SPACs with Expiring Timelines are Moving Forward with Deals Despite Regulatory Uncertainty and Elevated Cost of Capital
Companies Need Strategic Advice to Evaluate Different Financial Strategies that Maximize Capital at Merger Close
The SPAC IPO market paused in Q3 2022 as SPAC sponsors await more regulatory clarity and deal with the high cost of capital. In the third quarter, eight SPACs raised $0.7 billion compared to the second quarter of 2022, when 16 SPACs raised $2.2 billion, given the challenging market backdrop. Despite the slowdown in new blank check companies, the SPAC market announced 48 new business combinations and closed 25 mergers in Q3.
"SPACs with expiring timelines are pushing forward with deals despite regulatory uncertainty and elevated cost of capital. To navigate the current environment, it’s more important than ever to have an experienced advisor that provides a full range of services and we are the largest integrated global platform to deliver that. We partner with sponsors and target companies to create value in a SPAC transaction through capital markets expertise, investor relations, deal communications, and public relations strategies," said Don Duffy, President, ICR.
The third quarter was the slowest for new equity issuers in over a decade, with just 25 initial public offerings (IPO) raising $2.4 billion, of which only three IPOs raised $100 million or more. While there are some signs of life heading into the final stretch of 2022, IPO issuance is unlikely to begin normalizing until 2023.
"New issuance is still below recent historical levels, despite a slight pick-up from Q2 levels. Small deals continued to account for a majority of activity, driving median deal size down to a new multi-decade low of $15 million. As challenging market conditions persist and risk appetites remain low, profitability remains a key focal point for investors in the near term. That said, the pipeline of companies ready to come to market once conditions improve continues to grow," said Lee Stettner, Co-Head of Capital Markets, ICR Capital.
Redemption rates and PIPE capital availability seem to have stabilized at conservative levels in Q3 2022. That said, cash at merger close and post-merger stock liquidity remain the focal points for SPACs and target companies. As a result, SPACs have continued to consider non-traditional financing and structuring options, such as forward purchase agreements and bonus-share structures, to close funding gaps.
"In a high redemption environment, SPACs and targets are focused on sustainable deal structures and financing packages. We see more targets with modest financing requirements, which reduces the need for committed capital in a difficult market, "said Niren Nazareth, Managing Director, ICR Capital. "We are actively advising teams on how to efficiently navigate the complexity of SPAC capital markets. The time required to close a SPAC transaction has steadily increased since Q1 2022, and the right advice allows a SPAC team to focus on critical workstreams to optimize the SPAC transaction in the allotted time."
The SEC’s proposed rule changes are still a significant overhang with final rulings likely not until after mid-term elections in November. Additionally, the recently passed Inflation Reduction Act includes a 1% excise tax on stock buybacks that may apply to SPAC redemptions, subject to Treasury clarification.
"Overall, the SPAC market shift to more mature businesses reflects the investor demand for targets that are attractively priced and generate cash which we view as a positive," said Duffy. "As US regulators provide more clarity, we expect the number of SPAC IPOs to increase from current levels. In the meantime, the uncertainty over the excise tax implication for SPACs might require further overfunding of trusts, reducing ROI for prospective Sponsor teams."
ICR is the largest advisor and communications consultant to SPACs, having worked on more than 125 transactions since the start of 2021. To obtain a copy of ICR’s Q3 2022 SPAC Market Update report, please click here.
Established in 1998, ICR partners with its clients to execute strategic communications and advisory programs that achieve business goals, build awareness and credibility, and enhance long-term enterprise value. The firm’s highly-differentiated service model, which pairs capital markets veterans with senior communications professionals, brings deep sector knowledge and relationships to approximately 1,000 clients across more than 20 industry groups. ICR’s healthcare practice operates under the Westwicke brand (www.westwicke.com). Today, ICR is one of the largest and most experienced independent communications and advisory firms in North America, maintaining offices in New York, Norwalk, Boston, Baltimore and Beijing. Learn more at www.icrinc.com. Follow us on Twitter at @ICRPR.
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Brian Ruby, ICR, 203-682-8268, email@example.com