Attention all healthcare entrepreneurs: There are at least eight shell companies on the public market in desperate search of a worthy healthcare company to buy.
Investors are always looking for creative and innovative ways to put their money to work. One interesting vehicle that has cropped up in recent years is called a special purpose acquisition company, or SPAC. SPACs also seemed to be making small inroads into healthcare until the credit markets started roiling this past summer, putting a big question mark after everything.
SPACs, also sometimes referred to as blank check companies, are in some ways the alter egos of private equity. Investors create a publicly traded shell company to raise money in the public market with the promise of either paying investors a minimum percentage yield on the investment within some defined period of time or a conversion of the equity into ownership of a company, says Robert McCarrick, senior managing director of corporate finance at GE Healthcare Financial Services. After first raising the money, the company then goes out and identifies a company to buy. If it doesnt identify a company within the specified period, then the money, which has been sitting in an escrow account earning interest, is returned to the investors along with the accrued interest minus the minimal administrative fees.
Quite honestly, from my perspective, its just another way to access another investor base, McCarrick says. It is accessing another pocket of liquidity in the market.
Unlike private equity, in which investors are betting on the company or portfolio of companies held by a private equity firm, SPAC investors are betting on the management team that is structuring the SPAC before a company is even identified, says Douglas Ellenoff, a partner at the law firm Ellenoff Grossman & Schole in New York. Ellenoffs firm has closed on 20 SPACs in all types of industries in the past few years, raising more than $2 billion, he says and noting that SPACs now represent more than 20% of the initial public offering market. Of those, a healthy percentage represents healthcare-related deals although he couldnt be more specific.
In some ways, healthcare is like the canary in the coal mine in gauging the viability of investment vehicles. If healthcare tanks in the market, then heaven help other industries that are not so recession-proofindustries, for example, that rise and fall on the fickleness and discretionary income of consumers. In the stormy financial markets of late, healthcare has weathered the winds in terms of IPOs better than most (Dec. 24/31, 2007, p. 6).
Still, there has been some backlash. Seven months ago, the tremendous excitement surrounding private equity in all industries and its spillover effect in healthcare seemed to bring the same excitement that the dot-com bubble did at the close of the last century (June 4, 2007, p. 38). Unfortunately, in just a matter of weeks private equity seemed to be facing the same kind of destiny as the dot-coms (Oct. 1, 2007, p. 36).
But Ellenoff thinks the market roiling has affected SPACs less so than private equity because unique to SPACs, the money is sitting in escrow, presenting less risk to investors.
McCarrick, who has been tracking healthcare-related SPACs, is not so sure. I think the SPAC market in general is an interesting way to raise capital, McCarrick says. We would be happy to do business with SPACs, and we have been in contact with all of them, but the reality is we havent found any companies that are in our strike zone from a leverage perspective.
As of September 2007, GE Healthcare Financial Services identified 12 healthcare-related SPACs that have filed IPOs since 2003. Of the 12 SPACs, eight shell companies with roughly $650 million of equity to invest have not yet found companies to buyperhaps an indication of the turmoil in the markets, McCarrick says. Theres a lot more activity out in the private equity field, McCarrick says. If you look at the number of private equity firms that are healthcare only, there are 130 with an average half a billion dollars to invest in healthcare. So that is 60 (billion) to 65 billion of equity dollars that could be used to finance (healthcare-related deals) to $650 million in SPACs.
In the past year, GE has identified only one new healthcare-related SPAC: Geneva Acquisition Corp., which raised $60 million in February 2007. According to filings with the Securities and Exchange Commission, Geneva Acquisition reported net income of $1.2 million on a balance of $53.5 million as of Sept. 30, 2007. For the three months ended in September, the company earned net income of $483,977 from interest on the trust account.
One of the earliest healthcare-related SPACs absorbed NationsHealth, Sunrise, Fla., a publicly traded company that provides medical products and prescription services to Medicare participants. The SPAC, Millstream Acquisition Corp., Wayne, Pa., became fully invested in 2004 when it merged with NationsHealth Holdings, according to a news release at the time. Millstream had raised approximately $24 million through an August 2003 IPO, purchasing 4.025 million units at $6 apiece. Last month, NationsHealth stock was trading at approximately 40 cents a share, and facing delisting from the Nasdaq stock exchange because of its low share price. The companys current value is approximately $19.2 million, down about 21% since the stock was first issued in 2003, according to GE.
At deadline, NationsHealths Chief Executive Officer Glenn Parker was not available for an interview.
Kip Kirkpatrick, a partner at Water Street Healthcare Partners, a middle-market healthcare-only private equity firm, says he has been watching healthcare-related SPACs with interest. I think its another sign that the marketplace and investors are very interested in and want to find more exposure to healthcare, he says. Its gotten to the point where the market is even willing to give SPACs a blind pool of money to invest in healthcare companies to be determined at some point in the future. I think thats fascinating that people can raise this amount of money without knowing what they are going to invest in.