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Who wants to be a Spac millionaire?


One scoop to start: Carmine Di Sibio, global chairman of EY (pictured below), has expressed ‘regret’ that a fraud at the collapsed German fintech Wirecard was ‘not uncovered sooner’ by his firm’s auditors. 

© Patrick T Fallon/Bloomberg

Available on demand: missed last week’s DD Forum taking you inside the FT’s Wirecard investigation? The recording is here.

Welcome to the Due Diligence briefing from the Financial Times. Not a subscriber? Sign up here. Drop us a line and join the conversation: Due.Diligence@FT.com

Opendoor: Palihapitiya convinces start-up to try a backdoor IPO

Go on CNBC, they said. You’ll get some great publicity, they said. 

If there is a support group for Spac founders where they can share tips, surely Bill Ackman and Chamath Palihapitiya could tell their peers that doing a television interview on CNBC doesn’t always garner the attention you want. 

Yes, we’re talking about special purpose acquisition companies again. The reason? Spacs are the breakout product on Wall Street during these strange coronavirus times. Or as the rapper Megan Thee Stallion (pictured below) would say, it’s been a hot Spac summer.

© Carmen Mandato/Getty Images

Palihapitiya, who was raising money via Spacs before it was fashionable, has just landed his second deal — a $4.8bn merger with SoftBank-backed property start-up Opendoor

While doing the usual round of interviews, the former Facebook executive had an extremely awkward exchange with Andrew Sorkin on CNBC on Tuesday morning, over how much he was making in fees through the deal. The question of founder fees and Spacs is subject of much confusion at the moment, as a mainstream audience is being lured into a complicated product. Here’s the deal: what Palihapitiya was making isn’t technically a fee. 

When sponsors first launch a Spac, they will pay a nominal price for what is known as “founder stock”. If the Spac executives don’t find a target, they won’t get proceeds from the liquidation of the Spac — unlike investors who buy shares on the public market — so it acts as a reward (often, a generous one) for putting money at risk. 

On the other hand, if a deal is done, the founders receive shares equivalent to 20 per cent of the Spac’s proceeds for putting the deal together. It can therefore be a huge windfall for relatively little capital. 

That brings us to Palihapitiya’s CNBC interview and the “$70m in fees” he confessed to be making from the Opendoor deal. Can founder shares be egregious? Yes. We’ve written extensively about this and about Spac sponsors who say they’re trying to get rid of this feature or at least put investors and sponsors on equal footing. 

Are they unusual? Not among Spacs. In fact, it’s pretty much the benefit that keeps Spac sponsors coming back for more. Palihapitiya has done three, and there’s a rumoured fourth one. If DD readers cast their mind back to last summer, Palihapitiya (pictured above) oversaw one of the most high-profile Spac deals to date in a merger with Richard Branson’s Virgin Galactic

Let’s not forget that former Citigroup dealmaker Michael Klein, who has launched four Spacs, uses his firm M Klein & Co as an adviser on the deals, reaping millions of dollars in fees. 

What really happened with Palihapitiya’s interview on CNBC is that he put a dollar figure on the elusive concept of the so-called promote and all of a sudden it crystallised in people’s minds just how lucrative this business of setting up a Spac can be. 

Finally, if anyone needs a reminder that the road to Spac stardom is not always paved with gold, take a look at Tuesday’s DD on Nikola

FT reporters on Tuesday revealed that the US Department of Justice has also been making inquiries into claims levelled against Nikola, the truckmaker start-up that went public via a Spac earlier this year. 

We’ll be talking all things Spac-mania on Thursday with DD’s James Fontanella-Khan and Ortenca Aliaj. Sign-up here.

PSA and Fiat Chrysler rewrite their vows

They say only fools rush in. But hindsight is 20/20 sitting atop the financial wreckage of a global pandemic. 

Some of the most promising deals forged in the early months of this year seem blissfully ignorant not to mention garishly expensive, looking back now. Some, like Tiffany, may never make it down the altar.

France’s PSA and Fiat Chrysler Automobiles, meanwhile, are trying to work things out.

© AFP via Getty Images

The two carmakers this week overhauled the terms of their €50bn megamerger, with FCA cutting its planned special dividend to shareholders from €5.5bn down to €2.9bn. After all, the coronavirus crisis continues to take a battering ram to the automotive industry.

Doing this on its own risked upsetting the delicate balance between the values of the two companies, the original deal structured so that each party accounted for half the value of what will eventually adopt the cavalier name of Stellantis, the world’s fourth-largest carmaker.

