Blank cheque company with Korea focus lists in US

The acquisition vehicle, which is sponsored by former Morgan Stanley Asia-Pacific chairman Alasdair Morrison and a Korean partner, raises $50 million in Amex listing.
North Asia Investment Corp, a special purpose acquisition company (SPAC) with a stated strategy to invest in South Korea and China, listed in the US on Thursday after raising $50 million through an initial public offering. The total deal size was less than the $60 million initially targeted, reflecting the current tough environment for new listings.

Like other similar SPACs, the Citi-led deal was bought primarily by US investors û although some European names also participated û and the shares will trade on the American Stock Exchange. Consequently it attracted little attention in Asia. However, the past couple of years has seen a growing number of SPACs, commonly also referred to as ôblank cheque companiesö, making acquisitions in China and they are increasingly becoming a force to be dealt with when it comes to takeovers of private companies in the region.

North Asia Investment also has strong ties to the region through its two sponsors: Alasdair Morrison, a former Asia-Pacific chairman and CEO at Morgan Stanley, and Thomas Chan-Soo Kang, a former CEO and (for a brief time) the largest shareholder of Korean investment bank Seoul Securities. Morrison is the chairman of North Asia Investment, while Kang is the CEO.

The company offered 6 million units û each comprising one share and one warrant û at a fixed price of $10 apiece, but according to a statement issued Friday, it sold only 5 million. There was no information about the level of demand, but the fact that the size was cut suggests the order amount wasnÆt sufficient to cover the original offering. The proceeds could increase to a maximum $57.5 million if the 15% overallotment option is exercised in full, although sources indicated that the deal was unlikely to increase from $50 million. Under the original terms the maximum proceeds would have been $69 million.

Like for all bank cheque companies, the money will be put into a trust account until it is needed for an acquisition. This means the money is essentially safe-guarded until it is put to work, resulting in limited downside for the investors. According to the listing prospectus, the total amount put in trust equals $10 per unit (or $9.96 if the shoe is exercised in full).

This means that, contrary to the initial perception that SPACs may be a risky proposition because the investor puts money into a company with no business and no revenues, they are in fact quite defensive investments. Sources say the investors interested in these types of vehicles include hedge funds and retail investors as well as Asia-focused fund managers.

As an incentive to investors, they have the right to walk away from the SPAC and get their money back (with accumulated interest) at the time it makes an acquisition û should they not be happy with the valuation and growth potential of the target.

ôYou can invest in regular equities that can go down, or you can invest in a SPAC where you know what your downside is and you have access to unlimited upside,ö says one source involved in this market. ôThe goal is to make an acquisition in the private market at a discount to what you can get in the public market.ö

SPACs can acquire one or more companies, but typically, they buy just one unlisted company that has already been thinking about pursuing an IPO. Because the SPAC is already listed, it essentially offers a backdoor listing option that is both quicker and cheaper than the normal IPO route. Oftentimes, the SPAC adopts the name of the target company.

North Asia Investment says it wonÆt be limited to a particular industry or geographic location, but it will search for acquisition targets in Asia with a particular focus on South Korea and China. Given KangÆs background in Korea though, sources say this is likely to be the first priority. This is also the first SPAC to target Korea, which makes it stand out from the rest and perhaps will allow it to avoid too much competition for assets from similar companies offering a backdoor way into the US markets.

In its listing document, North Asia Investment notes that since 2003, about 158 similarly structured blank cheque companies have completed an IPO in the US, but of those only 52 have made an acquisition. Another 22 have entered into definitive acquisition agreements while 18 have failed to find a suitable target and have either dissolved or announced an intention to do so. Consequently, there are at present 66 companies with more than $12.9 billion in trust accounts looking to carry out a business plan similar to that of North Asia Investment.

According to Dealogic data, 10 blank cheque companies have made acquisitions of Chinese companies since the beginning of 2006, and the pace is picking up with one deal in February 2006, three deals in 2007 and six announced acquisitions so far this year, of which two have already been completed. Deal sizes have ranged from $300,000 to $625 million, with the latter referring to the acquisition of China Water & Drinks by a SPAC called Heckman Corp. in May this year.

North Asia Investment further notes that Korea remains one of the fastest growing economies in the world with 5% nominal GDP growth projected for 2009. The Korean government has also actively been deregulating key industries, including financial services, manufacturing, and information technology, and has been encouraging investments in future growth sectors such as renewable energy, biotechnology and nanotechnology. Meanwhile, Korean companies are increasingly seeking to diversify their access to capital, including listing in overseas markets.

The SPAC structure, it adds, will ôpotentially allow (it) to address certain key issues such as management control, compensation for senior officers and equity dilutionö.

The company has given itself 18 months to complete an acquisition, or 24 months if it has signed a memorandum of understanding within those first 18 months. This period can be extended by another year if certain criteria are met and shareholders representing a majority of its ordinary shares vote in favour of doing so. Following the IPO, 80% of the share capital will be in public hands, while the remaining 20% will be owned by the seven founding shareholders, including Kang and his private equity firm Kang & Company.

In connection with the IPO, Kang and Morrison also bought a combined 2.455 million warrants at a price of $1 apiece. The proceeds from this purchase have been added to the IPO proceeds in the trust account. If the company fails to make an acquisition within the required time, the additional $2.455 million will be part of the distribution to the public shareholders and the warrants bought by Kang and Morrison will expire worthless. In case of an acquisition, the sponsorsÆ warrants will be exercisable on the same terms as the five-year warrants held by other shareholders û i.e. each warrant entitles them to buy one share at $7.50. They can be exercised at any time after an acquisition has been completed or, if the acquisition happens before the first anniversary of the listing, after 12 months.

The shares and the warrants will be split and trade separately starting from 35 days after listing. For now though, they trade as one unit. As is almost the rule for SPACs, the unit price fell below the issue price in ThursdayÆs debut, losing 3.1% to $9.69 in light trading, and gave up another 3 cents to $9.66 on Friday.
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