1. SPAC ONE aims to raise $250 million to merge in the next 24 months with a...
Question:
1. SPAC “ONE” aims to raise $250 million to merge in the next 24 months with a private firm selected among potential prospects in the health care space. The bank supporting the SPAC in its capital raising exercise charges an underwriting fee of 5.5%, half of which is contingent upon the SPAC completing a merger. The IPO of the SPAC takes place under the usual terms. The SPAC is expected to be capable to cover its running costs during the search for a target by using its expected financial income. However, to remain on the safe side, the sponsors want the SPAC to have an initial cushion of cash equal to $500.000. The sponsors get the usual 20% promote. Shareholder warrants are fractional, with five of them needed to purchase one new SPAC share. Founder warrants are issued at $1.25 each. Both founder and shareholder warrants have the same strike price ($11.5) and maturity (5 year from the merger date).
a. Please, detail how SPAC ONE obtains its initial cash and what the SPAC does with it (describe precisely the transactions made and their precise terms).
b. Please, detail the SPAC shareholding structure (sponsors, investors and their corresponding shares).
c. A merger proposal has occurred. You invested in the SPAC at the IPO and have not traded on it since then. You do not like the merger proposed, but your vote will make a difference at the incoming shareholder meeting called to decide upon it. What will be your optimal strategy? Why?
d. Suppose, instead, that all SPAC investors like the merger and decide to be part of it. The merger is with a private company, Target Inc., whose equity value is agreed to be $1 billion for the purpose of the merger. The DESPACing will be a liquidity event for the shareholders of Target, i.e. they get to keep the cash in the SPAC for themselves. Therefore, the combined entity, Merged Inc., retains the reference equity value of Target Inc. ($1 billion), divided in an appropriate number of shares to set an initial theoretical reference price per share equal to $10. The shareholders of the SPAC will obtain a number of shares in Merged Inc. equal to the number of shares they owned in the SPAC (i.e. all SPAC shares are valued $10 for the purpose of the merger). Please detail the shareholding structure of Merged Inc. (SPAC sponsor, SPAC investors, Target Inc. Shareholders, not considering the warrants).
e. Before the approval of the merger, the SPAC had an amount of cash equal to its original capital raising exercise (the initial cash cushion has been depleted), as well as merger related advisory and legal fees, due at the merger, equal to $5 million. How do the proceedings for Target Inc. shareholders from taking the company public in such a way compare to those that they would have realized should they have sold the same percentage of the company in a regular IPO paying a 4% gross spread, plus other fees (legal, due diligence,…) for $1.5 million? Please, comment briefly on such a comparison.
f. How would you change the comment considering the warrants held by SPAC sponsors and investors?
2. Today, the shareholder meetings (of the saving and ordinary shares) of Company XYZ have approved the combined proposal of converting saving shares (SS) in ordinary shares (OS) in a 5 to 4 ratio and, prior to it, paying a dividend of 50c/12.5c to saving/ordinary shares. On the announcement date, their undisturbed prices were respectively 3.5 and 6.125 euro.
There are currently 100 million of ordinary shares and 25 million of saving share outstanding.
a) Please, calculate the conversion rate (# OS per 1 SS) implied in the undisturbed prices.
b) Please, calculate the conversion rate and the premium implied by the conversion offer.
3. True/False/Uncertain. Explain
a) A proportional demerger may be detrimental for bondholders, while it is usually value enhancing for shareholders.
b) Hostile takeovers are rare because they are expensive, carry a huge risk and, depending on the applicable legislation, may have a very low probability of success.
c) In a hostile takeover, the issuer statement set the terms of the purchase proposal made by the bidder to the shareholders of the target.
Introduction to Finance Markets Investments and Financial Management
ISBN: 978-1118492673
15th edition
Authors: Melicher Ronald, Norton Edgar