To compromise, PSA has divided up its 46 per cent stake in component group Faurecia, and will give half the shares to FCA investors. 

The biggest loser of the shift is arguably Exor, FCA’s principal shareholder and the investment vehicle controlled by Italy’s billionaire Agnelli family, which sees its payout reduced by €320m. But John Elkann (pictured below), Exor’s chairman and the scion of the Agnelli family, supported the move.

So why now? The deal doesn’t close for another six months, as the pandemic rages alongside the looming threat of a second wave.

As the FT’s Lex column points out, the tie-up has strong upside potential. The union has synergy expectations from €3.7bn to more than €5bn, in addition to cost savings in areas such as procurement.

Having hoarded cash, Stellantis, Latin for “to brighten with stars”, may even pay €1bn to shareholders after completion, depending on trading for the rest of the year.

It remains to be seen whether the newly formed company can live up to its prolific title. The first take, however, is to complete the deal. 

Klarna: party now, pay later

The past few months haven’t been kind to many European fintechs from scandals to falling revenues. But Klarna has bucked the trend, not only managing to increase its revenues despite coronavirus but attracting a who’s who of investors to back it ahead of a likely IPO.

On Tuesday, the Swedish buy-now, pay-later company unveiled Silver Lake, GIC, BlackRock and HMI Capital as new shareholders as part of a $650m fundraising round. 

They bought in at a post-money valuation of $10.65bn, almost double the level of Klarna’s last public valuation in August 2019.

Despite the starry shareholder roster — which also includes Sequoia Capital, Permira, Bestseller Group, Ant Group, H&M and even rapper Snoop Dogg — there are still questions around Klarna and its business model.

Its credit losses almost doubled in the first half while its operating losses, after more than a decade of profits, deepened nine-fold. Critics allege it offers credit to those who can’t really afford the latest fast fashion and then collects interest from them if they struggle to repay.

© Bloomberg

It’s also striking an increasingly bullish pose, with chief Sebastian Siemiatkowski (pictured above) telling the FT that it would “wreak havoc” on the payments and banking industries that have done little to innovate in recent years.

Job moves

  • Berkshire Hathaway’s railroad unit BNSF named company veteran Kathryn Farmer its new chief. She will replace Carl Ice, who will retire in January after 42 years at the freight network. More from Reuters.

  • Apollo Impact, the asset manager’s new impact investing platform, will be co-led by senior partner Marc Becker and Joanna Reiss, who recently joined Apollo as a partner from Cornell Capital where she was a founding partner and headed ESG investing.

  • Private equity group PAI Partners named Ralph Heuwing as a partner and head of Germany, Austria and Switzerland in its Munich office. He was previously chief financial officer of German braking systems manufacturer Knorr-Bremse.

Smart reads

Under siege Tumultuous markets and Bridgewater’s worst losses in a decade are chipping away at the crown of the “king of hedge funds”. To preserve his ranks, billionaire Ray Dalio is barricading potential defectors by posing two-years of unpaid gardening leave among other strict retention measures. (Bloomberg)

Benched Loyal licensers of chips from SoftBank-owned Arm are worried they’ll lose access to the UK chip designer’s newest models once the Japanese group hands it off to Nvidia, one of their competitors, for $40bn. The deal has cast a grey area over the industry’s once-clear boundaries of supply and demand. (FT)

Water cooler wars The world is divided over the future of work — one camp is in line with Jack Dorsey’s declaration that Twitter would operate remotely “forever” and another mourning their cubicles. Governments eager to reverse the economic damage of empty city centres only fuel the fire. (The Economist).

News round-up

TikTok set to become a standalone US company to satisfy White House (FT)

Snowflake completes largest ever software IPO (FT)

Kraft Heinz sells parts of cheese business for $3.2bn (FT+ Lex

Premier Oil in financing talks with rival Chrysaor (FT)

Harvard pressured to support Toshiba chief in ‘dark arts’ campaign (FT)

Carlos Ghosn’s deputy pleads not guilty on opening day of trial in Japan (FT)

Software listings head biggest week for IPOs since Uber (FT)

Blackstone, Partners Group said in race to buy Piramal Glass (BBG)

Software developer Bentley Systems aims for near $5 billion IPO valuation (Reuters) 

Oprah-backed vegan milk brand Oatly said to plan 2021 US IPO (BBG)





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