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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 9 minutes read

Clogged PIPE Market Leading to Alternative Financing Structures in Some De-SPAC Business Combinations

The standard PIPE playbook for de-SPAC business combinations in the last 12-18 months has been remarkably consistent: a SPAC wall crosses a number of institutional investors, shares historical and projected financial information and obtains subscription commitments at the same time as the SPAC signs its business combination agreement with a target company.  Some might say the secret sauce of the SPAC boom has been the ubiquitous common equity PIPE, which has helped to validate valuations and guarantee available capital. 

Yet over the past few months, with the PIPE market becoming tighter but with 400 SPACs still seeking targets for business combinations, we have been seeing some de-SPAC deals being announced with alternative and even creative financing structures.  Some SPACs have raised funds through the issuance of convertible debt or preferred stock, providing investors with fixed returns with additional upside through the convert features.  Others have utilized common equity PIPEs but also included warrants together with a lockup on the shares and warrants – again to increase potential PIPE return.  Some deals have included sponsor and other backstops to cover potential shareholder redemptions, thus reducing execution uncertainty.  In some cases there has been no PIPE or other financing at all. 

While business combination transactions are still being announced with traditional PIPEs, including large ones, it is clear that the de-SPAC market continues to be fluid and alternative financing structures are being utilized where appropriate in a very crowded market with significant competition for investment.

Convertible Notes

One financing development involves the SPAC obtaining commitments for the issuance of convertible debt.  A number of recent de-SPAC transactions  have included  commitments for 5-year convertible notes with semi-annual interest ranging between 6% and 7% and conversion prices ranging between $11.50 - $12.00.  A number of those convertible notes structures include interest make-whole payments in cash depending on when the notes are converted.

In the 890 5th Avenue Partners, Inc. / Buzzfeed, Inc. business combination announced on June 24, 2021, the SPAC obtained a $150 million convertible note commitment from certain investors led by a number of unaffiliated institutional investors, including Redwood Capital Management.  The notes, which mature in 2026, bear interest at a rate of 7.0% per annum, but provide for a stepped up rate of 8.5% if there is less than $144.0 million in the SPAC’s trust account at closing  The notes are convertible at an initial conversion price of the lesser of (x) $12.50 and (y) a 25% premium to the lowest per share price at which any equity of the SPAC is issued prior to the closing.  If a noteholder elects to convert its notes after the one year anniversary, and prior to the three-year anniversary, of the issuance of the notes, the SPAC will be obligated to pay an interest-make-whole payment in cash. The indenture governing the convertible notes also will include restrictive covenants that, among other things, will limit the ability of the issuer to incur additional debt or to incur liens.

Similarly, in the Seven Oaks Acquisition Corp. / Giddy, Inc. (“Boxed”) business combination, announced on June 13, 2021, the SPAC entered into subscription agreements for $86 million of convertible notes.  The notes are exchangeable for common stock at a conversion price of $12.00 per share and will bear interest at a rate of 7.0% per annum, payable in-kind or in cash at the option of the company, which provides the company greater flexibility with its cash flows. The obligation of the convertible noteholders to close is subject to satisfaction of a minimum cash condition.  As an additional inventive, the SPAC sponsor also agreed to transfer 125,000 founder shares to the lead investor in the convertible notes offering.  The SPAC also entered into subscription agreements for a $34 million common stock PIPE with third party investors.

Also, in the GigCapital4, Inc. / Holdings LLC business combination, announced on June 4, 2021, the SPAC obtained commitments for $200 million of convertible notes from institutional investors.  The five-year notes bear interest at a rate of 6.0% per annum, and are convertible into shares of common stock at an initial conversion price of $11.50.  Here again, the investors received a guaranteed return with holders of the notes who elect to convert (a) prior to the third anniversary of the initial issuance of the notes, receiving a cash payment equal to twelve months of interest or (b) on or after the third anniversary of the initial issuance of the notes but prior to the fourth anniversary of the initial issuance of the notes receiving any remaining amounts that would be owed from the conversation date up to, but excluding, the fourth anniversary of the initial issuance of the notes.

Warrants / Lockup

We have also seen PIPE investors agree to lockups in a number of recent transactions, tied to the issuance of warrants to these investors.

In the CF Acquisition Corp. V / Nettar Group Inc. (“Satellogic”) business combination, announced on July 5, 2021, the Cantor Fitzgerald-led SPAC obtained commitments from certain investors to purchase ordinary shares at $10/share for approximately $69.7 million (the SPAC’s sponsor, affiliated with Cantor Fitzgerald, purchased $23.2 million of this amount).  PIPE subscribers may elect to lock up any of the new shares for two years after which they will receive non-redeemable warrants that may be exercised at $20.00 per share (1 warrant for each share that is locked up). In addition, if the VWAP of the shares is less than $10.00 per share (during the 30 calendar-day period prior to the effective date of the registration statement which registers the resale of the PIPE shares), each PIPE investor will be entitled to receive, for no additional consideration, a number of additional ordinary shares based on a formula included in the subscription agreement.  In addition, each PIPE subscriber (other than the SPAC sponsor) may, at its option, offset its commitment to purchase new shares against shares of the SPAC that it already holds, provided, among other things, such PIPE investor may not transfer such shares prior to the closing, does not redeem such shares in connection with the business combination, and votes such shares in favor of each shareholder proposal to be contained in the proxy statement for the deal.

In the Far Peak Acquisition Corp. / Bullish Global business combination, announced on July 8, 2021, the SPAC obtained commitments for a $300 million common equity PIPE.  The lead investor in the PIPE, who committed to purchase $75 million of shares, also agreed to purchase 3 million warrants for $1 per warrant from the SPAC’s sponsor or from Blackrock, an investor in Bullish Global.  The lead investor agreed to a 90-day lockup with respect to its shares and warrants.  Unlike most founder warrants but like most public warrants, the company has the right to redeem the warrants for $0.01 per warrant if the company’s stock price exceeds $18 per share.

