Andina Acquisition Corporation: A Unique And Speculative Colombian Investment

| About: Andina Acquisition (ANDA)

Colombia is quickly becoming the next investment hotspot in Latin America. Once off limits, the South American country has stabilized its security situation and is now seeing record levels of foreign investment and tourism, as well as increasing integration into the global economy through economic deregulation. All of which has contributed to the substantial increase in Colombia's growth rate. For the third quarter 2011, GDP growth in annual terms was 7.7%, which equated to a quarterly rate of 1.7%. This was the highest growth rate the country has seen since 1979. Furthermore, the IMF has forecast Colombia's 2012 real GDP growth rate to be 4.5%, which is more than double the IMF's GDP growth projection for the U.S. of 1.8%.

Overall, the Colombian economy is gathering continued momentum with the local stock market performing well, increased foreign investment, falling unemployment and companies expanding their operations. All of this economic growth combined with the increasingly stable security situation has made Colombia more attractive to global investors. This has seen a number of Colombian companies seeking listing on U.S.-based exchanges such as the NYSE and NASDAQ, in order to access greater investor attention, capital and liquidity.

For an investor to access this unique growth story, typically they could either purchase shares directly in a Colombia company thorough the Colombian Stock Exchange the Bolsa de Valores de Colombia (BVC), or by purchasing stock in a Colombian company such as Ecopetrol (NYSE:EC) or Bancolombia (NYSE:CIB), which are listed on the NYSE.

Now another unique opportunity has presented itself for investors who want to dip their toes into Colombia's increasingly deeper investing waters: The recent listing on the NASDAQ of Andina Acquisition Corporation (ANDAU). This company is the only Colombian company to be listed on the NASDAQ and only the third to be listed on a major U.S. exchange along with Ecopetrol and Bancolombia.

Andina is based in Bogota and was incorporated on September 21, 2011 for the purpose of effecting business investment and acquisitions through mergers, share exchanges, asset acquisitions, share purchases or other similar business opportunities with one or more businesses. Its key focus is to identify prospective target businesses in the Andean region of South America, with a particular emphasis on Colombia. The company has not set any limits on the type of businesses or the industries that it will consider. It recently listed on the NASDAQ, raising $40 million through the issue of 4 million shares at $10 each.

As Andina is a newly incorporated and listed company, there is a distinct lack of financial data, performance ratios and other historical information on which to judge its future performance.. Typically this would make me quite cautious of investing in such a company. But at this time, I do believe that Andina presents an interesting if somewhat challenging investment opportunity. In this article I will explain why and highlight both the risks and benefits associated with investing in Andina.

The company has no historical data available, therefore making it difficult to see the historical performance of its operations. However, its accounts as at 8 November 2011, showed that Andina reported no revenues and a net loss totaling $4,000. It also showed a balance sheet with total assets of $125,000, which when adjusted for the IPO, gives the company total assets of $40.1 million. In addition, the company had total liabilities of $104,000 prior to the IPO, which when adjusted for the IPO leave it with no debt. The company post-IPO has shareholder equity of $5.6 million.

Andina's business strategy is to identify and invest in suitable businesses in the Andean region. The company believes that investment and acquisition opportunities should arise due to the lack of maturity in Andean capital markets caused by regulatory hurdles and the limited liquidity of local stock exchanges. Essentially, Andina will be providing boutique investment advisory, capital management and venture capital services in Colombia and the Andean region.

A key plank in this strategy is the company having executive leadership that has the experience, professional contacts, skills and qualifications to generate and identify suitable investment opportunities. From reviewing the company's documentation and after conducting exhaustive research, I can see that Andina's key executives certainly have the credentials and experience to execute this strategy. Both co-chief executive officers have extensive experience working in banking and finance across both private and public institutions: Mr. Torres was formerly the director general of the public credit and the treasury department of the Colombian Ministry of Finance. Mr. Robayo was the former chief executive officer of one of Colombia's largest financial institutions, Banco Popular. He was also the general manager of ERS & Associates, a specialist firm focused on the management of projects and consulting in privatization, acquisition, and financial restructuring for Colombian companies.

