Navigating De-SPACs: Key Negotiation Points and Merger Terms
Navigating De-SPACs involves key negotiation points such as valuations, negotiation of transaction documents, lock-ups, and merger terms including SPAC market trends. Understanding these critical aspects is vital for success in the De-SPAC process.
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NAVIGATING DE-SPACSIN HEAVY SEAS. September 22, 2021
DE-SPAC TIMELINE: 5 KEY STEPS TO SUCCESS Preparedness and SPAC Selection 1 Confidential Phase 2 Public Process 3 SEC Review and Marketing 4 Closing 5 2 NAVIGATING DE-SPACS
KEY NEGOTIATION POINTS AND TRANSACTION DOCUMENTS Letter of Intent and Purchase Agreement Valuation: Because SPAC stockholder approval is necessary for the combination and SPAC stockholders may elect to redeem, the valuation must be viewed as appropriate by those stockholders or the deal could result in increased redemption and less operating cash going forward. Also, the PIPE investors will need to buy into the valuation in order to successfully execute the PIPE offering. Transactions structure Management and governance considerations PIPE Financing: Investors and SPAC sponsors can negotiate the details on types of shares, amount and price of the deal Closing conditions, such as minimum proceeds condition following redemption and payment of transaction expenses Target stockholder consideration (a combination of cash and rollover equity, or all equity) Exclusivity Founders Shares and Warrants SPAC founders asked to transfer, forfeit, or vest a portion of their shares and warrants 3 NAVIGATING DE-SPACS
KEY NEGOTIATION POINTS AND TRANSACTION DOCUMENTS Lock-Ups and Registration Rights Insiders are usually subject to post-merger lock-ups Registration Rights PIPE investors SPAC key holders Target key holders Voting and Support Agreements Executive compensation arrangement and equity plans Other governmental approvals and third-party consents Transaction Expenses 4 NAVIGATING DE-SPACS
KEY MERGER TERMS SPAC market trends There is a wide range with respect to the day 1 trading pop for recently announced deals Driven by capital markets judgment to clear PIPE market and limit redemptions Valuation Ideally, would like the SPAC to trade in the range of $11.00-$11.50 in the period post signing Dilution must be viewed as a percentage of capital raised, committed and non-committed Forfeitures are common in ~19% of transactions and typically cover ~23% of founder economics Founders shares can be subject to forfeiture either upfront or if conditions are not satisfied Price triggers at $15 or above are more valuable compared to lower thresholds Can be tied to amount of redemptions Promote economics Founder will also receive economics in exchange for at risk capital Vesting conditions occur in ~39% of transactions and typically cover ~30% of founder economics Generally in form of warrants but can also be shares, which is generally less dilutive Typically model as 0.2 shares (could be up to 0.25 shares) to measure dilution Many smaller SPACs have hedge fund backers with respect to at risk capital ~43% of transactions include a seller earn-out provision and typically represents ~8% of shares outstanding Increasingly used as a tool to offset dilution to SPAC sponsor Earn-outs Precedents indicate that capital markets will not penalize upfront if sufficiently out-of-the-money Could have some impact on follow-on offering but generally worth the trade-offs Source: Company filings, Dealogic; J.P. Morgan SPAC database; Data as of 08/31/21 Note: Sample set consists of U.S. SPAC deals announced after 2015 where SPAC IPO size is greater than $200mm and M&A value is greater than $500mm 5
KEY MERGER TERMS SPAC market trends Can be in the form of non-redemption agreements, forward purchase contracts and common stock PIPEs Committed capital typically represents 40-50% of total capital in recent transactions Non-redemption and FPA are valuable since they reduce the amount of SPAC capital that is subject to redemption Redemption rights create considerable uncertainty and the embedded option is a significant value transfer to investors PIPE capital is being increasingly leveraged in recent transactions Since 2020, the % PIPE to total capital is ~40%, compared to a median of ~30% in 2015-2019 Committed capital Becoming less important because of the presence of committed capital Min. cash condition Avoids limited float in a down market SPACs typically receive 1-2 board seats in recent transactions ~49 recent transactions include a dual class share structure SPAC will typically concede to limited board rights Governance Opportunity for high vote stock but usually limited to founder-led companies Dictated in part through negotiation with PIPE investors Should provide target shareholders with clear path to monetization post transaction SPAC founders should be locked-up for same or longer period vs target shareholders Lock-up and registration rights Lock-ups often have a duration of 180-365 days Source: Company filings, Dealogic; J.P. Morgan SPAC database; Data as of 08/31/21 Note: Sample set consists of U.S. SPAC deals announced after 2015 where SPAC IPO size is greater than $200mm and M&A value is greater than $500mm 6
