Cash shells and Spacs sound innocuous enough. Blind pools less so. Call them what you will. They are all the rage, at least in the US where an exchange traded fund is being launched to invest in these special purpose acquisition companies. That must mark a high water level for spacs.
So far this year, tens of billions have been raised stateside by shells that have no assets and are designed to circumvent the arduous disclosure hurdles that go with a bog-standard initial public offering. All a Spac needs is a big-name entrepreneur or financier to back it and a hot topic to pique investors’ interest — autotech, agtech, meditech or fintech works. Raise the money, list the company and find a target later.
Last year, Richard Branson backed his Virgin Galactic tourism venture into a blank cheque company. He liked it so much he has just launched another one. One of 2019’s most successful cash shells is DraftKings, the online sports betting group now worth $20bn.
The recipe works better in the US than the UK, where investors are warier about writing blank cheques. British-born Martin Franklin, a veteran blind-pool engineer in the US, has been touting plans for a $750m London-listed version for a while. It has yet to happen and there haven’t been any others.
Perhaps the IPO process works more smoothly in the UK. More likely British backers are nursing the scars from a long line of blank cheque duds. Who doesn’t recall Vallar, the shell brought to us by Nat Rothschild that turned into the doomed Bumi? And who does remember Gloo, which listed in the UK five years ago, raised £30m and vanished in 2018 without landing a deal.
Some UK spacs are stayers. Melrose is one. WPP another. A lot sink without trace.
The London Stock Exchange boasts that 30 spacs have been listed in London in the past five years. More than $2bn has been raised since 2017. But few of us will ever have heard of the shells or the targets, with the exception perhaps of Derriston, which Martin Sorrell used to launch S4Capital, a WPP mark-2. The performance since listing has been equally forgettable. UK investors have long complained that the British versions are blind pools with massive management fees attached.
In that, the UK is not alone. US spacs tend to be structured differently. But managers extract “founder shares”, which can be hefty and dilutive. Note to would-be investors in the spac ETF, FT research this summer showed that of the cash shells launched in the past four years to 2019, more than half trade below their IPO price.
Halfords defies Haldane
Bank of England economist Andy Haldane warned this week against Chicken Licken economics after the chicken — aka Henny Penny — who was wrongly convinced the sky was falling in. Undue pessimism could hold back the UK’s economic recovery, Mr Haldane said.
Halfords seems to have a case of Chicken Licken-itis. The retailer has been swept along by the cycling and staycation boom. But boss Graham Stapleton seems barely able to believe his luck.
He was wide of the mark in March when he predicted prettified profits for the fiscal year to early April would be below guidance. They were better than even the top end of the retailer’s range. He was off again with a Covid financial model that planned for a 25 per cent drop in 2021 sales. By late August, revenues were up 5 per cent like-for-like and Mr Stapleton was forecasting half-year profits of between £35m and £40m. Even then the chief executive underestimated his lot. Three weeks later, Halfords says underlying profits for the six months to October 2 will exceed £55m.
Nonetheless, Mr Stapleton stays cautious. There are a number of factors that could bring the numbers down in the rest of the year, he says. Brexit and the end of the furlough scheme are approaching. Both could affect consumer confidence. The cycle surge could dissipate as the cooler weather sets in. Cars, which generate a larger slice of business in the second half of the year, could be consigned to driveways again if there is a second national lockdown.
If Chicken Licken was misguided (it was an acorn, not the heavens, that fell on the pessimistic poultry’s head). Mr Stapleton may be less so. Halfords has long since learnt that it operates at the whim of the weather, whether it is rain that puts off cyclists or frost-induced potholes that brings in extra motoring business. While trade might be more resilient this year than most because people are avoiding public transport, this would not be the first time a predicted cycling boom has failed to live up to its promise.
In other words, exuberance would be ill-advised. There are many endings to the Chicken Little fable. Few of them are entirely happy.
Better news on Thursday doesn’t mean Renewi is on the brink of renewal. The London-listed Benelux waste business formed out of a merger of Shanks and Van Gansewinkel Groep (bought for €482m in 2017) has been consigned to the small-cap sector for the past two years.
Its market cap has shrunk since Dutch authorities stopped shipments of its treated soil in 2018 and is now about £180m with more than €400m in debt. The shares rose a fifth on Thursday after it said first-half trading had been materially ahead of the board’s Covid-adjusted expectations. And regulators have recently allowed it to restart some soil shipments.
But broker Investec reckons even then operating profits won’t rise above 2020’s pre-Covid levels of €88m until 2023.
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