Hollywood has been hopping with hedge funds and pumped with private equity. Now, get ready for a SPAC attack.
The dissonant acronym -- which stands for Special Purpose Acquisition Company --represents a new investment scheme attracting big names and heralding a potential wave of media deals.
There are not apt to be deals in the $1 billion-plus price range. And many of the outfits tilt toward new media, videogames and telecom rather than TV and film production. But the list of those steering SPACs suggests that even modest-size deals could rearrange the media landscape in some intriguing ways.
The roster includes former high-ranking execs at Sony, AOL, DirecTV, ABC and Anchor Bay. Both
R. Steven Hicks, the Austin, Texas-based radio mogul, and billionaire brother
Tom Hicks jumped into the game last year, as did
Ron Perelman. SPAC board members and advisors include the likes of one-time NBC exec
Scott Sassa, Walden Media's
Cary Granat and deep-pocketed AOL alum
Ted Leonsis.
A more mellifluous shorthand for these firms -- "blank-check companies" -- helps explain their quirky mission and sudden popularity. And with everyone from Time Warner to
Barry Diller rethinking the bigger-is-better mantra that helped create the media congloms, this could be prime time for those with blank checks to write.
There are now almost 100 such firms across all industries, at least eight of them targeting media and entertainment. The number of SPACs spiked 78% in 2007, according to industry tracker SPAC Analytics.
And Wall Street has taken notice.
When SPACs began in the late-1990s, they were underwritten by bottom-feeding players. Now, underwriters such as Citigroup, JP Morgan and Lazard Freres have helped launch consumer brands like Jamba Juice, Golfsmith and American Apparel.
The first step for blank-check companies is doing an IPO to arm the management team with cash for a takeover. Most SPACs are traded on the American Stock Exchange due to its lenient listing requirements. In the media sector, the amount of the initial coin raised has ranged from $18 million to $500 million.
Sounds pretty routine, but here's the key twist: Under federal guidelines, 2.5% to 5% of the initial proceeds must be invested by the people running the company.
That's right. SPACs blatantly violate one of the oldest precepts in Hollywood -- the use of
other people's money.
"We have our own skin in the game and you cannot imagine what motivation that is," says
Malcolm Bird, a longtime AOL exec who started TM Entertainment along with Anchor Bay and Sony vet
Ted Green. "It gives you extra incentive to find targets that are not only right for you, but are right for shareholders."
The media sector has not yet produced a deal, but there is one good reason why it almost certainly will: SPACs, under federal regulations, are permitted just 24 months to complete a transaction. The valuation of a deal must be at least 80% of the initial funds raised.
If the firm doesn't manage to identify a target, make an offer, get shareholder approval and get regulators' blessing within 24 months, the SPAC is liquidated and the top execs' money goes to shareholders. Oh, and no cheating -- rules bar talks with possible targets ahead of the IPO.
"It's really like having a gun to your head," says one M&A guru who has contemplated launching a SPAC. "Those are a lot of hoops that private equity doesn't have to jump through, and they are often competing directly for the same targets."
Given the hassles, why doesn't the SPAC pack simply go the private equity route?
A couple of reasons: SPACs offer an equity stake of typically 20% after a takeover. That means an initial investment of a couple million could grow exponentially with a deal.
Bird and Green, for example, put in more than $2 million of TM Media's $72 million war chest, but would acquire a position immediately worth $10 million-plus after an acquisition.
Plus, federal rules also require the heads of a SPAC to manage the takeover target after a deal, something that comes naturally to the hard-charging media types behind the wheel. After its first deal, a SPAC becomes a regular operating company subject to the usual market rules.
The equity stake and the management role make SPACs a different arena than private equity or hedge funds, and the midrange price point where media and entertainment SPACs are looking means market turbulence won't likely hit as hard.
L.A.-based blank-check company HD Partners, headed by a group of DirecTV vets including former chief exec
Larry Hartenstein, raised $150 million and bought the National Hot Rod Assn. Unlike megadeals stalled by the credit crunch, currency woes or the subprime crisis, the deal is actually about to close.
"It's a good place to be given the climate," says
Robert Clauser, a former media consultant for Accenture whose Media and Entertainment Holdings launched last March.
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