Preferred Stock

One recent transaction included a side-by-side common equity PIPE and a preferred equity PIPE.  In the Isos Acquisition Corporation / Bowlero business combination, announced on July 1, 2021, one group of investors committed to participate in a standard $150 million common stock PIPE, whereas other investors subscribed to purchase $95 million of perpetual convertible preferred shares of the SPAC. The perpetual convertible preferred stock has a 5.5% dividend and a conversion price of $13.00 and mandatorily converts into common stock after two years if the common share price is at least $16.90.

Backstops Against Shareholder Redemptions

Ultimately one of the main purposes of the PIPE is to serve as a backstop against shareholder redemptions and provide certainty to the target company and its shareholders that the transaction will be able to close notwithstanding substantial SPAC shareholder redemptions and with a certain amount of cash on the balance sheet.  This is a key feature of the PIPE which has made SPACs an attractive merger partner today compared to several years ago.

Some deals make this linkage even more explicit by having the SPAC sponsor, or another shareholder, specifically commit to provide a financial backstop against some or all shareholder redemptions.

In the Trebia Acquisition Corp. / S1 Holdco, LLC (System1) business combination, announced on June 29, 2021, an affiliate of the SPAC’s sponsor provided a $200 million backstop against potential redemptions and the SPAC obtained a $400 million term loan commitment from Bank of America, $218 million of which can be used as a backstop against potential future redemptions.  In addition, if the value of shareholder redemptions exceeds $417,500,000, the current equityholders of the target agreed to reduce their closing cash consideration by such shortfall and proportionately increase their closing equity consideration. If the value of shareholder redemptions exceeds $462,500,000, the current equityholders of the target may elect to further reduce the closing cash consideration and proportionally increase the closing equity consideration, at their discretion.

In the Aurora Acquisition Corp. / Better Holdco, Inc. business combination, announced on May 11, 2021, the SPAC’s sponsor, Novator Capital, committed to backstop any redemptions by Aurora shareholders.  In addition, as part of this transaction, Softbank Group Corp. committed to a $1.5 billion PIPE, and the SPAC’s sponsor agreed to invest $200 million of the PIPE by taking up a portion of Softbank’s commitment. 

Finally, in the Venus Acquisition Corporation / Viyi Algorithm Inc. business combination, announced on June 10, 2021, the SPAC entered into a binding backstop agreement with Ever Abundant Investments Limited in which (i) the backstop provider has the right but not an obligation to purchase ordinary shares in open market or private transactions at prices of no greater than the redemption price per share plus $0.05 and (ii) the backstop provider agreed to purchase from the SPAC ordinary shares which SPAC shareholders have elected to cause to be redeemed.  The backstop is limited to $10 million (with a trust of $46 million), and the backstop provider agreed that any ordinary shares acquired by it will not be subject to redemption.

Significant Sponsor Participation in PIPEs

In a number of recent transactions we have seen the SPAC sponsors make very meaningful contributions to the PIPE.  This contribution is in many cases included in deal announcements as evidence of incremental skin-in-the-game and a belief in the company’s future.

In the DFP Acquisitions Healthcare Corp. / The Oncology Institute business combination, announced on June 28, 2021, the SPAC obtained commitments for $175 million in a standard PIPE, and an affiliate of the SPAC sponsor (Deerfield Partners) committed to purchase an additional $100 million of shares.

In the Yucaipa Acquisition Corporation / SIGMA Sports United GmbH business combination, which was announced on June 11, 2021, the SPAC obtained commitments for $252 million in a standard common equity PIPE, and an affiliate of the SPAC Sponsor (Ron Burkle) purchased an additional $50 million of shares.

And in the Kensington Capital Acquisition Corp. II / Wallbox B.V. business combination, announced on June 9, 2021, the SPAC obtained commitments for $100 million in a standard PIPE, and certain officers and directors of Kensington and their affiliates subscribed for approximately $25 million of this amount. 

Board Observer

Individual PIPE investors typically do not buy enough shares to warrant board representation or even board observer rights.  Moreover, certain information received by a director or board observer may sometimes  constitute material non-public information which would or could prohibit a PIPE investor from reselling its shares.  However, in the FS Development Corp. II / Pardes Biosciences, Inc. business combination, announced on June 29, 2021, the SPAC raised a $75 million PIPE from a group of investors including the SPAC sponsor and a strategic investor, Gilead Sciences, Inc.  In connection with its subscription, Gilead obtained the right to designate a board observer who will be entitled to attend all board meetings in a non-voting capacity and receive copies of all materials provided to the board.

Discounted Shares

Almost every common equity PIPE is sold at $10.00 a share – the same as the SPAC’s IPO price and close  to the anticipated trust value of the shares in the event of redemptions.  However, another way to improve the economics for PIPE investors is to sell them discounted shares.  In the DPCM Capital, Inc. / Jam City, Inc. business combination, announced on May 19, 2021, the SPAC obtained commitments from PIPE investors to purchase 11,876,485 shares of SPAC common stock for approximately $100,000,000.  This translates into a heavily discounted price of $8.42 per share. 


Finally, there have even been deals with no PIPE at all.  For example, the Big Cypress Acquisition Corp. / SAB Biotherapeutics, Inc. business combination, announced on June 21, 2021, anticipates an enterprise value for SAB of approximately $325 million and is expected to provide the combined company with approximately $118 million of pro forma cash (assuming no redemptions).  The transaction as announced had no PIPE or other financing and no minimum cash condition.


spacs, m&a, corporate, capital markets and securities, pipes