Friday Night - Time For A SPAC Story
By Josh Beckerman
Wall Street Journal
November 13, 2009, 10:20 PM ET
Here’s a true-life tale that you probably won’t see on the History Channel.
It’s the story of a real estate company that walked away from Nasdaq in favor of the Pink Sheets, but later plotted a return to the public markets to help it capitalize on a plethora of distressed opportunities. And it’s the story of a private equity-backed blank check company that debuted in late 2007, a time of great SPAC intrigue, but wound up dangerously close to its liquidation deadline amid an altered financial landscape.
Kennedy-Wilson Inc., based in Beverly Hills, decided in 2004 to deregister its common stock and suspend its reporting obligations. The company said it “determined that the increasing financial cost and commitment of management’s time to ever increasing regulatory requirements have become an excessive burden that will only grow over time.”
In September, the company said it would merge with Prospect Acquisition Corp., a SPAC whose backers include growth equity firm LLM Capital Partners. Kennedy-Wilson said there are “over $1 trillion of commercial real estate loans will reach maturity in the next five years” and estimated that, just in California, there are “approximately 450 condominium projects with more than 37,000 unsold units, worth in excess of $10 billion, that are currently being marketed by developers and/or lenders.” The company said “looming debt maturities and the expected re-pricing of real estate assets present a compelling opportunity for well-capitalized investors.”
When Prospect went public in November 2007, raising $250 million, it intended to focus on financial services, noting that corporate profits in the financial industry from 1996 through 2006 posted 11.4% annual compound growth, compared to 5.6% for non-financial companies. But, in a world where many SPACs liquidated and others had to drastically revise their deals in order to close, the deadline grew closer.
The transaction was required to be completed by Saturday or else the blank-check company would dissolve like many others. Late Friday, the parties announced that Prospect’s shareholders approved the deal and it closed. Additionally, warrantholders approved certain amendments, including a revised exercise price.
Even pre-financial meltdown, some of the hedge fund shareholders of SPACs used a strategy that involved voting against deals. SPAC units are split into shares and warrants – if a SPAC liquidates, shareholders get their money back plus interest, while warrants become worthless, and some shareholders voted no as a “yield play.” One way to cut back on “no” votes is buying shares from holders who might vote against deals, and it turns out Prospect worked hard this week on that front. A filing with the Securities and Exchange Commission details several transactions in which it agreed to buy Prospect stock – effective at the time of the merger closing – and the sellers agreed to grant a proxy in favor of the merger.
All of these stock sales were worth $9.95 each and were dated Nov 12: Arrowgrass Master Fund Ltd. (which agreed to sell 1.39 million Prospect shares), Bulldog Investors (2.25 million), Del Mar Master Fund Ltd. (1.37 million), Citigroup Global Markets Inc. (617,745), several Glazer Capital funds (609,396 shares) and Malibu Partners and Broad Beach Partners (1.45 million combined.)
Additionally, some presumably pro-merger types bought Prospect shares in open market transactions, also dated Nov. 12.
Certain officers, directors and sponsors of the SPAC bought a total of 134,600 shares for a price that didn’t exceed $9.95 each. In addition, De Guardiola Advisors, Inc., Prospect’s financial adviser in the merger, bought about 21,500 shares for a price that didn’t exceed $9.95.
Some Kennedy-Wilson executive officers and directors bought 555,000 Prospect shares for $9.92 each. And Guardian Life Insurance Co. of America, which holds a $30 million convertible subordinated note issued by Kennedy-Wilson, bought 445,000 shares for $9.92 each.
Boston-based LLM Capital Partners specializes in non-control investments, in companies with enterprise value of $15 million to $250 million. In May, it invested in low-carb food company Atkins Nutritional Holdings Inc., to help finance the purchase of nutrition bar maker Bora Bora. It also invested in the private equity firm that owns Atkins, North Castle Partners LLC.
At the time of an October 2007 SEC filing, LLM owned 23.6% of Prospect’s common stock, which was expected to fall to 4.7% after the IPO. (Those figures didn’t include shares related to sponsors’ warrants.)
Prospect shares closed Friday at $9.85, down 7 cents, on NYSE AMEX.
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