Is it time for London to finally welcome SPACs?
Posted on April 29, 2021 by Jonathan Symcox
The trend in the US for high-growth companies to list via SPAC mergers has even swept up some the UK’s top brands.
A faster way of listing a company, it involves the creation of a publicly traded blank cheque company – known as a SPAC, or special purpose acquisition company – created specifically for the purpose of the deal.
UK-based Super Group, parent company of online gaming firm Betway, recently agreed a SPAC listing in New York which values the business at $4.75 billion as it plans to expand in the US.
And in Q3, UK-based online car retailer Cazoo plans to go public in the US via a merger with a blank cheque company led by billionaire investor Dan Och which will see it valued at $7bn.
“Following Brexit, the UK needs to reform its listing rules as a whole to attract special purpose acquisition companies and tech unicorns”, explains Maxim Manturov, Head of Investment Research at Freedom Finance Europe.
“It is essential that the Prime Minister [Boris Johnson] convinces more fast-growing tech companies to list in the London Stock Exchange to make the UK financial markets more attractive.
“EU companies have been long tending to prefer the US exchanges over the domestic ones due to more favourable valuation and stock structure.”
The slowdown in London listings has led to concerns over the attractiveness of the London Stock Exchange markets for companies looking to go public.
Indeed, when food delivery disrupter Deliveroo revealed its intention to IPO in London, Chancellor Rishi Sunak rushed to hail the firm a ‘British tech success’, adding last month: “We are looking at reforms to encourage even more high growth, dynamic businesses to list in the UK.
“So it’s fantastic that Deliveroo has taken this decision to list on the London Stock Exchange.”
Deliveroo’s subsequent float was labelled a disaster as many of the most prominent investors in the UK – Aberdeen Standard, Aviva Investors, BMO Global, charity fund manager CCLA, Legal and General Investment Management and M&G – refused to participate, citing poor treatment of delivery workers. Others feared increasing costs relating to regulation of the gig economy.
Sunak perhaps wishes he’d been less vocal about the deal. His government, however, remains keen to attract high-growth companies to the London market, issuing proposals including easier rules for SPAC companies, reducing the requirements to the free float to protect the first shareholders and allowing a two-class share structure that gives more control to the founders.
The head of the London Stock Exchange, David Schwimmer, said: “Continuing to develop the UK listing scheme is key to providing flexibility for companies looking to list in London, while maintaining high standards of corporate governance.”
Deliveroo founder Will Shu’s decision to have a dual-class share structure – where his shares hold 20-times the voting power of other investors – came in for heavy criticism and were also held up as a reason for the firm’s poor performance on IPO.
However, Manturov is more optimistic: “These rule changes will naturally make LSE listing more attractive in the longer term.
“Dual-class share structures were pioneered by tech such giants such as Google and Facebook, giving the founders extended voting rights. Switching to a similar system in London could induce more local unicorns, such as Revolut and Checkout.com, to enter the local market, and more likely to grow over time, also taking into account that Trustpilot and Deliveroo have already launched their IPOs in London.
“SPACs are structured differently in the US than in the UK. New York-listed SPACs allow investors to buy back their shares if they are unhappy with the target company. Meanwhile, in the UK, trading is suspended following the announcement of the merger, which upsets the investors; this is a key difference and the reason why the US SPACs are much preferred.
“The Financial Conduct Authority, however, suggested easing the rules that lead to such suspension, and also said it intends to include a minimum market capitalisation and buyback option to protect SPAC investors.”
Freedom Finance Europe is a broker giving traders direct access to the American and European stock markets through its mobile trading platform Freedom24.
“It will probably take time for the global sentiment regarding London listing to start changing for the better, given the new regulations,” acknowledged Manturov.
“It is important how these regulation changes will be brought in, since it is necessary, on the one hand, to reduce the regulatory pressure and, on the other, not to allow high handedness.”