Friday, August 22, 2014

WL Ross Holding Corp (WLRH)

As I was looking through the new lows list in the newspaper, I stumbled upon WL Ross Holdings Corp (WLRH).  Wilbur Ross is a very successful distressed investor so I was surprised to see a listed entity with his name on it.

This is a blank check investment company (or Special-Purpose Acquisition Company (SPAC)), and who cares about those these days?  I am not a big fan of these things, usually, as they tend to just do nothing for a long time and then they either make a good deal or a bad deal and the stock price responds accordingly.   I don't follow these systematically so don't know what the historical record is (even though a quick googling shows that they have generally performed poorly), but off the top of my head, the disasters were things like American Apparel and Crumbs.  Even RLJ Entertainment (RLJE) run by the legendary Robert Johnson (founder of BET) looks like a disaster.   Recent success stories are Burger King and Platform Specialty. 

Over the years I've read a bunch of S-1's for these things and for me it really boils down to the people.  Who is running it and making the investment decisions?  We've had SPACs run by ex-CEOs, private equity guys and even celebrities.   But for many of them, there were no verifiable, independent track records.  So how do you evaluate someone who is going to make one big acquisition without something to look at?

Free Option
The reason why SPACs can be interesting (and the Special Opportunities Fund (SPE) has almost 10% of assets in SPACs) is that they often have a term of two years and if they can't make an acquisition by then the cash is returned to shareholders.  If they make an interesting acquisition, the stock price will pop up and you make a quick profit on the difference between private market value and public market value.   They are usually offered with warrants too, so you can buy warrants in anticipation of making money on the 'pop'.

Hedge funds like them (or used to like them) as they can buy them at a discount to the cash redemption value and vote down acquisitions or redeem their shares for a decent return, especially with leverage (plus the optionality). 

Flat Stock Price Can Be Good
And then it occurred to me that these investment vehicles that remain flat for the most part until some event occurs, with the option of getting your cash back instead of holding onto the shares through an acquisition might be interesting to some in this market where people seem worried about an imminent crash or bear market. 

From the prospectus (dated June 5, 2014):
We will provide our public stockholders with the opportunity to redeem all or a portion of their shares of our common stock upon the completion of our initial business combination at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account described below as of two business days prior to the consummation of our initial business combination, including interest (which interest shall be net of taxes payable) divided by the number of then outstanding shares of common stock that were sold as part of the units in this offering, which we refer to collectively as our public shares, subject to the limitations described herein. If we are unable to complete our business combination within 24 months from the closing of this offering, we will redeem 100% of the public shares at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account, including interest (less up to $50,000 of interest to pay dissolution expenses and which interest shall be net of taxes payable) divided by the number of then outstanding public shares, subject to applicable law and as further described herein. 
If the stock market crashed tomorrow, these SPACs will not move in price at all.  OK, maybe there would be some selling pressure in a severe crash, but since the asset is mostly cash, the value wouldn't change at all. 

In fact, SPACs might actually benefit in a crash as it may lead to more investment opportunities. 

So let's just take a quick look at WLRH.  What I like about WLRH is that Wilbur Ross himself is listed as the Chairman and CEO.  Of course, this does not guarantee that he will spend a lot of time on WLRH.  But if he is going to hold those titles, I don't think he is going to just let anything happen.  He will make sure whatever deal happens is a good one. 

There is obviously some conflict here as Ross runs other funds and dealings between WLRH and his other funds are not forbidden.   Will he save the best ideas for his other funds?  Will he dump a bad asset / lemon in his private funds into this entity?  Of course, that is possible.  

But as usual when looking at these things, we have to look at the people.   There are some names that come to mind that I wouldn't trust at all in this sense.  But Ross, as far as I know, has a very good reputation and I wouldn't worry about funky self-dealing here. 

