through because of structural matters. Non-U.S. target companies considering deals with U.S.-domiciled SPACs can be difficult to navigate because the targets may never have been pulled into the U.S. federal tax net before. Complying with U.S. tax regulations can require a recast of their tax accounting. How the tax profile will change by being subject to U.S. taxation can dramatically impact the investment return. Being aware of and intentional regarding cross-border transaction structure with a SPAC is critical to address these potential risks.
Sportico: When a SPAC files for an IPO and later to acquire a target, what do regulators look for?
Jason Sandberg: Regulators are paying attention to how the SPAC is structured, how compensation works for executives, directors and advisors, what dilution will look like for shareholders in multiple deal scenarios and any current and potential conflicts of interest. The last item can be a particular focus when private equity firms sponsor SPACs and may have holdings that are potential targets. As you progress toward the merger, regulators want to know the targets you reviewed, the ones you considered and why you decided on the target to acquire. We’re seeing more and more follow-up questions from the SEC not only on the target selected, but also on the ones not selected.
Sportico: Why should SPACs and companies looking to position themselves as a target consider using subject matter specialists such as Grant Thornton?
Jason Pizza, Jason Sandberg, Melanie Krygier and Micah Dekofsky: There‘s no “I” in SPAC. There are numerous moving parts that require a broad-based team to achieve success. For the SPAC itself, they will benefit from working with a reputable service provider that has significant experience helping companies prepare to go public, from working with an auditor that adheres to the Public Company Accounting Oversight Board standards for both pre- and post-merger financial statements and proxies, engaging an advisor to conduct due diligence on a target, to tax structuring and modeling scenarios. On the target company side, they benefit from working with an advisor who can assist with the various components that go into the acquisition, and what that business will need to be public company-ready. That could include Sarbanes-Oxley readiness, upgrading financial, HR, governance and IT functions, analyzing optimal tax structures and evaluating all remaining matters encountered in the acquisition or registration process. SPACs and companies positioning themselves as a target – especially those in the upper middle market where many sports and media organizations fall (an enterprise value from ~$200 million to ~$5 billion) – can benefit from working with Grant Thornton due to our extensive experience supporting deals for organizations of this size.
Grant Thornton contacts:
Micah Dekofsky Media & Entertainment Audit Services Leader
Melanie Krygier Partner, M&A Tax Services
Deborah Newman National Media & Entertainment Leader
Jason Pizza National Managing Partner, Transaction Accounting and IPO Readiness Services
Jason Sandberg National SPAC Audit Leader