When billionaire investor Bill Ackman first proposed his riff on the SPAC — he wanted to slap an R in the middle of the acronym — few cared on Wall Street. This was mid-2021 and the SPAC market, where investors hand cash to a dealmaker hunting for a company to acquire, was just months removed from peak mania. So bankers weren’t too interested in contemplating a new flavor of SPAC that would add a layer of complexity.
(Bloomberg) — When billionaire investor Bill Ackman first proposed his riff on the SPAC — he wanted to slap an R in the middle of the acronym — few cared on Wall Street. This was mid-2021 and the SPAC market, where investors hand cash to a dealmaker hunting for a company to acquire, was just months removed from peak mania. So bankers weren’t too interested in contemplating a new flavor of SPAC that would add a layer of complexity.
Now, with the dormant SPAC market in desperate need of a jolt, the Ackman SPARC is getting another look.
True, this is mostly because Ackman himself has begun talking it up again after getting regulatory approval in September. But unlike the last time, it’s generating interest in the SPAC world. Bankers, lawyers and sponsors are quick to point out features of the SPARC that could help drum up interest in a market that went bust — along with meme stocks and NFTs — once the easy-money days of the pandemic came to an end.
Prominent among them: SPARCs don’t pool investor cash upfront like SPACs, also known as blank-check companies, do. This means holders can choose to opt in if they like a proposed merger instead of having their cash sit around in mostly low-yielding investments before deciding to yank their money out of a bad SPAC deal.
A SPARC — short for special-purpose acquisition rights company — gives holders the right to invest in a deal while its blank-check counterpart sells units to investors that are then freely traded on an exchange. Ackman is giving himself ten years instead of the shorter deadlines SPACs race against, and rights won’t trade until a merger is unveiled. Pershing Square will first find a target then determine the cash to raise.
“It’s a vehicle that’s appropriate for investors like Ackman and us who can put substantial capital into a transaction that they like,” said Daniel Cohen, the co-founder of Cohen Circle which has closed five SPAC deals, liquidated six and has one on the hunt for a target. “We’ll be watching with great interest as to how it plays out.”
So far, the SPARC hasn’t led to any fresh deals. Ackman had dangled the idea that he could use the structure to team up with Elon Musk in taking X, the company formerly known as Twitter, public. Musk has shown no public interest in such a deal. It’s also possible that the SPAC moment has simply passed and that there’s no letter in the alphabet that can be tacked on to save it.
A representative for Pershing Square declined to comment. A spokesperson for Musk’s X didn’t respond to a request for comment.
A SPARC also comes with its own set of risks. Because the rights are expected to trade over-the-counter instead of on a national securities exchange like NYSE, trading after a deal is announced could be volatile. It’s something Pershing Square calls out in its filing.
“If he’s not able to pull something off, there’s no appetite,” said Matthew Tuttle, the CEO and chief investment officer of Connecticut-based ETF provider Tuttle Capital Management. “You can’t do a SPAC IPO right now, so you could launch a SPARC. But if Ackman isn’t able to make it work” there aren’t a lot of people that could.
No Big Discounts
Still, Ackman says the new structure is better aligned with public investor interest and will be less dilutive for its target than a traditional SPAC. It doesn’t have the deeply discounted shares that typically benefit sponsors in a SPAC deal even if shares tank because the SPARC incentives require shares to rise at least 20% above the price paid by public investors. It also doesn’t have warrants issued to public investors, deal sweeteners blank checks use to entice investors in their IPO that can increase dilution for successful deals.
A standout for potential targets and something that has grabbed the attention of the SPAC ecosystem is affiliates of the SPARC’s sponsor agreeing to commit as much as $3.5 billion as an anchor investor in an eventual merger.
“We’ve got an evangelist, now let’s see if we get a movement,” said Usha Rodrigues, a professor at University of Georgia School of Law.
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