Issues, TigerTalk  |  AUGUST 6, 2015 12:00AM

Misaligned management and shareholder goals: Spacs

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TigerTalk Ink Splash side bannerFor the management teams of Spacs, it is about getting a qualifying asset or acquisition at all costs, so the company can graduate to become a full-fledged company like any other on the bourse. Shareholders, on the other hand, want to get a nice return on their investments and this might come even if the Spac does not graduate.

The clock is ticking for special purpose acquisition companies (Spacs) Cliq Energy Bhd and Sona Petroleum Bhd, with less than one year and about a year left respectively for them to make their individual qualifying acquisition or asset (QA).

Getting the cash was fairly easy but finding the right QA has proven to be a rather more elusive challenge.

Cliq’s and Sona’s management teams, however, insist they will secure a QA before time runs out. Their message is “fear not investors, we are confident about completing a deal before the clock runs out”.

The message is unsurprising – after all, failure to secure a QA, and the management team and initial investors would lose all of their investments.

Cliq has identified and signed a sales and purchase agreement to acquire a 51% stake in two producing Kazakhstan oil blocks for US$117 million (RM429.53 million as at the announcement date) from a local Kazakh company, Phystech Firm LLP.

It is currently in the process of gaining regulatory approvals before being able to take it to its shareholders. Sona, meanwhile, has said that its management team is in advanced discussions over several assets and is confident they will meet their deadline.

They had better be confident, because the alternative is losing their entire investment.

Securities Commission MalaysiaUnder the Securities Commission’s (SC) regulations, 90% of all proceeds garnered by a Spac through its initial public offering (IPO) and subsequent listing must be placed into a trust. The funds can only be used for the purpose of securing a QA. Funds can be invested in approved investments, but all interest earned must be channelled back to the trust.

Meanwhile, the remaining 10% can only be used for IPO- and QA-related expenses and must not be used as remuneration for the management team. These regulations put together are enough to drive any management team to secure a suitable QA. With time not on their side, there is no luxury to shop around and the first asset to meet requirements will have to be grabbed.

This will allow the Spac to graduate and hopefully its share value will be at least maintained until the moratorium ceases and they can start realising gains. Which of course will be significantly more than the average retail investor because both management teams would have got their shares at a hefty discount.

And given that shareholders in theory invested their money in the expertise of these management teams and their ability to secure that promised QA, you would assume they too are rooting for their management to clinch a deal.

But in the curious world of Spacs, the opposite may hold true.

Remember that in the event that a QA is not secured or is rejected by shareholders, the money which is being held in trust must be returned to the shareholders (excluding the management team and initial investors).

With 90% held in trust and earning interest over a three-year period, shareholders might, in fact, benefit if management fails in its pursuit of a QA. Not only will they get their initial investments back, they may even make some gains on it.

In a recent report, Hong Leong Investment Bank (HLIB) noted that its investment thesis on Spacs is that its share base value should be determined by its gross trust value. (HLIB does not rate Spacs.)

Based on this thesis, HLIB said that Spac investors could expect “higher risk-free returns than a fixed deposit… (and) for investors with longer-term horizon, in the worst-case scenario, holding to maturity will translate to about 13% risk free per annum (for the three years time frame), which is significantly higher than the average fixed deposit rate of 3.2% per annum”.

Currently based on the gross trust value per share as at IPO, there is about 3% and 7% upside to Sona’s and Cliq’s share prices respectively. If interest earned on the invested proceeds is factored in, then there is an upside of 11% and 9% respectively, said HLIB.

So basically for the shareholders, not getting a QA will not be the end of the world. And remember that they get a vote on whether or not to approve the QA, while management and initial investors have limited voting rights.

Using HLIB calculations, Sona’s and Cliq’s management teams will need to present a QA option which is capable of giving shareholders immediate upside of about 11% and 9% to their share values – in line with what they would get if they voted against the QA and caused the trust to be liquidated.

So it becomes a question of either trust your management team’s judgement, or take what you can get.

Unfortunately for Sona and Cliq, shareholders looking at the only Spac to have graduated into a full-fledged company might be rather nervous. Hibiscus Petroleum Bhd, these days, trades at about 83.5 sen and it has yet to hit a significant oil well to send its share price soaring. It has not been the success it had hoped it would be and this will play on the other Spacs’ shareholders sentiment.

It comes down to this: the management team’s primary focus is to secure a deal so long as it allows them to graduate, while shareholders will be torn between the promise of eventual gains post-QA (possibly quite far in the future) versus a tidy risk-free gain at the end of three years.

Management and shareholders, two different agendas – only in the curious world of Spacs.


Yesterday: Interview: Sona sees opportunities from falling prices


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