The New Way To Make Deals: Blank Checks
Monday, February 18, 2008
What kind of deal brings Jack Kemp, Mario Cuomo, Henry Aaron, former Washington Nationals president Tony Tavares and a New York City taxicab king together?
A $215 million "blank check" company called Sports Properties Acquisition, which they formed last month to buy sports teams, stadiums and other entertainment companies.
Also known as special-purpose acquisition companies, or SPACs, blank-check firms raise money by selling stock to the public and then scouring the world for businesses to buy. They are the current rage among dealmakers, but have drawn some skepticism from critics who say investors don't know what they are buying when the SPAC goes public.
In many ways, blank-check companies are bets on the dealmaking prowess of their founders. In this case, investors are counting on the connections that Kemp, Aaron, Tavares and Cuomo bring.
"The more I looked at it, the more I realized that the potential for sports properties and entertainment in a global economy is huge," said Kemp, who runs Kemp Partners, a Washington-based investing firm, and is chairman of Sports Properties. "SPACs are hot."
Entrepreneurs are turning to blank-check companies as banks have grown reluctant to make big loans. SPACs can provide a cheaper way to access capital, according to SPAC managers and some financial observers. SPAC managers also love them because they get a big block of stock in the company in return for putting the deal together.
Since 2003, blank-check companies have raised about $20 billion from investors in initial public offerings, according to SPAC Analytics, a research firm that follows the asset class. SPACs raised $12 billion last year alone, which is still a fraction of the $437 billion in U.S. private-equity buyouts last year.
Big-name investors like billionaire Nelson Peltz, who is chief executive officer of Triarc, which owns Arby's and other food franchises, and Tom Hicks, owner of baseball's Texas Rangers and the Dallas Stars National Hockey League franchise, have put together SPACs over the past year. Peltz backed a SPAC last fall that plans to raise up to $750 million to acquire a business that he feels has been mismanaged. Hicks raised $550 million last summer.
Locally, AOL co-founder James V. Kimsey and Discovery Communications founder John S. Hendricks are co-sponsors of Education Media, a District-based SPAC that will buy a for-profit education company whose chief executive officer will be Pete Kirsch, Kimsey's chief of staff.
Washington venture capitalists Raul Fernandez and Mark D. Ein recently raised $260 million for Capital Acquisition, a SPAC that will look for high-growth companies, while former Maryland congressman and National Basketball Association player Tom McMillen co-founded two SPACs in the security sector.
The management team of a SPAC generally has 18 to 24 months from the initial public offering to find an acquisition target or it must return its investors' money, with interest. If the managers want to buy a company, they must get approval from 70 percent of their shareholders.
Once an acquisition is made, the SPAC's original investors often sell their shares to make a profit, according to industry experts. The new company is then bought by investors who bet on the long-term prospects for the business. The people who put the SPAC together receive up to 20 percent of the equity in the purchased company.