Furthermore, one of the Andina's directors is Dr. Hommes, a former Colombian Minister of Finance, while another director, Ms. Byorum, was previously the chief of staff and chief financial officer for Citigroup's (NYSE:C) Latin American Banking Group. She was also a senior managing director at Stephens Cori Capital Advisors, a division of Stephens Inc. Stephens is an investment advisory firm focused on providing investment banking services to Latin American, Caribbean and U.S. Hispanic companies. Finally, there is Lorne Weil, another director who is chairman of the board of Scientific Games (NASDAQ:SGMS), a supplier of technology-based products systems and services to gaming markets worldwide.

Overall, the credentials of the company's executive leadership and the experience of its directors indicate that it is well placed to identify and execute value add investments in a range of Colombian companies. In fact, this indicates strong contacts within both the private and government sectors in Colombia, which bodes well for the identification of suitable and profitable investment opportunities.

Indeed the strong growth of the Colombian economy, which is being led by the growth of the mining and financial sectors combined with the sound macroeconomic policy being executed by the Colombian government, bodes well for future investment opportunities. A recent OECD report has found that since the 1990s, the Colombian government has adhered to a sound macroeconomic policy. The government has created a strong and stable macroeconomic framework through prudent fiscal management, inflation targeting and a flexible exchange rate. Additionally Colombia is the fourth largest economy and second most populous country in Latin America and it is experiencing rapid growth of its middle class, all of which creates favorable growth and investment opportunities for businesses.

Combined with the improved security situation and the country's substantial resources, these factors bode well for Andina, helping the company to identify and make a business acquisition or investment on profitable terms.

I also quite like that $38 million of the funds raised through the IPO will be held in trust with UBS Financial Services and only released for use by Andina should a suitable business acquisition be found. It is also a requirement of release that the proposed business acquisition meets the guidelines listed in the prospectus, including the requirement to obtain shareholder approval prior to proceeding with the investment.

However, there are a number of risks and considerations that must be understood before considering any investment in Andina. Firstly, an important consideration for investors is that Andina has only allowed 21 months from the date of its NASDAQ listing to complete a business acquisition with no obligation to return investor funds prior. After the expiration of that period, all public shareholders are entitled to liquidation distributions, if the company is unable to complete a business acquisition. This does not necessarily mean that investors will receive all of their invested funds but rather the balance of the trust account will be distributed amongst shareholders, less nominal administrative fees.

Secondly, despite substantial improvements in Colombia's economic, political and security situations it still possesses a degree of sovereign risk that all investors should consider. Especially as Andina will be investing in a Colombian business that is not listed on a major U.S. exchange. Finally, as a micro-cap stock, it possesses all of the risks that are typically associated with investments in micro-caps such as limited liquidity and whether the company has sufficient funds to weather any prolonged dips in the business cycle or decreased profitability.

Overall, there is an increasing growth of boutique business development and advisory firms in Colombia that are seeking to capitalize on the rapid growth of the Colombian economy. There are also sizable investment banking operations in Colombia being operated by large global banks such as Citigroup (C), Santander (NYSE:STN) and Banco Bilbao Vizcaya Argentaria (NYSE:BBVA), local banks such as Bancolombia and Davivienda and specialist investment banks such as Inverlink.

However, in comparison to many of its competitors, Andina has a number of advantages. Firstly, it has met U.S. securities law requirements to be able to list on a recognized and liquid U.S. securities exchange, the NASDAQ. This, in my opinion, mitigates many of the risks associated with investing in a Colombian company as any that is listed on the NASDAQ or NYSE are held to a far greater standard of accountability than a company listed on the BVC. Secondly, that it has a highly experienced and well-connected management team. Thirdly, due to its small size, it is able to act quickly and efficiently and finally, it provides investors with a ground floor investment opportunity.

Investing in Andina is not for the faint-hearted, and any investment should be made with a key regard for the risks associated with this particular investment. However, an investment in the company offers investors a unique opportunity to access businesses that you would not normally be able to access. In addition, the company provides a number of exit points for investors during the company's life cycle and business acquisition process.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.