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Europe’s Spacs scramble for targets as market hit by hangover

Europe may have been late to the Spac boom but that did not stop some of the continent’s wealthiest and highest-profile business figures from muscling in.

Bernard Arnault, who runs luxury goods group LVMH, and fellow fashion billionaire François Pinault, backed special purpose acquisition vehicles. The craze proved a magnet for former European bank bosses, including Jean Pierre Mustier, Sergio Ermotti, Tidjane Thiam and Martin Blessing, who have all sought to capitalise with their own launches.

Special purpose acquisition vehicles, which raise cash by listing on a stock market before seeking a merger with a private company, took off in the US during the early stages of the coronavirus pandemic as stimulus measures from the Federal Reserve fed investors’ appetite for risk.

Despite Europe arriving just as Wall Street’s Spac fever began to cool, some European vehicles found merger targets. The region’s supporting role, however, has not allowed it to escape the market’s hangover as interest rates rise, regulatory scrutiny intensifies and investors grow warier.

Of the 66 Spacs that listed in Europe since the start of 2020, just 13 have found a company to merge with, according to Dealogic. Of those deals, eight have completed.

“You have to assume a lot of the money they have raised will be going back to investors,” said the head of M&A at a large European bank. “A lot of Spacs are suffering from investors losing interest — redemption rates are really high. That makes it even harder for them to do deals.”

Among those still on the hunt is Pegasus Europe, the continent’s largest Spac, launched last year by Mustier, the former head of UniCredit, and Diego De Giorgi, once a heavyweight dealmaker at Bank of America, with backing from Arnault’s family office, among others.

Established to invest in fast-growing financial services companies, Pegasus Europe raised €484mn when it listed in April 2021. But more than 12 months since doing so on the stock exchange in Amsterdam, the preferred destination of European Spacs, a merger candidate remains elusive.

According to people familiar with the matter, Pegasus’s quest has been hamstrung by the lofty valuations demanded by fintech targets that Mustier and De Georgio were unwilling to meet, even though they were scouring for a multi-billion-euro deal.

“The Pegasus Europe guys made two mistakes,” said a European investment banker involved in Spacs. “They raised too much money and they defined the scope [of the target] too narrowly.”

The backers or so-called sponsors of a Spac, who invest in the initial capital raising, typically end up with a minority holding of the company, with the rest held by other investors or financed through other means such as convertible debt. The average Spac deal announced has been worth around 4.4 times its initial capital raise, according to an E&Y analysis of the sector globally.

That would pitch any deal made by Pegasus Europe at more than €2bn, although people familiar with the Spac said it has looked at deals at twice that amount.

The rationale for Pegasus Europe appeared straightforward: Europe’s financial services industry — particularly asset management, insurance and fintech — is ripe for consolidation and disruption after a decade of low interest rates, new regulations and technological threats battered business models.

“They’ve looked at a bunch of assets and passed because of the valuations, mostly, or because they couldn’t agree on a price. It’s frustrating but that’s also part of their job,” said a person close to Pegasus Europe.

The Spac has had to aim at a larger deal, they added, because smaller mergers would not attract enough interest from institutional investors.

Jean Pierre Mustier, chief executive officer of UniCredit SpA
Jean Pierre Mustier, chief executive officer of UniCredit SpA © Jason Alden/Bloomberg

Pegasus Europe went public during the brief halcyon days for the European Spac market in the spring of 2021. Of the 66 Spacs that listed in Europe since the start of 2020, 16 did so in the second quarter of last year, raising $3.8bn.

That is more than a third of the total $10.8bn European Spacs have raised since the start of 2020, according to Dealogic, a sum dwarfed by the global total of $270.7bn generated — largely in the US — over the same period.

It was not only the former Commerzbank chief Blessing who subsequently struck a deal after taking money from investors. Ex-UBS chief executive Ermotti merged his Spac with Italian luxury fashion company Zegna in December. Former Credit Suisse boss Thiam’s blank-cheque company is in advanced talks to merge with a Californian life sciences group. Both vehicles are listed on Wall Street.

Indeed, the team behind Pegasus Europe has scored a success with another Spac. After listing in December, the vehicle struck a deal last month with French entrepreneur Stéphane Courbit that will see it merge with Banijay, his television company that produces MasterChef, and his online gambling company Betclic. The business is expected to list in Amsterdam next month with a €4.1bn valuation.

“The Spac market in Europe seemed to go from 0 to 100mph and then back to 10mph within the space of 15 months,” said White & Case partner Jon Parry, who advised on many of the European launches.

The gathering gloom over the market means the clock is ticking for the 58 European blank-cheque companies yet to nail down a merger, including Pegasus Europe.

Column chart of Deal value since the start of 2020 showing Just a fraction of global Spacs are listed in Europe

Under the terms of its prospectus, Pegasus Europe has 24 months after listing to execute a merger, giving it until next May, though it can seek shareholder approval for a six-month extension.

Its sponsors — Mustier, De Giorgi, Paris-based Tikehau Capital and Financière Agache, a holding company controlled by Arnault’s family office — jointly invested €55mn in the private listing and €12.75mn for warrants to cover commissions and costs. They pledged another €100mn of investment that can be used when a suitable target is found.

The Spac has held talks with several potential targets in sectors including wealth tech, insurtech, payments and data management, according to people familiar with the matter.

Several of its investors have signed non-redemption agreements, locking their money in, according to a person with knowledge of the discussions, a boost as De Giorgi and Mustier continue to seek a deal.

Pegasus Europe declined to comment.

Parry of White & Case said that the turmoil from Russia’s invasion of Ukraine, high inflation and rising interest rates “pretty much put paid to the [Spac] market completely”.

It is a combination that has sent the S&P 500 down 19 per cent this year while also depressing the valuations of privately held fintechs once coveted by investors.

With less than a year before Pegasus Europe has to decide whether to push forward with a merger or return money to investors, there is some optimism among its sponsors that a deal can be struck as more realistic valuation expectations prevail across Europe’s fintech sector.

Investors have told the Financial Times that they expect Klarna, the Swedish fintech, to have to raise capital that could see its €46bn valuation cut by half.

“If Klarna does a down round, that will help reset expectations,” said the person close to Pegasus. SumUp, another European fintech, last week also raised funds at less than half the valuation suggested for the group earlier this year.

Even if the market turmoil ultimately helps unlock a deal for Pegasus Europe, the region’s nascent Spac market, just like the far larger version in the US, can no longer rely on the combination of record-low interest rates and rising equity markets.

Bankers who worked on deals believe a smaller, more targeted Spac market will emerge in Europe, servicing companies who prefer it as a way of going public.

“When it all shakes out, Spacs are here to stay as an instrument, an alternative structure to an IPO, but not in levels we were seeing last year,” said Parry of White & Case.

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