SPAC-ulation oh SPAC-ulation

I do have SONA - which is the third SPAC listed in KLSE.

1st one is Hibiscus.
2nd one is CLIQ.
3rd one is SONA.

Time to end the SPAC-ulation?



We’re still waiting for SPACs to become capital market catalysts

MORE than two years after the listing of Malaysia’s first special purpose acquisition company (SPAC), it’s time to ask this question: Is it a good idea to have SPACs in Malaysia?

The regulatory framework for the listing of SPACs and for protecting their shareholders, is fairly sturdy and has been much discussed. However, there are still big question marks about the developments and sentiments that drive trading in the shares and warrants of these companies.

Is the speculative interest in Bursa Malaysia’s three SPACs unhealthy? For that matter, can somebody explain what exactly healthy speculation is?

SPACs are very different from most of the other companies on the stock exchange. A SPAC is floated without any business. It’s up to the management to identify a suitable acquisition or merger (or more), and to secure shareholder approval to use the initial public offering (IPO) proceeds to pay for that deal.

In Malaysia, a SPAC must complete this so-called qualifying acquisition (QA) within three years from the date of listing.

All investments involve some risk, but when you buy a piece of a SPAC, you’re taking an unusual leap of faith because all that you have to go on is the track record of the management team.

Typically, these are people with experience and expertise that will help in finding the right QA and in growing the business after the QA is done.

There are safeguards in place that provide some comfort. For example, 90% of the amount collected from the IPO must be placed in a trust account. If the SPAC fails to make a QA before the deadline, it will be liquidated and the money in the trust account will be distributed to shareholders.

These conditions are part of the Securities Commission’s (SC) Equity Guidelines, which were amended in 2009, partly to allow the listing of SPACs.

According to an SC press release issued at the time, this move is meant to add breadth and depth to the Malaysian capital market.

“The listing of SPACs will promote private equity activity, spurring corporate transformation and encouraging mergers and acquisitions,” said the regulator.

The revamped Equity Guidelines took effect in August 2009 but the first SPAC, Hibiscus Petroleum Bhd, was listed only in July 2011. There was another lull before two more came onto the scene – CLIQ Energy Bhd made its stock market debut in April this year, while Sona Petroleum did so in July.

All three were floated with the aim of going into the oil and gas industry. Hibiscus completed its QA in April last year, while CLIQ and Sona have yet to announce any proposed QAs.

So far, the SPACs are a long way from being the capital market catalysts in the way envisaged by the SC. Maybe they will one day, but for now, the SPACs are better known for inspiring a lot of market activity of a different kind.

The securities of all three companies, particularly the warrants that come free with the shares, have often experienced heavy trading volumes. Bursa Malaysia has queried Hibiscus twice – in November 2011 and January 2012 – in relation to unusual market activity in the company’s securities.

The warrants of CLIQ and Sona are almost fixtures in the daily list of the most active counters. The shares and/or warrants of CLIQ have been in the top 10 almost 50 times.

Sona’s ability to hold the interest of investors is more impressive. More than half (56% to be exact) of the trading days between Sona’s listing on July 30 and yesterday ended with Sona shares and/or warrants among the 10 most actively traded counters.

And we’re talking about companies that don’t have business operations and have yet to announce any firm targets. It’s trading fuelled by froth.

Investing in SPACs after their listing is a hair-trigger pursuit. The market is hyper-sensitive to the slightest hint that a QA is coming. Any rumour or news report about a SPAC can be construed as a signal to trade.

The greedy and the naive are drawn to such a scene, lured by the intoxicating combination of cheap warrants and the promise of massive returns. When there is the chance of an easy kill, the predators will come.

Surely, this isn’t what the SC had in mind.

Why should there be long stretches of active trading in SPACs before they have announced any QA? Yes, every market needs a bit of speculation, but when people buy and sell shares and warrants in SPACs in large volumes, what really are they acting on?

Just the fact that the management is looking at a potential target shouldn’t be a big deal. That’s what a SPAC is supposed to do – search for something to buy. So much more has to happen before the company can even talk about reporting earnings that will make it a worthwhile investment based on fundamentals.

Will the deal happen? If it’s such a good asset, why is the vendor selling and can the SPAC extract more from the business? And let’s not forget that with the three-year clock ticking away, SPACs have the disadvantage of negotiating with sellers who know that the SPACs don’t have time on their side.

The SPAC’s management may have the relevant industry experience, but putting together a merger or an acquisition and making it work thereafter, usually requires a different set of skills and exposure.

There are a lot of ifs and buts about SPACs. That’s not necessarily reason enough to reject them, but if people ignore the uncertainties and are quick to believe just any story about an imminent QA, we may be better off without SPACs.

Executive editor Errol Oh was once intrigued by the idea of SPACs being listed in Malaysia. He may have overestimated the maturity and sophistication of investors here.