An analysis of the Liberty International-Pearl Group transaction:
In Pearl Deal, a New Role for Spacs?
June 29, 2009, 4:47 pm
The craze for blank-check companies may have dissipated with the onset of the credit crunch and ensuing market volatility, but the veteran deal-makers running some of the biggest of these vehicles are still seeking to put their money to work.
Case in point: the deal Monday for the Pearl Group, the big British life insurer, which sold itself to Liberty Acquisition Holdings (International), a so-called special-purpose acquisition company, or Spac, run by Nicolas Berggruen and Martin Franklin.
For the uninitiated, Spacs are publicly listed shell companies, whose sole purpose is to use their shares to strike deals, usually within two years. Liberty International had until early next year to find an acquisition target, after which it would have dissolved.
Through Liberty International’s deal for Pearl, the British insurer will receive a 510 million pound ($843 million) injection of capital, money the company was compelled to raise amid the wider turmoil in the insurance industry. About 17 of Pearl’s lenders also agreed to take write-downs on their holdings, reducing the company’s debt by about 560 million pounds ($926 million).
When the acquisition closes, Liberty International’s shareholders will own about 60 percent of Pearl, which carry a gross embedded value of about 5.2 billion pounds ($8.6 billion). The insurer’s existing shareholders — including Sun Capital, a vehicle for British financier Hugh Osmond — will own about 29.5 percent. Other stakeholders will hold the remainder.
Pearl’s existing management, led by chief executive Jonathan Moss and chief financial officer, Simon Smith, will remain in place, though Liberty may seek to add new faces to the insurer’s board.
At some point, perhaps as soon as early this fall, Pearl will move its public listing from Euronext to the much more liquid London Stock exchange.
“It’s a win-win situation for all parties involved,” Mr. Franklin, a veteran deal maker who also runs the consumer products conglomerate Jarden, told DealBook in an interview on Monday.
According to Mr. Franklin, expect more Spac deals like the Pearl acquisition because financial firms are compelled to seek out more capital to bolster their balance sheets. In particular, companies close to tripping their debt covenants — be they in the financial, entertainment or consumer sectors — could benefit from the money that would come from a Spac deal, he said.
“The time for Spacs has become much more interesting after Lehman’s bankruptcy,” Mr. Franllin said, referring to the market tremors that radiated from last fall’s collapse of Lehman Brothers. “We still have not gotten to a place of full equilibrium.”
Two years ago, it wasn’t hard to find a business mogul who was setting up his own Spac. Among those who attached their names to blank-check vehicles were Ronald Perelman, Nelson Peltz and the investment bank Lazard.
But the freeze in deal making and the volatility of the equity markets made Spacs much less popular, and only few blank-check deals have been made since last year.
Victory Acquisition, a Spac run by Jonathan Ledecky, who previously acquired the retailer American Apparel, has announced it will liquidate after its proposed purchase of TouchTunes failed to win enough support from TouchTunes’ shareholders.
Even Goldman Sachs was humbled by the difficult market for Spacs, withdrawing the initial public offering for its Liberty Lane Acquisition vehicle last year.
Mr. Franklin and Mr. Berggruen, however, have had a fairly successful record of Spac deal making. A previous vehicle of theirs, Freedom Acquisition, struck one of the biggest blank-check deals in recent memory, merging with the British hedge fund GLG Partners to give it an New York Stock Exchange listing.
For Mr. Franklin, the biggest problem with Spacs was what he said was a prevalence of smaller vehicles making mediocre deals. A decade ago, blank-check companies earned a black eye for acquiring companies that soon failed. The practice hasn’t gone completely away, Mr. Franklin said: “There were ones that were done that should have failed.”
“I’m much more cynical of the small space in general,” he added. (His various Spacs have tended toward the larger side, with Liberty International having raised 600 million euros in February 2008.)
Mr. Franklin and Mr. Berggruen still have one more Liberty Spac on the market, with a market value of almost $1.2 billion. Mr. Franklin said that with the Pearl deal, Liberty can now widen its scope beyond deals just in the United States.
– Michael J. de la Merced
Correction: A previous version of this post incorrectly indicated that Victory had acquired TouchTunes; that proposed deal was not completed because of insufficient shareholder support.
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