Making the Mold
With the Alignvest acquisition of Trilogy as a guide, the SPAC structure is likely here to stay
Alignvest Acquisition Corp. pulled off a relatively smooth qualifying acquisition when it picked up US-based telecom Trilogy International Partners for US$875 million. But after news that Dundee Acquisition Corp. and INFOR Acquisition Corp. had redeemed their shares and delisted, some observers heard death knells ringing for Canadian SPACs. It turns out those reports were greatly exaggerated. In late May, Alignvest’s proposed second SPAC increased the size of its IPO; it has now raised over $500 million.
LEXPERT: Would you consider this transaction a model for other Canadian SPACs?
Simon Romano (Stikeman Elliott LLP, for Alignvest): I do think this transaction represents a very good way to proceed with a SPAC qualifying acquisition. The key was lining up additional committed funds via an institutional private placement before announcing the transaction. That was a solid show of support from sophisticated investors, with sponsor participation, that was instrumental in managing the redemption risk. Post-Alignvest, this was the model most other SPACs used to get their transactions through. Alignvest has evolved the model a little further in its recently filed proposed second SPAC, getting committed funds even before doing its IPO.
LEXPERT: Why was Trilogy ultimately selected as the target for Alignvest? When did the companies first meet?
Scott Morris (Senior Vice President and General Counsel, Trilogy International Partners): Trilogy management became acquainted with Alignvest a couple of years ago through a minority shareholder in Trilogy’s New Zealand mobile business, 2degrees Mobile. As a result of this introduction, Alignvest was familiar with Trilogy’s New Zealand business and strategic approach on capturing the growth in usage and data services in international mobile telecom markets. Trilogy was looking for a strategic partner who could provide the additional equity required to capitalize on this growth, including freeing up cash previously required for debt repayments.
Romano: Trilogy is very much a growth-oriented company that had debt constraints. It is primarily a cellphone supplier in New Zealand and Bolivia, both of which are countries with a small number of suppliers, and which are in the process of moving from 3G to 4G services and providing greater data-oriented services. Alignvest thought it was a very attractive company, with which it had prior relationships. Also, Nadir Mohamed, formerly of Rogers, Joe Natale of Rogers, and formerly of TELUS, and Anthony Lacavera of WIND Mobile, were highly experienced Canadian telecommunications ex-CEOs who assisted.
LEXPERT: What was the experience of working on this deal? How would you characterize the negotiations?
Cheryl Slusarchuk (Blake, Cassels & Graydon LLP, for Trilogy International Partners): It was a textbook example of how high-functioning teams — business, financial and legal — working together can solve complicated problems with moving pieces in real time. The LOI [letter of intent] provided a strong framework for the business deal and valuation, which even during the inevitable difficult conversations, both sides respected and didn’t attempt to renegotiate items that at a high level had been agreed to by the key business people. This approach allowed the teams to focus on ‘operationalizing’ the deal structure, including managing the cross-border aspects of the transaction, including the “up-C” structure [a reverse exchangeable share structure], SPAC requirements and those associated with New Zealand overseas foreign-ownership rules.
Romano: The teams worked very well together. The Stikemans Toronto-based team included the folks who had originally done the Alignvest IPO, while the Blakes Vancouver-based team was new to SPACs but able to call on the experience of their Toronto colleagues, who had SPAC IPO experience. The negotiations were long and complex, in part because a novel US “up-C” structure, via a Canadian plan of arrangement, was used for tax efficiency, and also because neither the New Zealand or Bolivian operations were wholly owned so minority shareholders had to be taken into account at various levels in both countries. However, they were very efficiently conducted. Both legal teams, as well as Trilogy’s US counsel, were very focused on attempting to achieve a successful deal.
LEXPERT: One of the pitfalls of the SPAC structure is that shareholders can redeem their shares leaving the buyer with insufficient cash balances to carry out the acquisition. How did you manage that risk?
Romano: The redemption right is the unique and defining feature of a SPAC offering. Investors effectively get both a put and call option at the time of a qualifying acquisition, and if they wish to do so can redeem their shares and keep their warrants. The additional $82 million in committed funds via an institutional private placement before announcing the transaction was a solid show of support from sophisticated investors, with Alignvest sponsor participation, and was a key part of managing the redemption risk. In addition, however, an extensive “re-marketing campaign” to both current Alignvest shareholders and interested new institutional shareholders was key, such that there was a good deal of liquidity as institutions that liked the business bought from those that might have otherwise chosen to redeem their shares. A 23-per-cent redemption rate, with no founder share give-up, is a very good result.
LEXPERT: The due diligence process for this deal was described as “private-equity style.” What was involved? Did it take a long time to complete the process?
Slusarchuk: The due diligence process was thorough and more extensive than what we understand is the typical US SPAC due diligence process. While that made it more burdensome on Trilogy during the process, it was also reassuring, because it meant that Alignvest was a knowledgeable investor and was making a long-term investment decision. Also, as a result of that extensive due diligence process, which included Alignvest travelling to the countries in which the business operates, the new board members from Alignvest had a good appreciation of Trilogy’s business and the local New Zealand and Bolivian mobile markets.
Romano: It was intense. Bolivia is not a country for the uneducated, and New Zealand has very stringent foreign-ownership restrictions. It took several months. In addition to legal due diligence, seller-side legal opinions, and financial and tax due diligence, there were also several other expert consultants involved in the process.
LEXPERT: What was the most memorable or satisfying aspect of this deal? What will you take away with you?
Romano: This was the first Canadian SPAC to complete its transaction with a low redemption rate, the first with committed private placement capital before deal announcement, the first with a US “up-C” structure, the first involving an emerging markets business, the first with high-yield financing in place that needed to be contemporaneously renegotiated, and the first done by way of a plan of arrangement — and without dissent rights and with a 50-per-cent voting threshold, I might add — among other firsts. It was highly challenging and was closed in a time of great market volatility. It was a new product that Stikeman Elliott was instrumental in designing. All of the parties involved were extremely sophisticated. It was both very stressful and very rewarding.
Slusarchuk: The most satisfying aspect of the deal was successfully closing a complicated cross-border deal involving the very first Canadian SPAC qualifying transaction by way of a plan of arrangement and just the second ever Canadian SPAC qualifying transaction. As SPAC qualifying transactions were relatively novel in Canada, the legal teams had to develop mechanisms and approaches that complied with regulatory requirements as well as meeting the business and deal needs.
Morris: In addition to the SPAC qualifying transaction with Alignvest, that is, the Arrangement Agreement, Plan, Non-Offering Prospectus, Voting Trust and Support Agreements, there were also a number of other counter-parties and regulators whose participation was integral to the overall deal. This deal required expertise and creativity from a variety of legal and business groups on both sides of the table, and both sides of the border, all working together to achieve a closing.
(For a summary and full list of legal advisors, click here.)