KBL Merger Corp. IV is the one of a growing number of special-purpose acquisition companies formed by a management team that have gone public this year—a sign that the unique investment vehicle is making a comeback after a lull following the 2008 market downturn.
KBL, which raised $115 million for a blank check in an IPO, was one of four special-purpose acquisition companies, better known as SPACs, that Holland & Knight partner Bradley Houser and senior associate Shane Segarra have worked on this year.
Structuring, advising and taking a SPAC public blends capital markets and corporate finance work and is considered a specialty legal practice area. SPACs are a way for business executives to pool money from investors for a blank check to buy a company. The investors are lured by the resume of the management team, but it’s also a way for public market investors to dabble in a private equity model, which can be more lucrative.
“One of the real prerequisites for doing a successful SPAC is you have to have a management team with a demonstrated track record, a history of successfully building companies and taking them public or selling them,” said Houser, whose corporate practice at Holland & Knight focuses on capital markets and mergers and acquisitions, and who has substantial experience in SPACs, real estate investment trusts and community banks. “We feel it’s an attractive opportunity for management teams with such track records and backgrounds that are looking for a new opportunity.”
For a management team with a demonstrated track record, a SPAC is an opportunity to go to market with an investment bank, execute an IPO and be in a position to find an attractive acquisition in the industry where the management team has the proven experience, he said.
KBL Merger Corp. IV was formed to make an acquisition of a health care or wellness company either through a merger, capital stock exchange, asset acquisition, stock purchase or reorganization. SPACs are prohibited from having acquisition targets in mind when they form but have 18 to 24 months to search for an acquisition candidate. KBL is at the early stages of seeking an investment.
The management team for KBL is led by Marlene Krauss, a wealthy New York-based investor and Harvard University MBA and M.D. who has a history of helping start and finance SPACs. KBL Merger Corp. IV is her fourth SPAC.
After practicing as a retinal surgeon, Krauss became the founder and CEO of KBL Healthcare, a family of funds that infest in health care companies.
Krauss has been either chairman, CEO or a member of the board of directors of 15 of the 25 companies she has either invested in or founded. Some of the companies, such as LASIK laser eye surgery, have created new industries and have generated billions in global revenue.
“As outlined in the prospectus, [Krauss] has a very substantial track record of success in building and selling health care companies,” Houser said. “That’s not a guarantee that this SPAC will be a successful investment, but that’s typically what investors in SPAC offerings are looking for. A management team with a demonstrated track record of success in a particular industry. In this case, it happens to be health care.”
In KBL’s case, Holland & Knight represented the SPAC’s underwriter, Ladenburg Thalmann & Co. Inc., a subsidiary of Ladenburg Thalmann Financial Services Inc., a Miami-based financial services company that counts local pharmaceutical billionaire and philanthropist Dr. Phillip Frost as chairman of its board and among its significant shareholders. In representing Ladenburg Thalmann, Houser and Segarra were responsible for reviewing the regulatory filing and performing due diligence and background checks on the SPAC and its management team to ensure that the underwriters have done thorough due diligence before marketing the SPAC as an IPO.
The lawyers also negotiated the terms of the securities offered to the public, and assisted in getting documents reviewed by the appropriate regulatory agencies, the lawyers said.
“Due to evolving market conditions, the company and the underwriters restructured the nature of the security being sold, which created timing issues in obtaining SEC and FINRA clearance of the offering,” Houser said.
In the end, the stock priced at $10 a share on June 1 and closed June 7, with more than enough interest in the security being sold. The security that was sold in the IPO resulted in the overallotment option being exercised in full, resulting in a $115 million deal, rather than the base $100 million deal, the lawyers said.
“That’s always a good sign when you are able to sell not just the base offering, but the additional 15 percent,” Segarra said.
Ladenburg Thalmann, B. Riley & Co. and FBR acted as joint book-running managers. Chardan acted as lead manager and I-Bankers Securities Inc. acted as co-manager for the offering.
The company began trading on the NASDAQ Capital Market under the ticker symbol KBLMU on June 2 and its stock price has been generally trading above the initial public offering price of $10 per share in the two months since.
Houser said while some executives with significant experience know SPACs exist, many don’t know the specifics of how they can be used.
The investment vehicle has been reappearing in the market since 2015, but Houser said he’s seen a significant spike this year. Industries such as health care, telecommunications and energy may be ripe for acquisitions through SPACs, and they’ve also been used to take real estate investment trusts public.
“SPAC is a private equity model that is sold in the public market, so it in essence gives investors in the public markets the opportunity to participate in a private equity type of investment model,” Houser said. “Not in all cases, but historically, if you look at the historical return of private equity investments, they quite often are higher than those that are publicly funded.”