SPACs turn to C&R

While sponsors of SPACs initially focused on fast-growing technology and biotech startups, in 2021, SPACs turned their attention the consumer and retail sector. C&R accounted for only 5 percent of the market for SPACs, also known as blank-check companies, but in the last year SPAC transactions grew 170 percent (from 10 to 27 deals).

SPAC Deal Volume and Value

For example, private-equity firm KKR raised $1.2 billion in an IPO for a SPAC headed by Glenn Murphy, former CEO of the Gap, that is targeting C&R acquisitions. In November 2021, a SPAC founded by two former executives of L’Oreal North America announced that it had merged with a skincare company and a makeup brand to create a beauty company called Waldencast valued at $1.2 billion.

C&R companies have moved into the limelight for several reasons, including a lack of suitable TMT and biotech targets after the huge SPAC wave of late 2020 and early 2021. Another attraction for SPAC acquirers: C&R players—particularly those heavily involved in e-commerce, have amassed huge amounts of data about their customers and are exploiting the information in various ways, including by offering their data and sales-management technology as a service to other companies.

A prime example of this approach was the $900 million merger acquisition of Boxed, an e-commerce retailer, by a SPAC called Seven Oaks Capital Management. Dubbed the “Costco for millennials,” Boxed’s primary business is online sales of bulk products with no annual membership fees. A major attraction was that the company began monetizing its advanced e-commerce platform by offering it to other retailers as a software-as-a-service (SaaS) product, gaining customers in overseas markets like Malaysia.¹ Unlike core C&R businesses, which fluctuate with the economy, the SaaS business offers a predictable source of revenue.

This is a huge advantage for SPACs, which have to establish credibility in the public markets. Indeed, many early SPAC mergers involved new companies without a record of profitable performance; some SPACs have even purchased companies at the pre-revenue stage. C&R companies are well understood by investors and steady revenue from data and technology can help build investor interest.

One of the big attractions of SPACs for sellers is the merger process is much shorter and far less work than a traditional IPO. A SPAC deal can close in three to four months, compared to six to nine months for an IPO, in part because the Securities and Exchange Commission review process is far less onerous. Sellers also benefit because the SPAC team is typically managed by executives with deep experience in the industry.

The SPAC market is not without risk. For example, companies considering a SPAC merger should pay attention to the recent rise in redemptions at SPACs. When a SPAC raises financing in an initial IPO, it sells shares and warrants to buy shares, usually at $10 each, with a right to redeem the shares at the IPO price at the time the merger takes place. Because the share price of a SPAC tends to decline on the secondary market before a merger, activist investors have been buying the shares at a discount and then redeeming them at the IPO price for a quick profit.

In 2020, the number of redemptions was around 20 percent of the outstanding shares, but in 2021 the average neared 50 percent. As the redemptions rise, the concern is that the company will have to raise outside financing through alternate investment firms, which is known as private investment in public equity, or PIPE financing. But PIPEs involve high fees, which can make the financial future of the firm more difficult.