Recent SPAC Surge Tied to LBO Decline

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Includes: AAAA, EST, GPH, NES, UREC
by: Abbi Adest

SPACs, or Special Purpose Acquisition Companies, have proliferated recently in the IPO market, as tracked by Seeking Alpha's IPO coverage. Bloomberg reports on this phenomenon of 'blank check IPOs', noting that these companies have underperformed badly since 2003 and that their recent growth coincides with a marked decline in leveraged buyouts:

LBOs all but disappeared in the second half of 2007 as borrowing costs almost doubled from June to December, Merrill Lynch & Co. data show. U.S. buyouts fell to $103.2 billion in the second half from $322.4 billion in the first six months of the year as the subprime-mortgage market collapsed.

SPACs sell units, usually one share of common stock and one warrant, and use the money to buy a closely held company. They were dubbed blank-check companies because they don't disclose their targets before the IPO. Any takeover must be approved by at least 70 percent of the SPAC's shareholders. If a purchase isn't completed within a set time, usually two years, the money is returned to investors, minus incurred operating costs.

Thomas Hicks, the leveraged buyout pioneer and owner of the Texas Rangers of Major League Baseball, raised $552 million for Hicks Acquisition Co. I in September.

"I plan to use the vehicle to try to build three or four or five significant companies over the next five to 10 years because it's permanent capital," Hicks, 61, said in an interview from his office at Hicks Holdings LLC in Dallas. "Once you make an acquisition, that entity has the ability to continue growing both internally and by acquisitions because it will be very lightly leveraged compared to leveraged buyouts."

Sluggish Performance

Hicks Acquisition has declined 1 percent in American Stock Exchange composite trading since the IPO. Hicks Acquisition has yet to announce a takeover.

SPAC shares often languish until a deal is disclosed. Returns for blank-check companies that have announced but not completed a purchase have averaged 14.6 percent a year, while those still looking have gained 4.6 percent, according to SPAC Analytics.

After a purchase, the shares trade on the fundamentals of the operating company such as earnings and sales growth. SPACs that have completed their initial transaction rose by an average of 3.7 percent a year.

Services Acquisition Corp. International, sponsored by former Blockbuster Inc. Chief Executive Officer Steven Berrard, raised $138 million in June 2005 in an IPO underwritten by Broadband Capital Management LLC. In March 2006, the SPAC said it would buy juice-smoothie retailer Jamba Juice Co.

Related: Three Blank-Check IPOs: Atlas Industries, Enterprise Acquisition, Golden Pond Healthcare