Special Purpose Acquisition Companies (SPACs) and the new Mexican stock exchange

September 2018 | SPOTLIGHT | CAPITAL MARKETS

Financier Worldwide Magazine

September 2018 Issue

Last year, a new vehicle reached the Mexican stock markets: the Special Purpose Acquisition Company (SPAC), usually incorporated as a Sociedad Anónima Bursátil de Capital Variable (S.A.B. de C.V.), is a vehicle where a promoter obtains resources through an IPO in order to collect funds to purchase or merge with one or several companies.

Given that there is no specific legislation for SPACs, and since they are incorporated as an S.A.B., they are subject to the Securities Market Law, the General Law of Business Corporations, the Commercial Code, the General Law of Negotiable Instruments and Credit Transactions and the Foreign Investment Law, among others.

SPACs may be listed on the Bolsa Mexicana de Valores (BMV) or Bolsa Institucional de Valores (BIVA). The money raised through the IPO of a SPAC is held in an escrow account until the SPAC identifies an M&A opportunity to pursue with the invested funds.

Usually within the next 18 to 24 months, the SPAC’s management team proposes to the shareholders meeting the business combination, which could result in two possible scenarios. First, if the acquisition is not approved, another objective can be sought within the agreed period, otherwise the funds are reimbursed. Second, if the acquisition is approved, the business combination becomes a publicly traded company which would allow the merged or acquired company, now part of the S.A.B., to be, from that day, publicly traded under the SPAC more quickly and effectively.

Benefits of investing in SPACs

Investing in a SPAC can be very attractive because it is an easier way to have a company listed on the stock market, and the shares will be freely transferable and liquid. Furthermore, the SPAC is a newly created company which does not have an operating history, so the Comisión Nacional Bancaria y de Valores (CNBV) will not require operating profits, sales or methodologies. However, it will be subject to the same rules as any other public company. SPACs can also invest in any type of sector and do not have to meet any size requirement. SPACS have access to specialised promoters with a proven track record; they can access liquidity in the capital market and are a vehicle free of salary and commission charges. With SPACs, capital earnings are taxed at 10 percent, compared with 35 percent of ISR on a traditional investment. Investments in SPACs are denominated in pesos and offer non-taxable exchange gains. There is also an alignment of interests and high standards of corporate governance. SPACs can also be liquidated in the event that the initial business combination is not successful.

Management team

SPACs are often managed by an experienced team in a given sector, generally integrated by three or more members, who will receive a percentage fee of the vehicle’s capital. This fee is usually kept in escrow (usually for two to three years) and the management team normally agrees to acquire guarantees or shares of the company in a private placement immediately before the IPO. No salaries, finder’s fee or other compensation is paid to the management team before the business combination.

SPACs listed on Mexican stock exchanges

To this day, there are only two SPACs listed on the Mexican stock market. Vista Oil & Gas S.A.B. de C.V. was listed on 11 August 2017. The company is comprised of 65 million ‘A’ series shares with a price of MXN$179.33. The offering’s amount reached MXN$11.6bn. Fifty percent of the global offering was placed in Mexico through the BMV, and the remaining 50 percent was placed in international markets, in accordance with Rule 144A and Regulation S. The focus of this SPAC is the energy sector.

The Promecap Acquisition Company, S.A.B. de C.V. was listed on 23 March 2018. Comprised of 30 million ‘A’ series shares and the same number of warrants, the price for each share as of MXN$185.93, and the offering’s amount reached MXN$5.5bn. Of the global offering, 79.02 percent was placed in Mexico through the BMV, and the remainder was placed in international markets, in accordance with Rule 144A and Regulation S. The focus of this SPAC is private equity.

SPACs are expected to attract investment from both national and international companies, mainly foreign due to the experience they might have with this kind of transaction; for instance US companies, which is the country that gave birth to the SPAC. Additionally, SPACs will be closely monitored since they have been on the market for a short period of time and will depend largely on the promoters, the trust they generate from investors and their ability to find opportunities.

BIVA

On 25 July 2018, a new stock exchange began operations, becoming the second Mexican stock exchange. The BIVA is expected to compete with the BMV, as both will trade the same instruments and their filling and listing processes are very similar.

BIVA uses technology provided by the New York-based Nasdaq, which is used in over 50 markets around the world. It is betting on offering a better service through technology with the following characteristics: (i) protocols in-line with international standards; (ii) broker anonymity; (iii) block trading book; (iv) closing auction; and (v) full market depth of the books.

With 146 listed companies in the Mexican stock market, Mexico has lagged behind other emerging economies, and the BIVA hopes that this number will grow to 200 in the next three to five years.

The capitalisation of the Mexican stock market is barely the equivalent of 37 percent of the country’s gross domestic product (GDP). This can also be seen in other emerging economies, such as China, which has a gross domestic product of $11.22bn, while its most important stock market capitalisation is barely $5.19bn. In developed countries, there are more listed companies and more participation from investors.

The main problem is the small number of issuers, market value, limited growth and small number of investors, though hopefully things will be different now that there are two options to allow companies to go public and both stock markets will be able to compete to offer the fastest, easiest and most secure way of going public, as well as offering the best conditions.

Alejandro Landa is a partner and Emilio Cuevas and Santiago Soldevilla are associates at Holland & Knight. Mr Landa can be contacted on +52 55 3602 8002 or by email: alejandro.landa@hklaw.com. Mr Cuevas can be contacted by email: emilio.cuevas@hklaw.com. Mr Soldevilla can be contacted by email: santiago.soldevilla@hklaw.com.

Alejandro Landa, Emilio Cuevas and Santiago Soldevilla

Holland & Knight