At first blush, the reverse takeover (RTO) method of listing a company is elegantly simple.
And, at around half the cost of a traditional initial public offering (IPO), you wonder why, then, so few companies have taken this route onto the London Stock Exchange.
For the uninitiated, the RTO method uses the husk of an existing stock market company that has either sold off or shut down its main operating assets.
After an accounting and legal deep cleanse, and the injection of fresh funds to meet its outgoings, the shell is offered to a business looking to join the stock market.
So far, so simple. Elegantly simple
There are a number of problems, however, that mean RTOs often turn into the stock market equivalent of RTAs (road traffic accidents).
The main issue is the captive investor base of the shell.
Having put their money into in one asset – for want of a better example, let’s say a failed miner – shareholders might find that, after clean-up and relisting, they are owners of equity in tech firm they do not understand.
Hardly surprising then that there’s a stampede for the exit post-reverse transaction.
This isn’t hypothetical; it happens regularly with RTOs.
Remember also that the preponderance of RTOs come from AIM simply because of the failure rate on the LSE’s growth market.
AIM rules decree that a cash shell must find an asset to reverse into within six months of making the shift from being an active, living corporation to becoming a zombie company.
This then puts a lot of pressure on management to find an asset to inject into the remains of a once-living PLC.
Media Tech SPAC
Why is this relevant? Well, it will help contextualise the comments of John Mahtani, the chief executive of Media Tech SPAC (MTS).
The company is a special purpose acquisition company set up, as the name suggests, to acquire assets in the media and technology space.
It offers all the benefits of an RTO without the downsides.
So, it is a clean new business without a legacy investor base that should bring with it what the market likes and craves – patient capital.
Crucially, as MTS will be standard listing rather than joining AIM, it has two years to clinch a deal. So, the commercial pressures that lead to poor RTO deal-making are alleviated.
“There are no legacy problems,” says Mahtani of MTS and its structure.
“So, we've got a clean cap table; we've got really good advisors; a strong board and we are aiming in the right space.
“With all those elements we're in an excellent position.”
SPACs making a splash
SPACs are currently making quite a splash on the other side of the Pond and have helped fast-track the IPOs of businesses such as Richard Branson’s Virgin Galactic and Draft Kings.
Homegrown used car specialist Cazoo is bound for the US to hitch a ride with a so-called blank-cheque vehicle, while Grab, Asia’s answer Uber, is taking a similar journey in Singapore.
According to a report co-authored by Bloomberg, there were US$166bn of US SPAC deals in the first quarter alone.
Here in the UK, the market is waking up to the opportunity (belatedly) with regulator outlining new rules that will, it is hoped, put London on an equal footing with NYSE or NASDAQ.
So, Mahtani, chief media officer Celia Li and chairman Rick Senat are blazing a trail in the Square Mile.
The business is expected to list in on the LSE in May with the team hoping to raise an initial £6mln of capital.
Getting word out
The current focus is on building the prospectus ahead of the float, and, crucially, creating awareness of the business and the opportunity.
“At the moment we are trying to talk to as many people as possible to deliver our message. It’s about building up the story in the marketplace,” explains Mahtani.
“You can't turn up two days before [the IPO] and say to people, ‘we're doing a raise by the end of the week, can you give me some money’. It doesn't work that way.
“You have got to give people time and let them be comfortable with the story.
“You don’t want to make them traders, you make them investors so they buy into the long-term value of what you're bringing.”
The MTS team will be looking at opportunities in immersive and gaming systems, direct-to-consumer, e-commerce, digital content, fintech and cybersecurity.
They will have to pass a rigorous screening process requiring them to have a clear value proposition, evidence of adoption and commercial traction.
Not only that, target companies must have the potential to disrupt the high-growth market in which they operate and emerge as a leader.
At the same time, the industry fundamentals and/or technology foundations should be strong.
Strong and proven management
And if that wasn’t enough, MTS is looking for strong and proven management.
You suspect Mahtani and the team will end up kissing a lot of frogs.
That said, the SPAC is likely to have a lot of potential deal flow from partners such as Barry Downes and Brian Kinane.
The former is a technologist and entrepreneur, the latter a venture capitalist and investment manager.
Both are principals of Sure Valley Ventures, which invests in early-stage tech companies focused on artificial intelligence, augmented reality, the internet of things and cybersecurity.
“When I first spoke to the guys, I was really in awe of their process in terms of how they identify incredibly exciting opportunities,” says Mahtani.
While Sure Valley offers outside counsel, there is plenty of in-house expertise in the media and technology sectors, starting with CEO.
Mahtani is a former Warner Brothers executive who has experience in building and selling businesses, and whose annual budget was in the order of US$250mln.
Li was at the sharp end of media as a presenter who also set up the London bureau of Phoenix Television, the world’s largest independent Chinese broadcaster.
Senat, a qualified lawyer, made his name at Warner Bros working on major film projects, eventually spearheading the company’s acquisition of the film rights to the Harry Potter series of films
“I've got a smart team, I've got good advisors, and I'm confident that we're going to land some really interesting companies. The focus is to have a controlling interest of one,” says Mahtani.
“If there are other deals that are made available, there's no reason why we couldn't potentially look at two transactions concurrently. These are exciting times.”