Challenges in SPAC land

HOW much control should Special Purpose Acquisition Companies (SPACs) exert over the assets they acquire? This is a question that is increasingly becoming a moot point with listed SPACs.

Here’s one indication of this: According to sources, Reach Energy Bhd, the oil and gas SPAC seeking a listing on Bursa Malaysia, has tweaked one the clauses in its prospectus relating to control over the assets it hopes to buy. It has now stipulated that it will seek to secure majority control over the assets it buys into. 

Apparently this was done to ensure there was no confusion in this area going forward.
SPAC guidelines from the start, had a very strict view on this matter. The rules initially required SPACs to secure both majority ownership and management control over the assets they buy. Subsequently, the rules were loosened after taking into consideration the dynamics of certain industries such as the minerals and resources industry that includes oil and gas. 

Here, especially in large production or exploration fields, the norm is for a few parties to have stakes without anyone having more than 50% as a means to diversify the huge capital requirements and spread business risks.

Hence the SPAC guideline rules then allowed for instances where SPACs may acquire non-majority stakes. But the condition of this was that the SPAC still needed to demonstate that it exerted “management control” over the operations of the asset.

For already-listed CLIQ Energy Bhd, the SPAC has had to consider going back to the drawing board of one of its planned acquisitions to ensure it had sufficient control over asset it was looking to buy, sources say.

Then there’s the recently-proposed acquisition by Sona Petroleum Bhd – it said it planned to fork out US$280mil (RM903.64mil) for a 40% stake in an operating asset of London-listed Salamander Energy Plc.

Details on this deal aren’t available yet as the company is yet to ink its sale and purchase agreement with Salamander, only having announced a heads of agreement.

Indeed Sona’s planned acquisition is one of the bigger stories hogging the talk space among retail investors these days.

Instead of seeing investor interest grow after it announced the planned deal, the stock has retreated by 12%.

It isn’t yet clear why the stock had been sold down.

But one factor could be this: on the day of Sona’s announcement, a major bank issued a note to its private banking clients to “take profit” on the grounds that Sona was poised to be an oil and gas exploration and production player and hence the risk-rewards were different. 

The note said that the 72% return for Sona’s IPO investors was “phenomenal” and it was time to take some money off the table. 

“Going forward, Sona will be transformed into a typical E&P company that is subject to exploration risks and oil price fluctuations.”