From the next big thing to rueful error, the global SPAC market has had a big few years. So-called blank check companies, which take a skeleton corporation public with the aim of later merging with a private entity, can offer a quick path to the world’s stock markets. They can also, as we’ve relearned in recent quarters, incinerate shareholder wealth and potentially expose retail investors to outsized risk.
The 2020-2021 period of excess investor ebullience led to a surge in SPAC listings and, later, combinations. The result of the flurry of deals, centered in the United States, is largely a series of smoking craters on the public markets. This is not news, entirely. It has been some time since TechCrunch declared the SPAC wave a failure, at least in terms of taking a useful portion of the unicorn backlog public; the tally of startups worth $1 billion or more that need to find an exit grows every month, a trend that SPACs were unable to halt.
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But while SPAC might as well be a bad word in the United States today, there is blank-check activity elsewhere that’s worth our attention. Most notably, this week’s SPAC combination from Deezer, a European music streaming service that competes with Spotify. Taking the SPAC route this late in 2022 might appear counter-trend, but there are some regulatory and choice-based differences in the European public markets that left us with a slightly more palatable taste in our mouth regarding the Deezer deal. (Our initial read of the deal can be found here.)
Still, the company lost ground in its first trading sessions, meaning that some elements of SPAC deals do appear similar on both sides of the Atlantic. Let’s chat through the final results of the Deezer deal, how quickly the IPO market has changed more generally, and then drill into the European SPAC market in the wake of Deezer’s demonstrative debut.
The Deezer SPAC deal
According to the company, after it closed its merger with public company I2PO, Deezer raised €143 million worth of new capital in its SPAC deal. That figure is inclusive of funds provided by the SPAC partner and private money flowing into a public company (PIPE) from prior Deezer backers.
Per the company, the new capital will be used to “fund its next stage of growth.”
The amount of money raised by Deezer may seem like a victory; any nine-figure round in 2022 is a win, after all. But it is lower than it could have been, with Deezer noting in its SPAC news release that its IPO partner had “€275 million held … in a dedicated deposit account” along with a PIPE deal worth “up to €119 million.” So how did Deezer wind up with only €143 million? Redemptions, more or less, or funds pulled from the deal by “Dissenting Market Shareholders,” to quote the companies in question.
Still, capital raised, shares floated. That’s a win, yeah? Somewhat. After trading at just under €10 per share before the combination, shares of Deezer plunged to €6 per share as of the time of writing, indicating that while the transaction was completed, work remains ahead for the music streaming company to convince investors to tap their feet along with its beat.
A global slowdown sinks all ships
The slack performance of Deezer shares isn’t great, and certainly not what the company hoped for when it announced its deal. But in defense of the music service, it was forced to ski uphill amid a blizzard in recent weeks given shudders in the global economy.
Indeed, the IPO market went from hot in 2021 to chilly in the first quarter of 2022 to downright frozen as the second quarter scooted along. Per data collected by EY, global IPOs totaled just 305 deals in the second quarter, raising $40.6 billion. The deal volume level was off 54% compared to the year-ago period, while dollars raised fell 65%.
SPACs, a subset of the larger IPO market, were down even more. With only 26 SPACs around the world in the second quarter, deal volume fell by 64% from the 72 deals in the first quarter of the year. But while the United States saw its year-to-date SPAC volume fall from 360 through the first half of 2021 to just 71 in the first two quarters of 2022, things were different in Europe.
Indeed, while there were 20 European SPAC deals (IPOs, not de-SPAC combinations) in the first half of 2021, again per EY data, that number dipped just 25% to 15 in the first half of this year.
Given poor SPAC performance after their combinations are struck and consummated, is it a good thing or a bad thing that the European blank-check IPOs are not falling as fast as they are elsewhere, like in the United States? Well, we found an expert who likely has an opinion on the matter: She thinks the recent Deezer deal is good news and had a lot more light to throw on the larger European SPAC situation.
Why does it matter? Because there are 55 U.K. unicorns, 36 German unicorns, another 27 in France and more than a half dozen apiece in Sweden, Switzerland and the Netherlands, all of which need to find exit paths in the coming years.
European flavors
Annie Maudouit-Ridde is one of the most knowledgeable people in the matter of French and European SPACs, which lawyers have played a key role in shaping. The firm at which she’s a partner, Winston & Strawn, was co-counsel to I2PO for its SPAC IPO — but not for the de-SPAC, i.e., the completion of the SPAC merger. This makes her free to comment that she thinks the merger with Deezer is good news — not just for I2PO, but also for SPACs in general.
“It’s a major de-SPAC so I hope that will be a good precedent for all French and European SPACs,” she told TechCrunch. Precedents like this are important, she added, “because over the last couple of years, there were only SPAC IPOs, not a lot of de-SPACs [since] it was quite recent in Europe.”
The fact that Deezer’s share price fell on day one is perhaps less important than it would be in the U.S. because the long-term incentives of blank-check companies and later investors are better aligned in European SPACs than in their U.S. counterparts. “Don’t forget that for I2PO,” Maudouit-Ridde said, “part of their promote is subject to performance conditions that are linked to the trading price; so hopefully for them, it will go up in the next months or years.”
Having a staggered promote (in short, the blank-check company’s compensation) tied to performance conditions has become a standard market practice in European SPACs. Just like the fact that the fair market value of the target company must be 75% or more of the SPAC’s trust assets and, perhaps even more importantly, the fact that retail investors can’t invest in SPAC IPOs.
Maudouit-Ridde explained what led European SPAC IPOs to be solely accessible to qualified investors: “It’s not because of regulations, because nothing prevents us from doing it. It’s just that, when we launched the first European SPACs in France and in other countries, both the lawyers, the regulators and the founders decided that it was safer to do it this way, because [blank-check companies are] a very complex product.”
These provisions likely explain why European SPACs aren’t subject to the same scrutiny as in the U.S., where the possibility of more oversight from the Securities and Exchange Commission looms. This led Citigroup, for instance, to temporarily freeze SPACs in April.
In contrast, SPACs in Europe have no regulatory motive to be frozen. They are, however, affected by the same market conditions as IPOs in general — with global factors such as the war in Ukraine, inflation and interest rates taking a toll. “Maybe some SPACs will be able to launch IPOs while traditional actors will wait to launch IPOs but … I don’t anticipate any new SPAC IPOs before September,” Maudouit-Ridde said.
In addition, it remains to be seen whether European blank-check companies will find appropriate merger targets. Per the Financial Times, “of the 66 SPACs that listed in Europe since the start of 2020, just 13 have found a company to merge with, according to Dealogic. Of those deals, eight have completed.”
As we have mentioned, Europe doesn’t lack unicorns that could want or need to IPO. But it is unclear yet why they’d choose the SPAC route, and why they wouldn’t wait longer if they can. So despite a different climate and approach to the market, European SPACs are not poised to drive exit volume for unicorns or see a near-term surge in activity. They are, then, much like their American counterparts in result, if slightly different in substance.