Cashing blank checks: Why the bold favor SPACs

Cashing blank checks: Why the bold favor SPACs
IPOs are excluded from US securities regulations which shield companies against investor lawsuits for making financial estimates they do not meet. (Reuters)
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Updated 28 April 2021

Cashing blank checks: Why the bold favor SPACs

Cashing blank checks: Why the bold favor SPACs
  • Amid a broader selloff, XL Fleet’s shares are now down more than 50%

NEW YORK: Dimitri Kazarinoff started his first ever earnings call as XL Fleet Corp. chief executive last month with a uturn.

When the maker of electrified powertrains for vans and pickup trucks agreed on $1 billion merger with a special purpose acquisition company (SPAC) in September, it made a financial forecast rarely seen in an initial public offering (IPO).

XL Fleet predicted that its revenue would more than triple in 2021 to $75.3 million.

However, on XL Fleet’s March 31 earnings call Kazarinoff said that the COVID-19 pandemic and a microchip shortage had weighed on fleet orders and its ability to fulfill them, which would mean it missing the revenue forecast.

Amid a broader SPAC selloff, XL Fleet’s shares are now down more than 50 percent since the completion of its merger with the SPAC, Pivotal Investment Corporation II, in December.

XL Fleet said that it had not foreseen the supply chain challenges when it gave its forecast last September, and that the “fluid” situation prevented it from issuing formal 2021 guidance once it became a publicly listed company.

Confident financial projections are common in SPAC deals and have been a decisive factor in attracting firms regarded as more risky, often loss-making and years away from even having any sales, over IPOs as a route to going public, industry insiders said and a Reuters review of data compiled by Jay Ritter, a professor at the University of Florida, confirms.

This is because IPOs are excluded from US securities regulations which shield companies against investor lawsuits for making financial estimates they do not meet.

SPACs are given this protection, so lawsuits against companies going public have to clear a higher hurdle of showing malfeasance or negligence in the making of the projections. Companies have taken advantage, opting for SPACs even though the lucrative stock compensation of SPAC managers leaves their existing shareholders with less equity, making them almost three times as costly than IPOs, investors and investment bankers say.

Three out of four firms that went public between 2020 and early 2021 through a SPAC merger were unprofitable, compared to 61 percent through an IPO, compiled by IPO expert Ritter shows.

“Some companies cannot sell their story based on valuation multiples all the way out to 2025 or 2027, it would bring their valuation down,” Vik Mittal, a portfolio manager at Glazer Capital and one of the biggest US SPAC investors, said.

The wild projections of some SPAC deals have turned them into darlings of amateur traders, who scour social media platforms such as Reddit for “meme” stocks to pile on.

But these stock rallies are usually fleeting; companies that went public through SPACs from January 2019 to June 2020 have negative mean returns of 12.3 percent six months after their merger, and negative 34.9 percent returns after one year, research led by Professor Michael Klausner at Stanford University shows.

Their 12-month return is 47.1 percent lower than the IPO index, Klausner’s data shows.

“Some of the companies that go public through SPACs are early and pre-revenue. They probably wouldn’t have been able to go public through an IPO, which doesn’t provide safe harbor for projections that are shared with investors,” said Anna Pinedo, a capital markets partner at law firm Mayer Brown.

Regulators have started to notice.

A US Securities and Exchange Commission official said this month that the ability of companies to freely publish performance projections during their SPAC deals was “overstated at best.”

An SEC spokesman declined to comment on whether the financial regulator was considering changes to the safe harbor provision in its rules that allows companies that go public through SPACs to make projections.

Nevertheless, several successful companies, including sports betting company DraftKings Inc. and potato-chip maker Utz Brands Inc, have gone public through SPACs, and have seen their shares continue to rise many months after their deal.

Some pick a SPAC because the frothy market for blank-check acquisition firms, which have raised more already this year than the entirety of 2020, can give them a higher valuation.

And companies get this valuation in advance, removing one of the big uncertainties of the IPO process.


Bahrain to double VAT to 10%: Reports

Bahrain to double VAT to 10%: Reports
Updated 26 September 2021

Bahrain to double VAT to 10%: Reports

Bahrain to double VAT to 10%: Reports

RIYADH: Bahrain plans to increase value-added tax to 10 percent in a bid to curb budget deficits and boost state revenue, 

Bahraini media outlets reported on Sunday.

According to a report published in a section of the Bahraini press, the legislators also discussed the options of reducing wages or social welfare given to nationals to bolster the economy.

According to IMF estimates, Bahrain’s budget deficit will contract by half this year after lower oil prices and the coronavirus pandemic boosted it to a record 18 percent of economic output in 2020.


Petrofac to plead guilty to 7 counts of bribery in Mideast oil projects

Petrofac to plead guilty to 7 counts of bribery in Mideast oil projects
Updated 26 September 2021

Petrofac to plead guilty to 7 counts of bribery in Mideast oil projects

Petrofac to plead guilty to 7 counts of bribery in Mideast oil projects

LONDON: British oil services group Petrofac said on Friday it would plead guilty to seven counts of failing to prevent bribery to secure projects in Iraq, Saudi Arabia and the UAE between 2012 and 2015, calling it a “deeply regrettable period.”

The company indicated its plans at London’s Westminster Magistrates’ Court after being formally charged by the UK Serious Fraud Office, drawing a line under a four-year criminal investigation. Its shares surged 25 percent in relief.

