How the backers of blank check companies are compensated for their efforts has emerged as a flashpoint in the debate over the merits or drawbacks of popular vehicles. Regulators also weighed. Even when disclosed transparently, large chunks of businesses going to a group of investors can be seen as giving other investors a raw deal.
Special Purpose Acquisition Companies, or SPACs, have burst onto the scene in the past 16 months. Some 600 PSPCs went public, merging with more than 110 companies. This rivals traditional initial public offerings and far exceeds direct listings. SPACs raise funds from IPO investors, then find an operating company to merge with, going public in the process.
The management teams of the SAVS, called “sponsors”, tend to buy the founder’s shares at the time of its IPO for a nominal sum. These are generally equivalent to 20% of the value of the SAVS, and the shares are generally acquired at the time of its merger. This so-called “promotion” of sponsors has two main drawbacks for PSPC investors: the dilution of their holdings and the potential misalignment of incentives with the sponsors.
The first criticism is often poorly worded: Since SPACs tend to make deals with companies worth four or five times their cash value, promotion usually only makes up 4% or 5% of the company. after the merger. It’s always dilution, but it’s not close to the 20% stake in the business that the promoter is sometimes billed for. And, in practice, sponsors often negotiate a reduction in their promotion to get a deal on the finish line.
Yet, because the sponsors get their founder’s shares for next to nothing after the PSPC merger, the incentive can be to make any deal, no matter how bad it is. They can still make a lot of money even if the shares of the new company go down considerably after the merger.
GS Acquisition Holdings
II (symbol: GSAH), a PSPC sponsored by a division of
(GS), aims to respond head-on to this second criticism, while reducing the first. The PSPC promotion is structured as a earn-out, with third parties vested at $ 12, $ 14, and $ 16 – bonuses to the PSPC IPO price of $ 10. In other worlds, stocks must rise 20%, 40%, and 60% from the IPO price for sponsors to be paid. There is no incentive for sponsors to enter into any deal. And the dilution will be lower with the share price at these higher levels. Promotion expires worthless five years after the deal closes if the stock does not reach these levels.
Other SPAC sponsors have also accepted price supplements in their negotiations with companies with structures similar to those of the GSAH. But GSAH included these conditions from the start in its IPO prospectus.
“We sit down with a lot of companies, probably between 800 and 1,000 for this PSPC,” says Tom Knott, CEO of GSAH and head of the Permanent Capital Strategies team at Goldman Sachs Asset Management. “We tell them all ‘the next time a PSPC meets you, you should ask them to defer their promotion.'”
SPAC agreed last month to merge with Mirion, a California supplier of radiation detection equipment for industries such as nuclear power generation and medical radiology. The deal values Mirion at around $ 2.6 billion and is expected to close by the end of 2021, when GSAH’s ticker symbol changes to MIR.
Mirion will receive $ 1.65 billion before expenses related to the deal, including the $ 750 million in trust from GSAH and a $ 900 million private investment in public capital, or PIPE, funded by Goldman Sachs,
Fidelity, Janus Henderson Investors, Neuberger Berman and other institutional investors. Mirion will also raise $ 830 million in debt upon merger.
Much of the proceeds will go towards the buyout of the current owner of Mirion – a private equity firm called Charterhouse Capital Partners – and debt repayment. This includes some $ 285 million in loans owed to another division of Goldman Sachs, which Knott says had no part in the process.
Existing shareholders will own around 19% of the company after the merger, with investors PIPE holding 44% and GSAH 37%. Mirion’s founding CEO Thomas Logan will remain in office as chief, while Larry Kingsley, former CEO of Pall and Idex (IEX), will become executive chairman.
Going forward, Mirion plans to expand its business in the industrial and nuclear medicine and laboratory end markets, currently focusing on nuclear power plants. These are growing faster and have wider profit margins, Knott says, while additional growth could come from mergers and acquisitions down the road.
“The company is the best in the world for ionizing radiation testing and measurement equipment,” says Knott of GSAH. “It has a long history of exploitation which has demonstrated its resilience through cycles, and what we consider to be a very good trajectory forward.”
Mirion had revenue of $ 651 million last year and earnings before interest, taxes, depreciation and amortization, or Ebitda, of $ 146 million. Management expects these to reach $ 723 million and $ 179 million, respectively, next year, valuing the deal at around 13.3 times the company’s value through 2022 EBITDA .
This is a discount compared to other actions related to measurement and testing:
(KEYS) goes for 18.7 times the estimated EBITda EV / 2022,
(BRKR) for 22.9 times, and
(MTD) for 31.2 times.
GSAH stock has not reacted much to the announcement of the deal with Mirion. It recently stood at $ 10.25, slightly higher than the PSPC spot value of $ 10 per share. Goldman Sachs’ previous SPAC, GS Acquisition Holdings, merged with Vertiv Holdings (VRT) last year. The deal was a success, with shares recently trading at $ 27.25, up more than 170% from the PSPC IPO price.
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