Since the FCA put the brakes on the listing of smaller cash shells on the London Market, the number of clean cash shells available as a cheap route to market has shrunk considerably. Every new reverse takeover means fewer SPACs available for smaller companies that want to use them as a means to get onto the market via another route than an IPO.
There are known to be a small number of mini cash shells that are still in the pipeline pre-listing and which will hopefully see the light of day soon, but the new regulations now mean that the next generation of SPACs need to be much larger, and much more expensive. The FCA last year raised the minimum market cap threshold for SPACs from £700,000 to £100m, and this means fewer cash shell opportunities at the small end of the market.
SPACs – Special Purpose Acquisition Companies – are companies holding pure cash that are listed on a market with the intention of buying one or more currently private companies. Part of their appeal is that they can assist a private firm with a speedy move onto the public market, without the costs or the considerable time period involved in listing via the conventional IPO route.
“Our final rules aim to provide more flexibility to larger SPACs, provided they embed certain features that promote investor protection and the smooth operation of our markets,” the UK regulator said of its reforms. The new rules came into force on 10 August 2021.
Smaller SPACs to become highly sought after
The regulatory pressures have meant that the boom in SPAC listings on both sides of the Atlantic experienced in 2020-21 has now tapered off somewhat. There were over 100 SPAC acquisitions (reverse takeovers) globally in Q4 last year, which was a record. Companies were scrambling to use the limited number of cash shells left on the market. We are unlikely to see ever anything like the volumes of SPAC listings we saw then.
This has left the market with a limited number of sub-£100m SPACS to choose from, and they will soon be as rare as hen’s teeth. While there are still a lot of SPACs full of cash on Wall Street – a recent Goldman Sachs estimate put it at $144bn worth in early February – the UK rules were tougher for cash shells, and hence we did not see the same surge in 2020 that we saw in the US.
This has translated into a very limited supply of cash shells for the many private companies that may still be considering using one to list in London.
Pineapple Power (LSE:PNPL), for example, originally listed in December 2020 and subsequently was suspended once it had located an acquisition target. The cash shell has since returned to the market and is freely trading again, as it could not agree terms with its original target. Pineapple Power’s directors said in February they would be proceeding immediately to seek an attractive acquisition opportunity.Even though it was returning to the market, in this case Pineapple Power was not subject to the FCA’s £30m limit. “It is our opinion that this sector of the market encapsulates many smaller, dynamic and rapidly growing enterprises ready to access the capital markets,” said Claudio Morandi, Chairman of Pineapple Power. “Their wish to do so makes a merger with a company such as Pineapple Power a very tempting and affordable way to realise their corporate development plans.”
Other smaller cash shells on the market include Electric Guitar (LSE:ELEG), which is seeking acquisitions in the digital advertising technology sector, and Net Zero Infrastructure (LSE:NZI), which is looking for deals in clean energy infrastructure.
The larger deals are still coming through of course, but such SPACs are tougher to get off the ground and are really the province of much larger operations or firms with private equity specialisation. Marwyn Acquisition Company II (LSE:MAC2), recently announced it was listing under standard main board rules, but is aiming to raise £500m.
For small to mid-sized deals, of course, this means that the SPAC route, while still there, is a rapidly closing door. Those smaller cash shells that are still on the market will become increasingly sought after assets.
