Although new SPAC launches have slowed, there are still hundreds of existing SPACs searching for quality operating companies to acquire. This gives public companies that are looking to divest businesses another option: selling to a SPAC. But to make divestiture assets attractive to SPACs, companies will need to prepare well before the deal making commences.
Why divestiture candidates should consider the SPAC route
Along with traditional sales to corporate or private-equity buyers, SPAC mergers now present a viable, alternative divestiture option with several benefits for sellers:
- Larger pool of potential buyers: Adding a SPAC as a divestiture vehicle could increase the number of potential bidders.
- Seller’s market: The imbalance between the large number of SPACs and quality operating companies (OpCos) for sale implies a relatively stronger negotiating stance for the divestor relative to the SPAC. Also, if the historical financials of the divestor are mostly separate and can be prepared quickly, it could be even more attractive to a SPAC facing a two-year window to complete an acquisition.
- Price certainty: In a SPAC deal, transaction value is determined in negotiations between the parties, rather than subject to the whims of the market the day the merger closes.
- Projections: Unlike in an IPO, where the company must communicate through the filter of analysts, in a SPAC deal, the OpCo can share financial projections directly with investors.
Understanding the SPAC divestiture model
Companies that want to divest assets to a SPAC need to understand the differences, as well as the similarities, between a SPAC deal and more familiar transaction types. Smooth execution will depend on being well-prepared for requirements specific to SPACs.
The SPAC combination is required to set up a public-ready entity very similar to a spin off, whereas preparation for a private-equity or bolt-on sale can sometimes require significantly less effort. In an environment of increasing regulatory scrutiny, certain characteristics of the corporate divestor, such as the credibility of the public record of financial performance and relative maturity of the existing public-readiness infrastructure and personnel, may enhance the value of the asset in the eyes of the SPAC.
The SPAC combination requires a full set of audited financial statements like a spin-off, whereas a sale to a strategic or financial buyer may, but does not always, require a full set of financials
SPACs generally must find and merge with an OpCo within 18 to 24 months of the IPO date. Extensions beyond the two-year window often require shareholder approval.
The complexity of any transitional service agreement (TSA) is driven by the degree of integration and operating model of the organizations, not transaction type
The SPAC transaction is likely to involve some level of sell-side diligence, but it’s not a component of a spin-off.
The divesting party’s activities are similar across scenarios, including addressing stranded costs, enabling TSAs, and executing a TSA exit strategy
What to focus on when executing a divestiture to a SPAC
Three steps are critical to ensuring the success of a SPAC divestiture deal: operational separation, financial statement preparation, and sell-side diligence. Timely completion of the first two processes is critical to hitting the market window, while sell-side diligence can help maximize deal value.
The key to timely and effective separation of a stand-alone OpCo is an exhaustive assessment of entanglements between the divestor and OpCo. Shared people, processes, technology/data, contracts, and IP are typical areas of inquiry. After the entanglement is mapped, processes to be developed for the future OpCo should be separated from those requiring an alternative solution, such as a TSA.
Financial statement preparation
The “long pole in the tent” for a divestiture is often the preparation of a full set of audited financial statements. The development of a set of annual and relevant quarterly financials generally takes three to six months. Timing may become an issue if another component of the divestiture, such as financing, moves the timeline to the point where the oldest statement becomes stale, requiring the development of an additional quarterly statement and possibly comparables1.
The carve-out process for a SPAC includes challenges similar to that of a spin-off, including developing a baseline, review of corporate allocations to identify OpCo share, analysis of related-party transactions to identify intercompany balances, analysis of historical tax balances to support the preparation of stand-alone provision and deferred tax balances, and preparation and audit of a full set of financial statements.
Sell-side diligence creates value for the divestor by anticipating key bidder inquiries around topics such as target markets, price and margin management, and product portfolio as well as components of operational efficiency. Other considerations include net working capital, net debt items, quality of net assets, and free cash flows. To provide support for the deal, conduct analyses of:
- Carve-in/-out adjustments based on go-forward versus historical allocated parent costs, shared services costs, and out-of-scope activities.
- Incremental adjustments to reported EBITDA, focused on one-time/nonrecurring items such as unusual transactions, past acquisitions, business restructurings, and deal costs.
- Go-forward scenarios such as new customers, enhanced unit economics, and postdeal structure opportunities.
For corporations with assets to sell, it may be an opportune time to consider a SPAC deal. But SPAC transactions can be complex and come with unique challenges that sellers will need to navigate. As in any deal, thoughtful preparation is a key to success. Another crucial differentiator may be working closely with external advisers who have experience executing SPAC deals to help your asset become transaction and operation ready with speed and certainty.
1. To mitigate timing risk:
- Enable an integrated financial statement preparation and audit review process to uncover issues early and to condense the process.
- Use technology that enables integration from data aggregation to financial statement presentation capabilities all within a framework with the flexibility to quickly accommodate the inevitable changes that arise..
- Deploy experienced carve-out teams to accelerate the work plan development and data request processes, as well as actual execution by bringing knowledge and functional content, including account-by- account issues and solutions.