Cash Shells on the London Market

Cash shells or SPACs (special purpose acquisition companies) are purpose-built vehicles with a stock market quote and a board of directors, but no active business and no assets other than a strong management team with specific sector expertise and the funds raised from financial backers (which will typically include management). The structure gives managers a ready-made stock market listing, a cash war chest and an acquisition currency at a time when, owing to global financial circumstances, the cost of financing is high and transactions are difficult to execute.

The Trend

Cash shells were all the rage on the AIM market of the London Stock Exchange (LSE) six years ago, arriving in such numbers that the LSE was forced to tighten the rules to safeguard the market’s reputation. In March 2005 alone, 31 cash shells rushed to list to beat the introduction of the rule changes the following month, which stipulated that a cash shell must raise a minimum of £3 million, a figure deemed high enough to require at least some institutional interest.

2010 and 2011 have seen a number of cash shells not only returning to AIM, but, for the first time, obtaining admission to the Official List of the United Kingdom Listing Authority (UKLA) by way of a Standard Listing. The timing of the appearance of these cash shells is a function of the regulatory environment of these markets and the volatile nature of the present economic climate. The cash shell structure is designed to take advantage of any dislocation in the market to acquire assets at favourable prices. When asset valuations start to rise, the opportunity for these acquisition vehicles could well disappear.

The Regulatory Environment

Access to the Premium Listing tier of the Official List, whereby the issuer is subject to onerous eligibility and continuing obligation requirements and is potentially eligible for inclusion in the FTSE indices, is not possible for a cash shell; there are a number of entry requirements that a shell company simply would not be able to satisfy, which do not apply to Standard Listing or to AIM applicants. In particular, a Premium Listing applicant is required to have unqualified, consolidated, independently audited accounts covering a three-year period; a revenue earnings record in respect of at least 75 per cent of its business for a three year period; and a history of control over the majority of its assets for at least a three-year period.

AIM cash shells are more heavily regulated than those with a Standard Listing. In the last 18 months, management teams and their financial backers have increasingly been making a virtue of the minimal regulatory requirements applicable to cash shells with a Standard Listing while raising very significant amounts of money on IPO. The key factor, as is made explicit in the listing documents, is that a Standard Listed issuer is not required to obtain shareholder approval for the acquisition of a target.

While a Standard Listing applicant must prepare a prospectus that is approved by the UKLA, it otherwise benefits from the relaxation of a number of rules that are applicable to Premium Listed and/or AIM companies. A Standard Listed cash shell is not:

  • required to appoint a financial advisor or sponsor on IPO or on a continuing basis (an AIM company is required to appoint a "nominated advisor" (or "nomad") at all times);
  • subject to the "Listing Principles" set out in the UKLA Listing Rules;
  • subject to any minimum fund raising requirement (other than to have a market capitalization of £700,000 as set out in the UKLA Listing Rules applicable to all Official List companies);
  • required to set out a formal investing policy or to implement it within any particular time frame (it follows that a change in investing policy is not subject to shareholder approval, nor is its ongoing validation in the event of failure to implement it within a stated period);
  • subject to the restrictions on share dealing (by the issuer or management);
  • subject to restrictions as to the price and nature of share issuances or buy backs (although a Standard Listed issuer must publish a prospectus if it issues, over a 12-month period, further securities represent 10 per cent or more of the securities of a class already admitted to trading);
  • required to adhere to certain specific ongoing disclosure requirements (other than the general obligation to disclose price-sensitive information);
  • required to seek shareholder or sponsor approval for related party transactions or (a nomad must confirm to an AIM listed issuer that such a transaction is fair and reasonable insofar as the shareholders are concerned and certain prescribed details of the transaction must be notified to the market);
  • required to offer pre-emption rights to shareholders (indeed, typically any statutory pre-emption rights are disapplied prior to the IPO in connection with consideration shares issued on an acquisition); or
  • required to comply with any corporate governance codes (although certain disclosures as to internal control and risk management procedures must be made in the issuer’s annual report).

In practice, issuers tend to voluntarily commit to certain standards or restrictions in relation to some of the above points, although the UKLA has no power to police compliance with such commitments.

It is usual for an issuer to state that it will seek a Premium Listing for the enlarged group following the acquisition.

Notable Transactions Involving Standard Listed Cash Shells

Horizon Acquisition Company plc raised £417.7 million on its IPO and Standard Listing in February 2010. Horizon has achieved its investment goal by acquiring APR Energy, a Florida-based temporary power provider, in June 2011 for £527 million (£221 million in cash and £306 million in Horizon shares).In June 2010 came the IPO and Standard Listing of Nat Rothschild’s Vallar plc raising £687 million to fund acquisitions in the metals and mining industry. June 2011 saw the acquisition by Vallar of PT Bumi Resources Minerals Tbk, an international mining company, and a reorganization resulting in the introduction of Bumi plc as the new Premium Listed parent company. The acquisition price represented a total consideration of £1.27 billion.

Marwyn Partners plc obtained a Standard Listing in January 2011, raising a relatively modest £6 million; Marwyn is presently concluding a further placing and recommended offer for Praesepe plc, a gaming company, for a total consideration of approximately £39 million. The IPO in February 2011 of Justice Holdings Limited launched by, among others, Nicolas Berggruen, the billionaire backer of hedge fund GLG and Pearl Insurance, raised £900 million. Vallares plc, the second of Nat Rothchild’s vehicles, raised £1.35 billion in June 2011. It will focus on oil and gas assets. Both Justice and Vallares have yet to make acquisitions.

These listings, together with the record of successfully completed acquisitions, represent some of the most significant recent transactions in the London market and clearly show that the cash shell concept, particularly by way of Standard Listing, remains compelling in current market conditions.