Updated: Apr 6, 2020
Inaugural column of a guest writer, Mr Kyle Shostak
The public capital markets have been dead as a doornail for shipping companies in 2019 and most of 2018; there have been no Initial Public Offerings (IPO) in the North American and European markets, and not for lack of trying. Several shipping companies with recognizable names as executive teams and as sponsors have failed repeatedly to convince (whether retail or institutional) investors to part with their money. Definitely times and market conditions have changed since the last decade when start-ups and “project companies” could go public in the shipping sector, as now investors want to see well-established companies with track-record, ideally access to contracts and industrial shipping, and definitely transparency and clean corporate governance.
In our inaugural guest writer column for this blog, we are welcoming Mr Kyle Shostak, the CEO of Navigator Acquisition Corporation, a Capital Pool Company (CPC) publicly traded on the Toronto Stock Exchange (TSXV). We thought that a CPC vehicle may be a good alternative for the current state of the capital markets for shipping companies hoping to obtain a listing in the New York Stock Exchange (NYSE) and other major boards in the future; a CPC can accommodate small shipping companies with possibly little track-record; it allows for the company to establish a public record with publicly available financials and a transparent corporate governance structure; and, it allows the company to show to the investment community that the management team is indeed competent and can deliver on promises; when the “big board” capital markets are open again, CPC shipping companies can pursue dual listings or even completely move to NYSE and Nasdaq. For reference, several NYSE-hopeful international shipping companies pursued a public listing in the Norwegian capital markets (Oslo Børs) earlier in the decade with the objective to move to the US once market conditions were suitable (and having a lower threshold than a full scale IPO). And, as an added benefits, the costs of pursuing a CPC vehicle are a fraction of the costs of an IPO or even a SPAC listing in the US.
[Full disclosure: Basil M Karatzas is a Board Member of the Navigator Acquisition Corporation]
Capital Pool Company (CPC) Structure
By Kyle Shostak
Background on CPC
A so-called Capital Pool Company (CPC) is a special purpose acquisition-oriented public Canadian investment vehicle founded by a group of experienced capital markets or sector-specific (or both) professionals. They form a team, fund a limited minimum amount of charter capital (up to CAD$3.5mm) and, with a help of an investment broker, who can market the company to its retail investment clientele, and possibly act as a co-sponsor of the CPC vehicle, and eventually achieve public listing on the Toronto Stock Exchange (TSXV). The management team and their broker will raise more capital amongst from the investors once the merger deal is identified. A CPC doesn’t have any assets and its sole purpose is to seek, identify and execute a Reverse Takeover (RTO) with a privately held business who wishes to go public. In an sense, a CPC is very similar to a Special Purpose Acquisition Company (SPAC) or “blank cheque company” in the United States. The only actual asset of a CPC company is really its management team which has to be experienced and well-versed in finance and capital markets, and will soon to be vetted and approved by the exchange and the regulators. It is such team that will be driving the process, present the merits of the RTO to the investment community to attract the capital, and complete the deal. At the time the IPO, a CPC has to have a minimum 200 public shareholders who buy its shares in the public offering, looking to make money on the eventual stock appreciation after the vehicle completes a merger (RTO).
A typical CPC will look for a private business with an equity value between approximately $10 million to $100 million, and possibly more. A CPC seeks to partner with an established company and support its growth by delivering financial and strategic support through its highly experienced management.
Why CPC Works for Shipping Businesses
While there has been almost no CPCs focused exclusively on the shipping industry, companies from this sector, previously overlooked by a mainstream capital market, must seriously consider this option to go public if:
Businesses intended to proceed with an IPO
Businesses seek to restructure their capital and/or shareholder base
Businesses seek growth capital
Businesses look to acquire a competitor and need to create currency in the form of its pubic stock and raise more capital for M&A
All of the above situations may be applicable to shipping companies at one or another stage of their development.
Background on TSXV
By ways of background, TSXV is one of the world’s largest exchanges (#3 or #4 depending on a year):
#1 number of international IPOs and new listings
Well-diversified across different economic sectors
~25% of TSX and TSXV member firms are headquartered outside Canada
~40% daily trading originates from outside Canada
There hasn’t been a shipping company IPO in quite some time thus making such an event an attention-grabber, provided a quality asset is introduced to the market.
Merger Candidate Criteria
There are several criteria that a typical CPC will look for in its merger candidates, such as:
Merger candidate should have already achieved initial economies of scale with at least $10 million in revenue
Sustainable, historical profitability should be demonstrated with at least of $2 million in EBITDA
Ability to pay dividends
New capital infusion will accelerate growth/increase margins (versus a use of proceeds primarily aimed at paying exiting shareholders)
Expansion sought in terms of acquisitions, new products or expanded market presence with potential growth in excess of 10% annually
Buyouts, Mergers, Capital Stock Exchanges, Asset or Stock Acquisitions, Recapitalizations or other similar transaction types in which a CPC merges with or acquires an operating business and/or acquires assets
No change of control required. Owner of merger candidate is expected to retain majority
Minimum of 2 years GAAP / IFRS
Potential Benefits to Shipping Businesses
In brief, once a shipping business completes an Reversed Takeover (RTO) with a CPC and becomes public, it will be able to establish a capital market platform for future capital raising and gain direct access to public market liquidity. Being public will allow a business to form a currency of company’s public shares for future M&A deals. An RTO, when executed in the right time, will optimize stock exchange and economic opportunity timing. Or a shareholder(s), it offers fast and straightforward way to exit from the business through potential follow-on offering(s) in the future. A shipping business will gain access to a broader international investor base and will obtain transparent business status, awareness raising and company’s image improving among international investors.
Becoming public will serve as a major catalyst to boosting the growth of the existing business, strengthening its balance sheet to attract larger clients, create insurance bond to reduce re-insurance costs, expand geographical reach within the North America, gain quicker and cheaper access to the banking facilities and mezzanine financing.
Additional strong benefits for the shipping business owners will include cash at the close of the RTO, shall the business and a CPC team are able to attract an anchor investor and generate interest amongst other public investors. It is worth noting that a merger valuation is fixed prior to the deal closing. Unlike in situation of traditional IPOs, the transaction success is irrelevant to market conditions as listing has been already established. In case, an investor mood at the time of RTO is favorable, a possible cash out for the shareholders of the business is feasible.
After the RTO, just like before, current shipping owners keep the control over the shipping business. Current management of the business would be expected to continue control of its operations.
Advantages of an RTO vs Traditional IPO
One of the key advantages of an RTO deal with a CPC vehicle versus a traditional IPO lies in a fact that an RTO is not a subject to lengthy regulator review process, its accelerated execution timeframe falls within 1-3 months. The process causes a very limited interruption to management, owner and employees. While a due diligence is certainly done and required, it is executed by a small dedicated team. A CPC team is able to pre-market the deal and interact with analysts/market participants. Regulatory review process can be deferred until after the closing.
Because the valuation is fixed and known prior to an RTO, there is a great deal of certainty on price early in the process, hence a limited risk from fluctuating market conditions. The process features lower direct expenses and indirect costs compared to traditional IPO. A CPC team, comprised of vetted by the exchange and regulator senior management, can further enhance a shipping business’ existing team, provide stamp of approval and potential supplement of management. None of the above advantages are evident in the context of a traditional IPO process.
Mr Kyle Shostak is a New-York- based investment adviser with extensive experience in special purpose acquisition vehicles, private-to-public deals across different sectors and acquisition finance. He is the CEO of Navigator Acquisition Corp (NAQ.P), a TSXV-listed capital pool company and Director of Navigator Principals, an investment advisory company.