Petrofac, which has struggled to secure key contracts in the Middle East and has seen its shares battered during the SFO investigation, will formally enter its pleas and await sentencing at London’s Southwark Crown Court on Monday.

Petrofac said offers or payments to agents to help secure projects were made between 2011 and 2017 but that all employees involved had left.

“This was a deeply regrettable period of Petrofac’s history,” said Chairman Rene Medori in a statement, adding that the company’s “comprehensive program of corporate renewal” had been acknowledged by the SFO.

“Petrofac has been living under the shadow of the past, but today it is a profoundly different business, in which stakeholders can be assured of our commitment to the highest standards of business ethics, wherever we operate,” he said.

Former executive David Lufkin, who has separately pleaded guilty to 14 charges of bribery to secure billions of dollars worth of contracts for Petrofac in the Middle East, is also expected to be sentenced on Monday.

His lawyer did not immediately respond to a request for comment.

In March, the UAE’s state-backed oil firm, ADNOC, barred Petrofac from competing for new contracts in the country.

It is the second corporate guilty plea secured by the SFO in five months.

Former Airbus subsidiary GPT Special Project Management pleaded guilty to corruption over military contracts for Saudi Arabia in April.


CFO of Russia's Novatek arrested in U.S. on tax charges of over $93m

CFO of Russia's Novatek arrested in U.S. on tax charges of over $93m
Updated 26 September 2021

CFO of Russia's Novatek arrested in U.S. on tax charges of over $93m

CFO of Russia's Novatek arrested in U.S. on tax charges of over $93m
  • Novatek has grown into a major competitor of Gazprom, produced last year, 18.8 million tons of liquefied natural gas, 5 percent of global output
  • The situation has absolutely no effect on Novatek’s operational and financial activities

RIYADH: The U.S. government has arrested Mark Gyetvay, the deputy chairman of the management board of Novatek, Russia’s second-largest natural gas producer, on federal tax charges for more than $93 million hidden in offshore accounts, according to the IRS statement.


The situation has absolutely no effect on Novatek’s operational and financial activities, adding that it isn’t involved in related litigation, the company said in WSJ about Mr. Gyetvay’s case.


Novatek has grown into a major competitor of Gazprom, produced last year, 18.8 million tons of liquefied natural gas, 5 percent of global output, WSJ said.


The arrest of Gyetvay, comes as Russia wrestles with European regulatory challenges to the Nord Stream 2 gas pipeline running along the bed of the Baltic Sea, seen by opponents as a geopolitical tool, Nord Stream 2 will deliver Russian natural gas to Germany, WSJ added.


Japan's SMBC advising on Aramco's gas pipeline deal: CNBC Arabia

Japan's SMBC advising on Aramco's gas pipeline deal: CNBC Arabia
Image: Shutterstock
Updated 26 September 2021

Japan's SMBC advising on Aramco's gas pipeline deal: CNBC Arabia

Japan's SMBC advising on Aramco's gas pipeline deal: CNBC Arabia
  • A consortium of Asian investors are leading candidates to win the deal
  • The financing structure of the deal will be similar to the $12.4 billion oil pipeline deal

RIYADH: Saudi Aramco has selected Japan's Sumitomo Mitsui Banking Corporation (SMBC) to provide financial advice to the company in a $17-20 billion gas asset sale, CNBC Arabia reported, citing sources.

A consortium of Asian investors are leading candidates to win the deal, after Asian sovereign funds, primarily sovereign wealth funds from China, South Korea, and Singapore, entered negotiations the CNBC source said.

The American Brookfield Fund, which won the Abu Dhabi National Oil Company (ADNOC) gas pipeline deal last year, is among potential investors.

The financing structure of the deal will be similar to the $12.4 billion oil pipeline deal, which was won by a coalition of investors led by EIG Global Energy, the source added.

The sources explained that the deal will be financed using $4 billion of issued shares, while the rest of the deal will be financed through loans from a group of banks.


PIF lender SRC acquires new housing portfolio from Banque Saudi Fransi

PIF lender SRC acquires new housing portfolio from Banque Saudi Fransi
A common residential area built above on the desert near the corniche park in the Dammam, Saudi Arabia (Shutterstock)
Updated 26 September 2021

PIF lender SRC acquires new housing portfolio from Banque Saudi Fransi

PIF lender SRC acquires new housing portfolio from Banque Saudi Fransi
  • It follows other partnerships with banks and real estate finance companies in the Kingdom
  • The company expects the acquisition to provide “long-term liquidity to the housing market”

DUBAI: The Saudi Real Estate Refinance Company has signed its second housing finance portfolio purchase with Banque Saudi Fransi.

The company, which is wholly owned by the Public Investment Fund, expects the acquisition to provide “long-term liquidity to the housing market.”

“We have illustrated to primary originators in the Kingdom the crucial role we play in developing the housing market and supporting their businesses through liquidity and risk management solutions,” SRC chief Fabrice Susini said.

It follows other partnerships with banks and real estate finance companies in the Kingdom, as SRC seeks to promote stability in the real estate finance market. 

“SRC has played a vital role in ensuring that the Vision 2030 housing program objectives are being met and we expect ourselves to play a significant role in this by supporting them,” Rayan Fayez, managing director and chief executive officer of BSF, said.