'Blank checks' write own ticket

Special purpose acquisition companies increase in popularity

While the recent debt market crunch has made it tougher for many companies and private-equity firms to pull off acquisitions, Media and Entertainment Holdings CFO Robert Clauser feels well positioned in this environment.

His firm is a so-called special purpose acquisition company, or SPAC. These blank check companies, as they also are known, have quietly become popular during the past couple of years, including in the media and entertainment space.

Such sector biggies as Time Warner and News Corp. have shed noncore businesses to update their asset portfolio, and smaller players also have looked at selling.

SPACs also are a way for experienced executives to find opportunities outside established company hierarchies. Media and Entertainment Holdings is a case in point. Its chairman and CEO is none other than Herbert Granath, the chairman emeritus of ESPN and, before that, a longtime ABC executive. Clauser most recently was lead strategy partner of the media and entertainment practice of consultancy Accenture.

Others in the media and entertainment space also have read the signs of the time, as similar shell companies led by former executives of such media companies as Time Warner, DirecTV (former CEO Eddy Hartenstein) and VNU -- the former name of The Hollywood Reporter's parent the Nielsen Co. -- have raised hundreds of millions of dollars on the stock market during the past year. Their initial public offerings often happen under the radar, and stocks usually move little until a deal is found as investors don't know exactly what a SPAC will invest in -- therefore the "blank check" name.

But Clauser said about 85 SPACs with various sector interests have gone public since 2005, raising about $10.7 billion and being in various stages of dealmaking. And 38 SPACs already have completed deals, acquiring such big names as Jamba Juice and American Apparel.

Media and Entertainment Holdings is one of the media sector examples, and it follows the same ground rules as all SPACs.

The company went public in March, raising about $100 million. Like fellow SPACs, it has 18 months from the IPO date to sign a letter of intent to acquire a company, and another six months to wrap up a deal. A transaction must be approved by 80% of shareholders in a vote within 60-90 days.

"We have something that's similar to a biological clock, but it's a financial clock," Clauser said.

SPAC rules state that a firm must use at least 80% of its war chest on one acquisition.

Media and Entertainment Holdings' focus is primarily on video-related assets, especially in broadcast TV and broadband, with a possible international component, given that the founders have experience in those fields. Clauser expects management would mostly stay on board, with all of his SPAC's members taking on executive roles to help take the company to the next level.

The size of a deal is likely to be in the $500 million range, which could buy as little as 51% for control of an asset, Clauser said.

Media and Entertainment Holdings not only can tap its IPO funds and its founders' money, but also a relationship with Hearst, which owns newspapers, including the San Francisco Chronicle; magazines, including Cosmopolitan and O, The Oprah Magazine; 29 TV stations through Hearst-Argyle Television; and stakes in cable networks Lifetime, A&E, the History Channel and ESPN. Privately held Hearst took a 10% stake in Media and Entertainment Holdings thanks to the ESPN bonds both parties have.

"Hearst would like to co-invest if we find a space that they would like to expand into," Clauser said. "And we could help them internationalize."

If a SPAC doesn't find a deal within the set time frame, a liquidation process starts, and the SPAC returns its funds to its investors. But when they do pull off deals, the value of an acquired property generally increases.

"There is a pop from going from a private to a public company because that is unlocking value," Clauser said. "If you buy an international company that then has a U.S. security, it looks safer and you get a double pop."

One risk has usually been that private-equity firms will snatch away a deal eyed by a SPAC simply by jacking up the price tag.

But the recent global debt market crunch has hurt private-equity groups' ability to pull off big deals. "We're already seeing a lot less competition, and prices are coming down," Clauser said.

In fact, he said SPACs offer private-equity firms a chance to cash out of an asset. "We are a PE exit strategy," he said. "Their exit is out entrance, which works well for both sides. We basically pay for their IPO."

So, how do SPAC investors and founders make money?

While they could pay themselves in dividends and salaries after a deal, Clauser said he and his colleagues won't want to make anywhere near their old pay packages to not burden the finances of their acquisition target.

Big institutional investors generally cash out of a SPAC after a deal, while the founders tend to benefit from the value they create. Clauser said as of early November, the 85 SPACs had an average return of 16%, with a 6% return before a deal announcement and 40%-plus returns thereafter.

Some on the Street see media SPACs as a fad. Clauser disagrees: "Media and entertainment has been interesting to SPACs because big companies have been shifting assets. As long as that continues, there will always be deals to do."

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