SPACs: Altus Power

Interesting Deal

I have written quite a bit about SPACs, but not yet under the banner of Banking & Beyond. But I have been prompted to write again now by news of a recently announced SPAC merger that I find interesting. This stock market does not seem to share my enthusiasm, but perhaps I’m just early. (Students may recall from The Big Short that in the investment world, being early is often regarded as being wrong).

Earlier this week, solar power company Altus Power agreed to merge with a SPAC sponsored by CBRE (the old Coldwell Banker commercial real estate management services company). Altus Power is a private company backed by Blackstone and others, which will now become publicly traded by virtue of the merger with the CBRE sponsored SPAC, CB Acquisition Holdings (ticker CBAH). You can read about the Altus/CBAH transaction here: in the WSJ article and the Altus Power press release.

For those of you who are new to the subject of SPACs, I refer you to this SPAC overview.

Unlike many SPAC deals, the Altus Power/CBAH merger appears on the surface to have a strong strategic rationale from both the Altus and CBRE perspectives. Altus builds and installs solar panels and power sources on commercial properties and CBRE manages a lot of commercial properties suitable for installation of Altus solar panels. I’m not a real estate person, but this sounds sensible to me.

The total estimated funding to be received by Altus in the merger is $678mm, a large portion of which ($250mm) comes from a PIPE investment underwritten by Blackstone (an Altus investor who will own 17% of the merged company), Altus Power management, CBRE and new institutional investors. The $678mm of total cash funding assumes no redemptions by the SPAC IPO investors, which is yet to be determined.

The merger is being valued at $1.58bn, which is the pro forma equity value of the combined company at the agreed deal price of $10 per SPAC share. I do not know how the parties came up with this valuation and I have no idea if it is sensible or not. Based on the post-announcement trading price of the CBAH shares, however, the stock market does not appear to believe that the acquisition of Altus is a great bargain from the CBAH perspective, although it may well be fairly priced.

CBAH shares were trading at a price below $10 pre-announcement, down from a peak of $10.70 or so in February. A pre-merger share price of $10 implies a CBAH market cap roughly equal to the amount of capital it had raised in the IPO, a bit over $400mm. (SPAC IPOs are typically priced at $10 per share and sometimes trade pre-merger at premiums or discounts to the IPO price (and cash value) for various reasons, including merger-related speculation.) The CBAH shares traded up briefly post-announcement to a price of $10.40, but closed Friday just below $10.

I guess it is true that we all live in a SPAC world, for now at least, but these sorts of deals have been successfully arranged for decades, long before anyone had heard of the acronym SPAC. So how might this deal have been put together without the use of a SPAC?

My first observation is that if the privately held Altus Power had wanted simply to raise new equity capital to fund its growth, it could have sold more shares to existing or new investors and have remained a private company, without the need for an IPO or merger. And if Altus anticipated that better deal terms might be available in the public market, it could have raised money via a traditional IPO. Any sale of new shares, public or private, would have diluted the ownership percentage of Altus’ existing investors, although not necessarily the value of their shares. (This is an important distinction when we are talking about “dilution”. Do we mean ownership dilution or value dilution or both? Ownership dilution is not always a bad thing, particularly if it leads to value accretion.) In going public via an IPO, Altus would also have created a new source of liquidity for its existing private investors, who would then have been able to sell their shares into the public market more quickly, at lower transaction cost and likely at higher prices than in the private market.

And if Altus wanted some sort of commercial relationship with CBRE, it could have struck such a deal with CBRE directly, either in conjunction with an Altus fundraising or not, and Altus could have done this as either a private or public company. I see no reason why any equity must necessarily have changed hands to accommodate an Altus/CBRE commercial relationship, although if the parties had desired to do this (which it seems they did), this too could have been arranged directly without any SPAC involvement.

SPACs are a clever financial innovation, which may change the dynamics of deal making quite significantly, both in fundraising and M&A transactions. By virtue of the SPAC merger, Altus becomes a public company without going through its own IPO process, saving considerable time, expense and risk to Altus (though not necessarily to CBRE). And CBRE was able to obtain an equity stake in Altus using not only its own money (invested in the PIPE) but also via a sponsor promote agreed as part of the SPAC IPO. (Each SPAC works differently in this regard.) Add in the commercial relationship struck between Altus and CBRE and it seems the parties accomplished quite a bit, facilitated by the use of a SPAC. But my point here is that these same objectives could also have been accomplished with more traditional deal structures.

SPAC mergers are not necessarily less complicated, less expensive, less risky or more value enhancing than other more traditional deal structures, although they may shift the transaction risk and costs between the parties. But what is really different about SPACs relative to traditional deal structures is the economics for the deal sponsors. The use of a SPAC creates new ways for the deal sponsors to profit off OPM (Other People’s Money), in this case that of the SPAC IPO Investors. And making money off OPM is of course the raison d’etre for the entire financial services industry. If you haven’t already done so, go back and read my recent post on managing OPM. .

At the end of the day, if you ask me “Why SPACs?”, I will tell you to the same thing that “Deep Throat” told to Bob Woodward (Robert Redford) in the movie version of All the President’s Men: “Just follow the money”. This is always good advice when trying to understand financial innovation on Wall Street.