PRECEDENT SPAC MERGER FORFEITURES / EARN-OUTS 279 SPAC mergers 2020 current Percentage of Founder shares subject to vesting Percentage of Founder share forfeitures Bottom quartile 20% Bottom quartile 13% Median 30% 87 / 31% mergers with no forfeitures or earn-outs Median 23% Top quartile 50% Top quartile 34% Founder share forfeitures 53 / 19% Founder shares subject to vesting1 109 / 39% 6 17 10 40 Target shareholders receive earn-out shares2 120 / 43% Target earn-out shares as percentage of O/S2 Bottom quartile 6% Median 8% Top quartile 10% Source: Company filings, Dealogic; J.P. Morgan SPAC database; Data as of 08/31/2021 Note: Sample set consists of U.S. SPAC deals announced since 1/1/2020 where SPAC IPO size is greater than $100mm 1 Includes founder shares subject to price-vesting and founder earn-outs; 2 Includes seller shares subject to price-vesting and seller earn-outs 7
APPENDIX HEALTHCARE DE-SPACS
RECENTLY ANNOUNCED HEALTHCARE DE-SPACS (1/2) Announc. Date Transaction value Closing date Target Acquiror ($mm) SPAC size ($mm) PIPE size ($mm) Price v IPO pricing 08/13/21 Pending Memic MedTech 655 $253 76 (2.0%) 08/06/21 Pending EQRx CM Life Sciences III 3,538 552 1,200 (1.4%) 07/19/21 Pending Gelesis Capstar 964 276 100 (1.3%) 07/15/21 Pending HeartFlow Longview II 2,374 690 - (1.3%) 07/12/21 Pending MSP Recovery Lionheart II 32,634 230 - (1.0%) 07/08/21 Pending Alpha Tau Healthcare Capital 650 275 92 (1.6%) 07/08/21 Pending Hyperfine, Liminal Sciences HealthCor Catalio 581 207 126 (1.2%) 06/28/21 Pending The Oncology Institute DFP Healthcare 842 230 275 (1.1%) 06/22/21 Pending Pear Therapeutics Thimble Point 1,197 276 100 (1.2%) 06/09/21 Pending Valo Khosla 2,323 345 169 (1.7%) 06/03/21 Pending Babylon Ark Global 3,623 345 230 (1.0%) 05/26/21 Pending P3 Health Partners Foresight 2,290 316 200 (2.0%) 05/11/21 Pending Ginkgo Bioworks Soaring Eagle 15,164 1,725 775 (0.3%) 05/03/21 Pending Roivant Montes Archimedes 5,000 411 200 (0.6%) 04/15/21 Pending Vicarious Surgical D8 Holdings 1,119 345 115 (0.2%) 04/07/21 Pending LumiraDx CA Healthcare 3,000 115 - (1.2%) 03/31/21 Pending Procaps Group Union Acquisition II 1,125 200 100 1.3% 03/29/21 Pending SomaLogic CM Life Sciences II 1,234 276 375 5.8% 03/19/21 08/11/21 Rockley Photonics SC Health 1,215 173 150 (29.7%) Source: Company filings, Dealogic; J.P. Morgan SPAC database; Data as of 08/31/2021; Note: Sample set consists of healthcare SPAC deals with a transaction value of $500mm+ 9
RECENTLY ANNOUNCED HEALTHCARE DE-SPACS (2/2) Announc. Date Transaction value Closing date Target Acquiror ($mm) SPAC size ($mm) PIPE size ($mm) Price v IPO pricing 03/15/21 06/30/21 POINT Therapeutics Acquisition 639 136 165 (4.5%) 03/09/21 Pending DocGo Motion Acquisition 900 115 125 (0.7%) 02/22/21 06/17/21 ATI Physical Therapy Fortress Value II 2,450 345 300 (57.5%) 02/18/21 06/16/21 Quantum-Si HighCape Capital 925 115 425 (3.2%) 02/17/21 08/26/21 Humacyte Alpha Healthcare 849 100 175 22.0% 02/12/21 07/01/21 Sharecare Falcon Capital 3,750 345 425 (24.9%) 02/10/21 07/22/21 Sema4 CM Life Sciences 2,071 443 350 (8.7%) 02/08/21 06/09/21 Nautilus Biotechnology ARYA Sciences III 905 150 200 (20.0%) 01/13/21 06/22/21 Talkspace Hudson Executive Investment I 1,400 414 300 (49.8%) 01/08/21 07/16/21 Celularity GX Acquisition 1,293 288 80 (18.5%) 12/18/20 06/08/21 CareMax Deerfield Healthcare Technology 692 144 405 (18.2%) 12/09/20 05/05/21 HydraFacial Vesper Healthcare 1,140 460 350 145.8% 11/23/20 06/09/21 UpHealth and Cloudbreak GigCapital2 1,351 173 125 (49.6%) 11/20/20 02/16/21 Butterfly Longview 1,457 400 175 22.7% 11/12/20 06/03/21 Cano Health Jaws 4,439 690 800 21.2% 10/21/20 02/10/21 Nuvation Bio Panacea 1,319 144 478 (3.5%) 10/06/20 01/07/21 Clover Health Social Capital Hedosophia III 3,702 828 400 (13.9%) 09/02/20 12/30/20 Clene Nanomedicine Tottenham Acquisition I 543 $46 - (19.1%) 07/30/20 10/27/20 Cerevel Therapeutics ARYA Sciences II 847 150 320 203.4% 07/29/20 10/30/20 SOC Telemed Healthcare Merger 721 250 165 (74.1%) Average: $3,051 $352 $332 (0.8%) Source: Company filings, Dealogic; J.P. Morgan SPAC database; Data as of 08/31/2021; Note: Sample set consists of healthcare SPAC deals with a transaction value of $500mm+ 10
