Today's Chicago Tribune has an article on blank check companies, focusing on a local deal, the Great Lakes Dredge & Dock-Aldabra Acquisition transaction.
Shells fill in the blanks for deals
By James P. Miller
Tribune staff reporter
Published January 21, 2007
Great Lakes Dredge & Dock Corp. went public not through a conventional initial public offering but by the increasingly popular alternative of combining with a "blank check" company.
Also known as special purpose acquisition companies, or SPACs, blank-check concerns are essentially publicly traded shells. It is an ownership format that requires investors to buy into an acquisition vehicle, rather than a business they can see or measure, and essentially bet on management's ability to find a good deal in the future.
As the Great Lakes deal shows, a SPAC investment can yield very solid profit.
Historically, newly formed companies have been owned by their founders and by private venture-capital investors that provide early-stage seed money. After the company matures, it raises additional capital by selling shares to the public.
That's the standard model. SPACs essentially reverse the process: They sell shares to the public first, then later become a functional company that actually produces goods or services.
Confused? Consider what happened with Great Lakes.
First, a New York private-equity firm created a company, naming it Aldabra Acquisition Corp. Aldabra was essentially a shell, without any operations or meaningful capital. Early in 2005, however, it went public through an initial offering.
Investors knew what they were getting into. "We are a blank-check company," Aldabra said in its IPO documents, "formed to effect a merger, capital stock exchange, asset acquisition or other similar business combination."
Aldabra sold 9.2 million "units" to investors at $6 apiece, raising total proceeds of $55.2 million. Each unit provided the buyer with one share of common stock and two warrants to buy shares at a future date.
In a conventional IPO, companies generally use proceeds from the offering to pay down debt or to expand by buying new equipment and hiring more workers. But Aldabra put almost all of the money into a trust account.
After the IPO, Aldabra shares began trading publicly on the bulletin board over-the-counter market, also known as the "pink sheets," a kind of minor-league equities market where shares of the smallest companies trade.
Searching for a partner
According to regulatory filings related to the merger, Aldabra executives looked at more than 150 potential acquisition candidates and conducted detailed due diligence reviews of 35 of those businesses. It liked two prospects, but neither proposed combination panned out.
Then in April, an Aldabra official contacted Madison Dearborn Partners to see whether the Chicago private-equity giant had any business in its portfolio that it would like to merge with Aldabra.
Madison Dearborn did, and in June the companies announced that the Aldabra shell would merge with Madison's Great Lakes subsidiary.
The combination closed Dec. 27. Great Lakes became a publicly traded company, without ever going through an IPO. As a much bigger company, its shares trade on the Nasdaq stock market instead of the pink sheets.
Madison Dearborn holds 67 percent of the post-merger Great Lakes, and Aldabra investors 28 percent. Great Lakes management, which had owned a 15 percent stake in the Madison Dearborn subsidiary, own 5 percent of the new combination.
Madison Dearborn contributed a company that generates more than $400 million in annual revenue and is modestly profitable on an operating basis. Aldabra brought to the deal roughly $50 million it raised in its 2005 IPO and its status as a public company. That is valuable: Madison, which controls Great Lakes' board, now is free to sell its more than 26 million Great Lakes shares, and Great Lakes can use stock instead of cash to make future acquisitions.
Profit for investors
With Great Lakes shares currently trading at $6.87, Aldabra investors have more than recovered the $6 a share at which they bought in. They can sell the shares or hold them in hopes that Great Lakes' stock rises in coming years.
But they also have an additional profit source, one that helps explain the appeal of the SPAC format to hedge-fund investors that don't mind a risk.
The two warrants investors received with their $6-a-share buy-in were worthless until Aldabra consummated a deal. But those warrants, which allow holders to buy Great Lakes shares at $5 apiece, now have been activated and trade publicly on Nasdaq.
The warrants are trading at $1.76, or roughly the price of the stock minus the $5 exercise cost, but could become much more valuable if Great Lakes shares climb in the future.
As of Friday Aldabra investors who put in $6 could sell their shares and warrants for $10.39. That's a 73 percent return over the span of about 18 months.
Such outsize returns aren't a sure thing, of course. If an SPAC fails to find a good merger candidate over a specified period of time, it is obliged by law to liquidate and return the money to investors in its IPO.
But deals are getting done. Acquicor Technology Inc., a California blank-check company, raised $172 million in its IPO and is nearing completion of a merger with closely held Jazz Semiconductor Inc. And investors in the SPAC that acquired Jamba Juice producer Jamba Inc. have seen the value of their investment rise sharply.
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jpmiller@tribune.com
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