We’ve talked before about how challenging the de-SPACing process is and the importance of marketing a combination. Specifically, if sector/long-only investors do not know a SPAC combination exists, how will they ever know they want to own the stock? This is why having an effective marketing plan is so crucial and we’ve got Cody Slach here, from Gateway IR, to discuss how they approach the de-SPACing tightrope. Gateway has previously worked with Hennessy II, III, and is engaged for IV, as well as Industrea Acquisition Corp. and two Canadian cannabis SPACs – Cannabis Strategies Acquisition Corp. and Mercer Park Brand Acquisition Corp. Clearly, they understand the nuances associated with SPAC investor relations. As such, they have put together a piece on what teams, bankers and investors should be thinking about when it comes to the de-SPACing process. Read on to see how they approach this tricky part of a SPAC’s life.
IR – A Neglected Function in the de-SPAC Process?
As we write this article, there are 73 U.S.-listed SPACs with billions of dollars of dry powder searching for targets. 2018 was a record year for SPACs post-financial crisis, and it’s looking like 2019 will top that. As business combinations are announced and financial sponsors look to successfully “de-SPAC,” the competition for investors’ mindshare and capital will be significant. The winners of this competition will likely see their SPACs trade well post-combination close.
But on the list of things a financial sponsor needs to do before announcing their transaction, creating a proactive investor relations program isn’t typically one of them.
Here’s why it should be one of the first steps a SPAC takes:
One major (and often overlooked) advantage of going public via a SPAC transaction is the ability to actively communicate with investors throughout the entire de-SPAC process. This transparency lies in stark contrast to a traditional IPO where, once the S-1 is filed, you are largely shut out from speaking with anyone on the outside. However, the ability to communicate the merits of a deal throughout the de-SPAC process is something all sponsors should be using to their advantage.
If engaged soon after the IPO road show, a strategic and experienced IR firm has a long runway to create investor and analyst awareness in a SPAC. This process is important for three reasons:
- While steadily gaining in popularity, SPACs still represent the minority of public listings each year (approximately 20-25% of all IPO issuance). As a result, they may be off the radar of many traditional institutional and retail investors.
- The shareholder makeup of a SPAC, from IPO to business combination close, changes dramatically, moving from mostly quantitative or arbitrage-based approaches to traditional, long-term fundamental strategies. This shift makes it imperative to have the latter ready to step in when the structured money moves out.
- While top-tier private equity funds have played a big role in legitimizing this compelling risk/reward asset class, some investors still need convincing. Good IR can be a strong, reputable voice.
Once the SPAC sponsor has identified its target, we have refined the key ingredients to effectively drive investor demand and assist with a successful business combination. Below we highlight the key events during the de-SPAC and our role within them.
1. Business Combination Announcement
First impressions, particularly in a SPAC, are important. When announcing the business combination, sponsors should clearly and effectively communicate the target’s competitive strengths and marketplace positioning, while providing investors with both historical results and a financial outlook. This first impression is why it is critical to involve an IR professional well before announcement.
However, when issuing the outlook, you also need to communicate conservative targets. It is difficult to overestimate the importance of meeting/exceeding public projections on stock price performance, multiple expansion and management’s credibility.
Follow up the business combination announcement with a conference call and Q&A session. Also, sponsors should do their homework early and target sell-side analysts with comparable coverage and buy-side investors with similar holdings and invite them to participate on the call. Doing so can initiate a relationship and drive awareness early in the de-SPAC process—a crucial point that we’ll expand upon next.
2. Creating Relationships with the Investment Community
Once the business combination has been announced, continue building relationships with the investors and analysts you invited to the call. This follow-up can take the form of scheduling an “analyst day,” where the targeted sell-side group convenes at your HQ or a neutral location to do a deep-dive on your business. Not only does this facilitate the learning process, it can also fast-track coverage. We have found sell-side sponsorship to be a strong catalyst in share price appreciation, so facilitating initiations is one of our highest priorities. Given the correlation, we even push for initiations before the combination is completed as it can provide great momentum into the shareholder vote and close process.
For the buy-side, continuing relationships can take the form of follow-up calls, in-person meetings and financial conference participation. Increasing the breadth of fundamental investor awareness is particularly important given the shareholder base will turn-over throughout the de-SPAC process. A good IR firm can play a critical role in setting up these meetings, securing invitations to the right conferences and obtaining meeting feedback.
3. Ongoing Communications
During the de-SPAC process, several events at the target company may occur, such as the closing of a previously announced acquisition, a major growth milestone or a large customer win. Use these opportunities to stay top-of-mind by issuing press releases and even holding conference calls. This not only prepares the management of the target for life as a public company, it also keeps the investment community engaged and informed of the business’ progress.
Throughout the de-SPAC process, aim to attend financial conferences. Ideally, these would be sponsored by sell-side analyst firms you are targeting for coverage. This will give target management the opportunity to further the relationship with an analyst and/or meet targeted institutional investors in an efficient manner. Target management also needs to perfect their “story” as they get closer to the business combination closing and should capitalize on any chance to discuss their strategic growth plan.
Additionally, use this time to develop the target company’s IR website and populate it with informative and actionable content. According to Cision’s recent Shareholder Communications 365 Study, 95% of institutional investors say they first visit a company’s IR site when researching new stock opportunities…65% say they won’t even consider investing if a company doesn’t have one. With that in mind, focus on creating a homepage on the IR site that gives a high-level overview on who the target company is, their mission, vision and values. A user-friendly IR website that is an extension of the company’s message is extremely important since this is often the first form of communication you will have with potential investors.
4. Final Push Before the Shareholder Meeting and Proxy Vote
As you near the end of the de-SPAC process, you will have the chance to speak with the majority of your shareholders. Consider re-issuing an investor presentation, providing a succinct, yet comprehensive overview of the business, its long-term prospects and any recent updates. Use this time wisely and address the frequently asked questions that have come up in past meetings—the end goal here is to minimize redemptions and get the share price trading above redemption value so that there is a natural recycling of the shareholder base from SPAC investors to sector investors or investors that want to own the shares post-close. To create optimal demand for the stock, a comprehensive communications strategy throughout the de-SPAC process can be critically important.
As the SPAC product continues to grow and we continue to see additional new issuance, there is a long runway of innovative and disruptive private companies that will be entering the public markets in the coming months and years. Instituting a proactive, strategic and comprehensive IR program early in the de-SPAC process will allow current and prospective investors to effectively evaluate the opportunity and discover companies they otherwise may have overlooked. It’s easy for standard financial screens to miss new companies coming public out of a SPAC transaction due to the sometimes-complicated capital structures and limited financial data. This information gap only increases the need for a proactive and comprehensive communications campaign.
One of Gateway’s most successful partnerships has been with the Hennessy SPAC team (Nasdaq: HCAC). We have represented two of their four SPAC targets and taken a hands-on role during the de-SPAC process of both HCAC III and their current HCAC IV SPAC vehicle. The Hennessy team has embraced the role of investor relations in a successful deal, which has enabled them to drive strong relationships with the sell-side and a deep roster of fundamental investment managers seeking the product they bring to market. Below is a typical process we deploy in our SPAC assignments.