This article first appeared in Corporate, The Edge Malaysia Weekly, on May 2 - 8, 2016.
THE hit single Another One Bites the Dust by Queen appears to have made a comeback, looking at how things have panned out for some special purpose acquisition companies (SPACs) listed on Bursa Malaysia in recent weeks.
At its extraordinary general meeting (EGM) last Tuesday, Sona Petroleum Bhd saw 77.39% of votes cast against its plan to buy a 100% stake in Stag Oilfield in Western Australia for US$25 million.
Acquiring the oilfield, a qualifying asset (QA), is a prerequisite for Sona’s continued presence in the market. Without it, Sona faces the same fate as CLIQ Energy Bhd, which is facing liquidation.
But Sona still has until July 30 to complete an acquisition, although the likelihood of that happening is slim, say market observers, because identifying a new asset, obtaining regulatory approvals and getting the shareholders’ nod may take a while.
At a press conference after the EGM, Sona’s independent director, Datuk Mohamed Khadar Merican, was heard lamenting the SPAC’s fate, saying there were too many shareholders looking for short-term yields on Sona’s liquidation proceeds rather than holding on to long-term opportunities that Stag Oilfield presents.
“We have given them very good assets. Unfortunately, there are a few big shareholders who are not keen on the oil assets. Instead, they aim for yields,” he remarked.
Analysts who track SPACs say the latest developments point to a not-so-rosy future for the remaining SPACs, such as Reach Energy Bhd and Red Sena Bhd, which are also waiting to graduate to full-fledged companies.
“SPACs offer investors high returns for the high risk they take. Most SPAC investors are looking for yield, which is higher than what they get from fixed deposits. So, they will see the opportunity in Reach Energy and Red Sena,” a local analyst tells The Edge. “This should not be the case but the structure of a SPAC allows it. A trend like this is not good for the companies.”
A SPAC is structured to hold 90% of the proceeds from its initial public offering (IPO) until it uses the funds to acquire a new business. Usually, the IPO includes the offering of the underlying shares and accompanying warrants. Theoretically, a SPAC offers a large upside potential once an acquisition is announced but also gives the investors sufficient protection.
However, the SPAC structure becomes problematic when a large portion of investors has no intention of voting in favour of an acquisition regardless of its merits. Many institutional funds and investors fall within this category.
Investors have the option of selling attached warrants to reduce the initial cost per share before a QA is proposed. When a QA is proposed and a shareholder disagrees with it, he can opt out of the SPAC and ask for the return of his investment without necessarily jeopardising the deal. However, if an acquisition does not materialise and the SPAC is liquidated, investors stand to gain from bank interest on the company’s IPO proceeds.
The liquidation of a SPAC is not hassle-free. CLIQ is currently caught in a legal tussle with the Securities Commission Malaysia. The regulator had returned the SPAC’s application for the proposed purchase of a 51% stake in Phystech II Joint Stock Co for US$110 million last year due to incomplete information submission. CLIQ’s request for an extension of time was rejected, leading to the company’s eventual liquidation.
Although the liquidation process has started, it is unclear how long it will take for CLIQ’s shareholders to see their investment returned to them.
SPACs race against a three-year timeline to purchase a QA. A weak market environment can make closing deals a challenge and lead to a decline in SPAC’s share price. Investors are quick to spot a buying opportunity when a SPAC’s share price falls to a level that is below the company’s cash per share ratio.
Sona’s experience is particularly telling. It had the acquisition price of Stag Oilfield reduced by 50% from US$50 million, promised a capital repayment of RM90 million and postponed voting once at an EGM. Yet, the opportunity to own a share of the RM527.5 million cash or
47.9 sen per share before taxes at the liquidation of the company proved to be more tempting.
Another local analyst points out that almost all the SPACs listed on Bursa are in the oil and gas (O&G) industry, which also makes them unattractive at this point in time. The sustained fall in crude oil prices since mid-2014 makes a compelling case for investors to withdraw from investing in an O&G SPAC in the short to middle term.
“The idea of a SPAC came about in Malaysia when oil prices were soaring. At the time, everyone was excited by a SPAC and wanted to be associated with the oil business. But that sentiment has changed,” comments the analyst.
“Investors are now more educated about the O&G industry. They know the company’s performance is closely linked to global oil prices and are getting impatient. They are aware of the risk that these SPACs may issue cash calls if oilfields are acquired and the IPO proceeds are not sufficient.”
Reach Energy, which has until August 2017 to make a QA, is proposing to pay US$154.9 million for a 60% stake in Palaeontol BV, the owner of an onshore oilfield in Kazakhstan.
The analyst observes that although Reach Energy entered the market in August 2014, when oil prices were already declining, it is still susceptible to shareholders voting against the QA.
Signs of anxiety over the possibility are evident. At Reach Energy’s annual general meeting last week, its managing director Shahul Hamid Mohd Ismail pleaded with the shareholders to consider the long-term value of the SPAC.
Red Sena, although at risk of liquidation, is in a better position than Reach Energy. It is Bursa’s first SPAC in the food and beverage (F&B) industry.
Analysts claim the prospects for the F&B industry are more appealing to investors now compared with the O&G industry.
“The F&B business structure is well known to investors, the earnings are more predictable and the assets can be easily valued. It is something that investors can relate to. But, of course, as a SPAC, you will still need to convince the shareholders that your QA is worth it,” says an analyst.
The share prices of Reach Energy and Red Sena have held up so far despite news of Sona’s impending liquidation. But whether they survive the shareholders’ vote on their proposed QA remains to be seen.
Reach Energy closed unchanged at 68 sen last Friday while Red Sena fell 1.22% to 40.5 sen. Sona settled unchanged at 44 sen while CLIQ ended the day flat at 67.5 sen.
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