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Pre-funded acquisition vehicles, better known as cash shells or blank cheque companies, have made headlines in the financial press recently thanks to the success of Horizon, Vallar, Justice and Vallares. The most recent example, Vallares, an oil and gas investment vehicle, was founded by financier Nat Rothschild, ex-chief executive of BP Tony Hayward, and former banker Julian Metherell. In June, Vallares raised £1.35 billion ($2.2 billion) from investors with an initial public offering (IPO) in London, and last month it sealed a $2.1 billion deal to merge with Genel Energy, a Turkish-owned company with oil assets in Kurdistan. The combined company is set to list on the London stock exchange as Genel Energy PLC, with Hayward as CEO, before the end of 2011. The Gateway wanted to find out more, so we spoke to Tom Ng, part of the UK team at Credit Suisse that worked on the Vallares deal.

What are cash shells all about?

Cash shells are special purpose companies that are founded by financiers and entrepreneurs with the sole purpose of raising cash through the public equity markets to acquire assets. Unlike traditional IPOs, where a company with existing operations and assets lists its shares to raise financing as part of a wider business plan, cash shells list purely to raise funds to make an acquisition. Recent cash shells have focused on acquiring commodity and natural resources companies, though they will not have a specific target company in mind at the IPO stage.

“A good example of a traditional IPO is Ocado,â€￾ explains Tom. “Ocado went to market last year to raise money to build a new warehouse facility, so the company sold new shares to fund its future growth and pay down some debt.â€￾ In contrast, Vallares listed on the stock exchange without any pre-existing assets in order to raise money to buy emerging markets oil and gas businesses.

Why are cash shells used?

Cash shells have been used as investment vehicles for many years. However, their popularity has grown considerably during the past 18 months, largely in response to the way in which the effects of the financial crisis have made listing, especially for foreign companies, more tricky. “The challenging IPO market conditions have contributed to the growth in cash shells,â€￾ says Tom, because merging into a London-listed company is an easier way for a firm to gain a listing than conducting an IPO themselves - a process known as a “reverse takeoverâ€￾. He also points out that there are many firms out there in need of new funding. “There's an abundance of over-leveraged assets in the system which need equity, and these vehicles are very well designed to pick those assets up and develop them.â€￾

Raising money through a pre-funded investment vehicle is advantageous to its founders because it reduces their exposure to financing risk. “One way to make yourself a high quality buyer is to get the funds raised upfront, so you know exactly how much money you have to spend. It puts you in a much stronger position against other buyers, and it helps with the speed of execution too,â€￾ explains Tom. It's also an attractive business model because the cash shell managers generally don't have to get approval from investors to make an acquisition once the money has been raised, and because they are flexible vehicles - cash shells can issue new shares quickly and easily if extra funding is needed to complete a takeover or merger.

But cash shells also come with considerable challenges. “Very few people can just stand up and raise a billion pounds on the London market with no more than a promise to go out there and acquire something in the future,â€￾ says Tom. Being able to inspire trust is key, and to persuade people to invest “it's essential to have a very credible entrepreneur with a very strong track record, and a first class board to manage the cash shell.â€￾ The expectations of investors pose another challenge: “The management team is under pressure to do a deal from day one, because the longer the funds sit in the company without having been used to acquire assets, the more that dilutes the investors' returns.â€￾

How do cash shells work?

Pre-funded acquisition vehicles are long-term projects for the investment banking division at Credit Suisse. When the team is approached by a financier or entrepreneur with an idea, there are four fundamental steps in a cash shell cycle. “The first thing we've got to do is help them develop the investment case,â€￾ Tom explains. “We have to question whether the investment thesis is right, and ask questions such as: What differentiates the investment proposition? Can we raise the required sum of money? Who are the likely investors?â€￾

The next phase is structuring the investment vehicle, which entails creating a cash shell that meets both the objectives agreed with the founders, and the regulatory requirements of the stock market. The bank then takes charge of raising funds from investors. “We've got to go out and actually speak to the investors and raise the money, which typically takes around three to four months, but it can vary,â€￾ Tom says.

Finally, the bank helps the cash shell managers to find suitable assets to acquire once listed. “We talk to our colleagues, and it becomes more of a traditional M&A process. We evaluate the target companies and do a financial analysis of their business. Then, if the company finds what they're looking for, we help to structure the approach and execute the takeover.â€￾

Tom's team coordinates the whole process of cash shell deals such as Vallares, but they work closely with other teams at the bank. “One of the key teams in the early phases is the equity capital market team, which is important in helping to structure the transaction. Then, because the vehicles tend to be commodities focused - whether it's metals and mining, oil and gas, or resources experts - we'll get the relevant sector team involved to help us identify acquisition targets. Lastly, the M&A team gets involved to help us execute a takeover.â€￾

How could you be involved?

“Working on a pre-funded acquisition vehicle is fantastic if you've just started at the bank, because it gives you exposure to a huge variety of different product areas and teams,â€￾ says Tom. At Credit Suisse, new analysts might be involved in drafting the prospectus for investors, or assisting with setting up the cash shell and getting it through the listing process. Graduate recruits can also expect to be involved in modelling some of the potential M&A scenarios once the company's up and running. “Being on one of these projects is a great opportunity to see the full cycle of a deal,â€￾ Tom says. “The core corporate finance skills are raising equity and doing M&A, and here you get to do both in one transaction.â€￾   


Lucy Mair
Former assistant editor


Issue 44


26 October 2011

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