By Stephanie Jacob
In this introductory article into the world of special purpose acquisition companies (Spacs), we look at the idea of Spacs, and the rationale behind the Securities Commission introducing the model into the Malaysian capital market. We also briefly look at the three listed Spacs; Hibiscus Petroleum, CLIQ Energy and Sona Petroleum.
______________________________________________________________________
Imagine that someone approaches you and asks you to make an investment in their company. But all the information they offer you about the company is its area of interest and its management team. Otherwise the company is a shell; no assets or financials to indicate the health of the company or its future growth prospects.
You might think you are being scammed, but on the other hand you might have just been offered an opportunity to be part of a special purpose acquisition company (Spac).
Spacs are curious creatures in a world that is used to making decisions based on assets, cash flows and past performances. They are also an increasingly popular way to gain access to the capital market.
The concept of a Spac has been around for awhile, but it really started to gain popularity in the 2000s, especially in the United States. Spacs also have a presence in Europe, and are quite popular in South Korea.
It came onto the Malaysian financial scene in the latter half of 2009, when the Securities Commission (SC) introduced it to the Malaysian market. It said that by introducing the Spac model, it hoped to “promote private equity activities, spur corporate transformation and encourage mergers and acquisitions to enhance the depth, breadth and competitiveness of the Malaysian capital market.”
The concept is similar to that of a private equity (PE) fund, in the sense that they both raise money from investors to acquire assets and add value to them. However there are also several key differences. For one, unlike PE funds in which money is raised from selected individuals and from institutional funds, Spacs raise money from the investing public, and therefore there is the need for greater and more comprehensive checks and balances.
The other difference is that unlike PE funds which are unlisted, Spacs are listed on Bursa Malaysia and can be actively traded.
When the Spac model was first introduced, it was met with as much trepidation as excitement, as the regular investor would very likely be the one holding most of the risk. Recognising that there was a lot of opportunity for abuse, the SC from the onset worked on a set of rules and regulations that had to be adhered to before and after listing to avoid misuse of the concept (see table 1).
Key among them was the need to raise a minimum of RM150 million in IPO proceeds, for a minimum of at least 90% of IPO proceeds to be held in a trust account until a qualifying asset is acquired and at least 80% from that must be used to acquire a qualifying asset.
A Spac has three years to get a qualifying asset, failing which it is liquidated and all assets, including the money in the trust account, is returned to investors, except the Spac promoters who came in with the seed capital.
The SC also requires that a moratorium must be imposed on the securities held by the management team of the Spac. Its minimum requirement is that members of the management team are not allowed to sell, transfer or assign their entire interest from the time of listing on Bursa, until the acquiring a qualifying acquisition. Following the completion of a qualifying asset, the management team then can sell, transfer or assign up to a maximum 50% of their securities per annum.
The first company to officially apply to become a Spac in Malaysia was Hibiscus Petroleum, whose founders begin looking into the idea of forming such company in early February 2010.
Ken Pereira
Hibiscus Petroleum was the brainchild of three individuals, namely Ken Pereira, Joyce Vasudevan and Pascal Hos looking to set up an oil and gas (O&G) exploration and production (E&P) company using the capital markets.
Being the first to be seriously looking at starting a Spac, the trio set about formulating a structure that would be acceptable to the SC and attractive to investors. Joyce Vasudevan, who is chief financial officer at Hibiscus Petroleum says that the process took them several months and plenty of consultation with the various players, such as the SC, potential investors and investment banks.
In July 2011, Hibiscus Petroleum finally listed on the main market of Bursa Malaysia after successfully raising RM235 million, about 57% more than the SC’s minimum requirement of RM150 million.
Slightly under a year later, Hibiscus Petroleum secured its qualifying acquisition after acquiring a 35% equity interest in Lime Petroleum Plc. This allowed it to transform from a Spac to a fully fledged O&G player on the main market of Bursa Malaysia.
Next on the scene was CLIQ Energy, who listed as an O&G exploration and production player on Bursa Malaysia after raising RM364 million through IPO listing in April of this year.
It is currently in the process of sourcing for a qualifying asset which it says is likely to be in the production stage, rather than in exploration (as Hibiscus Petroleum went for). According to the company, it is looking closely at the Asian and Oceanic regions for potential acquisitions.
Hadian Hashim
Sona Petroleum is the latest to have joined the fray, as it became the third O&G Spac in the E&P sector when is listed on Bursa at the end of July 2013.
The Spac led by Hadian Hashim as chief executive officer (CEO) and Maznah Abdul Jalil as CFO, made headlines when it successfully managed to secure RM550 million in IPO proceeds. It also was the first Spac to have cornerstone and Ministry of International Trade and Industry (MITI) approved investors participate in its listing.
Analysts and market watchers have said that the popularity of Spacs is likely driven by the massive returns that the investors of the earlier Spacs, in particular Hibiscus are currently sitting on.
For example, initial investors of Hibiscus and CLIQ had an initial cost of entry of 1 sen, today their shares are being traded at RM2.44 and RM1.15 (combined share and warrant price) respectively. Those are returns of over 240 times and 110 times respectively.
The question is why are more of the investors, especially those in Hibiscus (who are no longer subject to a moratorium) not cashing out yet? Another question is if there are too many E&P Spacs coming into the game, and if there is a risk of the sector becoming over populated.
There are two mining focused companies, Australaysia Resources and Minerals Bhd and TerraGali Resources Bhd who have been working on their proposals to become Spacs and have seemingly run into some difficulty getting approval from the SC.
Questions and rumours have emerged due to the fact that they both began their process around the same time as CLIQ, yet have still not managed to gain SC approval. This has raised suggestions of a SC bias against non O&G Spacs, which the regulator has strongly denied.
But such talk has failed to dampen the excitement surrounding the Spac model, and there are suggestions that there may be groups interested in introducing a food and beverage Spac or even a plantation Spac into the market.
With the Spac market continuously growing and an increasingly popular method to enter the capital market, it appears that there is unlikely to be a slowdown in Spacs attempting to list on Bursa.
In this series, Kinibiz looks at what it takes to be a successful Spac, the importance of regulations, what needs to be done to ensure that the Spac model is not abused, if there is room for a non O&G Spac in the Malaysian market and whether the public understands what a Spac is..
Tomorrow: Hibiscus faces its biggest test.
You must be logged in to post a comment.