US Spac boom lures UK tech companies in blow to London

Some of Britain’s most promising tech businesses are considering stock market listings in the US, amplifying the pressure on the UK to change listing rules at a time when ministers are keen to show an ambitious strategy for the City after Brexit.

UK tech businesses, including used car site Cazoo and health app Babylon, are discussing potential mergers with US special purpose acquisition companies, according to people familiar with the talks.

Other so-called Spacs, blank-cheque vehicles that hunt for companies to buy and bring public, have also approached Darktrace, these people said, although the cyber security company is more likely to opt for a straight UK listing. The companies declined to comment. 

The flurry of interest, which comes after UK electric vehicle company Arrival listed in the US through this channel last year, highlights the prickly environment in the UK for Spacs, which are proliferating rapidly on the other side of the Atlantic. Bankers and lawyers are lobbying for a swift change in UK rules.

“The appeal of doing a Spac is severely limited in the UK,” said Jason Manketo, capital markets partner at Linklaters. Current regulation makes London “less competitive particularly for tech IPOs and founder-led IPOs compared to the US”.

The US Spac craze has become the dominant equity capital markets trend, with more than 173 vehicles raising $55.2bn so far this year, according to Refinitiv data.

Some UK and European companies are fielding a “frenzy” of offers, according to their executives and investors, as US sponsors look to deploy capital before the two-year deadline to complete a merger expires. 

In Europe, mobility start-ups Tier and Voi, best known for their fleets of rented electric scooters, have also been approached. Voi and other European start-ups are fielding “a lot” of interest, said Fredrik Hjelm, chief executive of Sweden-based Voi. While he said it was “too early” for Voi to go public, like many of his peers Hjelm is maintaining an open dialogue with a small number of Spac sponsors “to understand it and take a stance on how, when and if”. 

LVMH founder Bernard Arnault and former UniCredit chief Jean Pierre Mustier earlier this month announced plans for a European Spac listed in Amsterdam to snap up financial companies in the region.

In the UK, though, the key hurdle is a rule requiring a Spac’s shares to be suspended once a target is chosen. Share trading cannot resume until a deal prospectus is published. That means Spac shareholders who dislike the target and want to sell can find themselves locked in. Only one Spac has chosen London since the start of 2020.

Bar chart of amount raised ($bn) showing European sponsors are increasingly listing Spacs abroad

Former EU commissioner Jonathan Hill has been urged to make London more Spac-friendly under his review of UK listing regulations that is due for release before the budget on March 3, according to people familiar with the matter.

Xavier Rolet, former head of the London Stock Exchange Group, this week said the UK should strive to become a centre for Spac activity in the wake of Brexit.

Bankers and lawyers say removing the suspension rule would encourage UK businesses to list at home and place London on the same footing as Amsterdam, which has emerged as Europe’s Spac hub.

“If the Hill review and [the UK regulator] gave their blessing around the stock suspension point, I feel the UK Spac market would open up rapidly,” said Paddy Evans, head of UK equity capital markets at Citigroup. “If I can convince you that the UK market is going to value [the company] in the same way, a UK tech champion would and should list at home,” he added.

Some UK investors are wary of Spacs because of several high-profile historical failures. Nat Rothschild, a member of the eponymous banking family, raised a £700m Spac in 2010 and merged with Indonesian mining company Bumi which was later fined by regulators for breaching listing rules. In 2015, Gloo Networks raised £30m but never made a deal.

But, today, Spac sponsors include some of Silicon Valley’s most prominent founders and investors. “People confuse how Spacs were viewed 18 months ago with how they are today — which is they are pretty viable alternatives,” said one UK tech executive who is weighing several offers. “They have created a ready-made path for people who want to IPO, with ready-made capital.”

UK investors have traditionally been considered more conservative than their US counterparts and less supportive of lucrative “promotes” for sponsors, which typically hand them 20 per cent of the Spac’s equity for $25,000.

Given the reputational baggage attached, many European venture capitalists remain wary of encouraging their companies to pursue a Spac, with one saying it was for “good companies” but not the “best companies”. “It’s a highly efficient structure, but I think it’s still a bit like settling for a .net domain,” he said, rather than a classic .com. 

However, UK sponsors could integrate several rules popular in the US, such as allowing shareholders to vote on the chosen acquisition and to redeem their shares if they dislike the target. Those urging the Hill review for change argue that attracting Spacs will not erode London’s reputation for upholding a gold standard of investor protections.

“They’re being lobbied quite hard,” said a senior banker. “The environment is perfect for Spacs and people can’t wait.”

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