As SGX’s first de-Spac deal nears, the question is whether investors will stay on

THE Singapore Exchange (SGX) is set for its first mainboard listing via a special purpose acquisition company (Spac) business combination, with Vertex Technology Acquisition Corp’s (VTAC) proposed merger with livestreaming operator 17LIVE.

Coming two years after rules for the alternative listing route were unveiled, shareholders of VTAC now have two important decisions to make. They now have to decide whether to exercise their redemption rights and whether to vote in favour of the business combination at the upcoming extraordinary general meeting (EGM).

Independent shareholders have little incentive to vote against a business combination, as they can redeem their pro-rata share of the escrow account regardless of how they voted. The more interesting thing to watch for is how many shareholders actually put their money where their mouth is, and stay invested in the listed company after the de-Spac.

Alignment of interest

To the sponsor’s credit, various steps have been taken through the Spac’s life to demonstrate alignment of interest with investors.

During the initial public offering (IPO), Vertex Venture Holdings and another Temasek-related entity, Venezio Investments, demonstrated significant commitment by investing S$60 million in the Spac which is non-redeemable.

The sponsor also incorporated a time-based and price-based vesting structure for its promote shares, with allotment at various milestones to mitigate concerns over dilution.

When the business combination was announced, VTAC went a step further and said that it is offering a special bonus scheme to non-redeeming shareholders and private investment in public equity (PIPE) investors. This essentially gives such investors 10 per cent more shares in the company.

To support this and to reduce dilution to other shareholders, the sponsor will waive its rights to receive a “significant portion” of its promote.

Whether these steps are enough to convince independent investors to stay around remains to be seen.

Shares of VTAC popped higher after the proposed deal was announced, with the counter rising 2.7 per cent to S$4.94 per share. The shares have since fallen to around S$4.85 as at Oct 10.

Notably, the share price has not gone above S$5, which was VTAC’s IPO price, and the initial amount per share in the escrow account.

The special bonus scheme would give non-redeeming investors additional shares. But this also comes with uncertainty about how the market would value the stock once redemption rights are no longer available.

Financials and valuation

A key consideration for many investors would be the valuation of 17LIVE, which will determine whether this deal makes sense for them.

17LIVE operates in markets including Japan and Taiwan, where it has significant market share. It unsuccessfully attempted to list on the New York Stock Exchange back in 2018 – when it was still known as M17 Entertainment.

In a press release, VTAC said that it is acquiring the live streaming platform for a consideration of up to S$925.1 million. This includes S$122 million of earnouts, which are subject to satisfaction of certain financial targets.

The consideration compares to the target group’s adjusted net profit of US$4.9 million and earnings before interest taxes, depreciation and amortisation (Ebitda) of US$15 million in FY2022. The target group had total equity of negative US$183.2 million.

When asked about the valuation multiples of the target, VTAC chief executive Jiang Honghui told The Business Times that more details would be disclosed in the EGM circular. He noted that comparable peers were used to arrive at its proposed valuation.

It isn’t uncommon for growth stocks to trade at rich valuations, but retail investors would likely want assurance that valuations are in line with norms. In the case of a Spac deal, a strong PIPE round may be helpful.

VTAC provided illustrations for a PIPE round of about S$10 million for its business combination. The final amount has not yet been determined, but the illustrated sum is significantly smaller than the over S$200 million currently in VTAC’s escrow account.

By comparison, Grab’s merger with the US$500 million Altimeter Spac in Dec 2021 had a US$4 billion PIPE. To be sure, market conditions were markedly different then. But the contrast is still stark.

A larger PIPE, with more institutional investors on board and willing to participate in the long-term success of the resulting issuer, could help to provide some form of validation on the valuation of the business combination transaction.

While SGX rules do not require an independent valuer to be appointed for a Spac deal if a PIPE is present, it raises the question of whether a relatively small PIPE provides sufficient checks and balances on the valuation.

An independent valuer should also be required in cases where the transaction involves related parties.

A number of Vertex funds that the sponsor has invested in are current shareholders of 17LIVE. While these funds are managed by independent general partners, it would still be preferred to have an independent party assess the valuation to assure and convince investors.

To redeem or not to redeem

Meanwhile, the resulting issuer will be required under SGX listing rules to meet the existing mainboard initial listing requirement, which requires a counter to have at least 500 public shareholders.

As at March this year, VTAC had 1,071 shareholders, putting it above the minimum requirements. But this could change if there is a substantial level of redemption.

It would be ideal for VTAC to indicate the level of redemptions the Spac can stomach before it falls below the minimum shareholder threshold.

SGX previously said that it would closely observe local developments and “be prepared to grant case-by-case waivers” of the 500 public shareholders requirement, if the resulting issuer can demonstrate sufficient bases and “genuine hardship” in complying at the point of business combination.

However, the market regulator should also indicate whether it is prepared to grant any waivers ahead of time, as investors will need to consider liquidity implications this may have on the resulting issuer.

Retail investors that hold VTAC shares should also study any independent analyses and consider the longer-term prospects of 17LIVE once more details are available in the circular. These will be critical in helping to decide whether or not to redeem their capital.