For those who don't know much about him, from the prospectus: 
We believe that our management team is well positioned to identify a value-oriented investment opportunity in the marketplace and that our contacts and transaction sources, ranging from owners and directors of private and public companies, private equity funds, investment bankers, attorneys, accountants and business brokers across various sectors will allow us to generate attractive acquisition opportunities. Our management team is led by Wilbur L. Ross, Jr., our Chairman and Chief Executive Officer, who has 17 years of experience in the private equity industry and 24 years of prior experience in the restructuring financial advisory industry. Over the course of his career, Mr. Ross and his team have invested in approximately 135 portfolio companies across four continents, deploying approximately $10 billion of invested capital. Mr. Ross is the only individual who has been elected to both the Private Equity Hall of Fame and the Turnaround Management Association Hall of Fame.
Mr. Ross is the Founder, Chairman and Chief Strategy Officer of WL Ross & Co. LLC, which we refer to throughout this prospectus as WL Ross, an affiliate of our sponsor. Mr. Ross was also formerly the Chief Executive Officer of WL Ross prior to stepping down from this role on April 30, 2014 to become its Chief Strategy Officer. Founded in 2000, WL Ross is a global distressed private equity firm with approximately $8 billion of assets under management as of December 31, 2013, across private equity, credit, infrastructure and mortgage funds. Mr. Ross and our management team will leverage the relationships of the investment professionals of WL Ross to identify and complete an initial business combination. Acknowledged as one of the world’s leading turnaround groups, WL Ross invests in and restructures financially distressed companies in industries in which the investment professionals of WL Ross have knowledge. WL Ross seeks niche opportunities in markets where it believes its knowledge, insight and experience offer an advantage in assessing and cultivating new investment opportunities. WL Ross has offices in the United States, China and Japan, and WL Ross’ current network of approximately 40 portfolio companies, which operate in over 10 industries and 12 countries across the globe, provide a broad network of relationships and market insights that we believe will help our management team source attractive value-oriented investment opportunities.
Prior to founding WL Ross in 2000, Mr. Ross was the Executive Managing Director of the Restructuring Advisory Group of Rothschild, Inc., where he and his team advised various constituencies through bankruptcies and workouts around the world, assisting in restructuring in excess of $200 billion of liabilities. In 1997, Mr. Ross and his investment team organized their first private equity fund, Rothschild Recovery Fund L.P. In April 2000, Mr. Ross founded WL Ross and acquired from Rothschild Inc. its general and limited partner interests in Rothschild Recovery Fund L.P., which was renamed WLR Recovery Fund, L.P. Our executive officers, Stephen J. Toy and Wendy L. Teramoto have worked at WL Ross since its founding and Michael J. Gibbons has been with WL Ross for 12 years. 
Some of the spectacular failures in SPACs have occured when they bought crappy companies (American Apparel), or companies that were simply not ready to be public (Crumbs?).  This is why I would avoid venture-type SPACs.

Here is what WLRH is going to look for:

Investment Criteria

Consistent with this strategy, we have identified the following general criteria and guidelines that we believe are important in evaluating prospective target businesses, including value-oriented investment opportunities. We will use these criteria and guidelines in evaluating acquisition opportunities, but we may decide to enter into our initial business combination with a target business that does not meet these criteria and guidelines. We intend to seek to acquire companies that we believe: 
Are Well Positioned within Industries Undergoing a Period of Dislocation.  Whole industries or sub-segments within industries routinely undergo periods of dislocation, often due to non-recurring macro-economic forces or disturbances, and our management team has a track record of contrarian investing in such industries and sectors, including banking institutions, basic building materials, financial services, metals and mining and transportation. We believe that the perceived risks inherent in these investment opportunities are often greater than the actual risks, and we believe that we are able to analyze and estimate the size of the actual risks through our diligence process. Within dislocated industries, we intend to target companies that have leading market shares, low-cost operations relative to peers or the ability to attain low-cost operations, defensible competitive characteristics or high barriers to entry, entrenched positions with customers and high potential returns on net assets where our capital and sponsorship can assist companies during periods of dislocation.
Offer Opportunities to Create Investment Platforms for Consolidation or Growth.  Our management team has an aggregate of over 70 years of experience creating platform investments and often consolidating meaningful portions of large industries. Mr. Ross and our management team have previously applied this investment strategy, creating horizontally and vertically integrated platforms, in industries such as steel, coal, automotive component parts and marine transportation. We intend to capitalize on their history of analyzing global macro-economic trends and industry-wide investment themes in the context of potentially creating investment platforms for consolidation or growth.
Have Significant Situational or Structural Complexity.  We believe that our management team has expertise undertaking complex transactions and providing flexible, long-term capital solutions, which often enable us to distinguish ourselves from other financial buyers. We believe that situational or structural complexity often hides compelling value that competitors may lack the time, inclination or ability to uncover. Our management team has historically capitalized on such investment situations, which have often taken the form of business, regulatory or legal complexity. We believe that successful private equity investing in complex special situations requires investment structuring expertise, which Mr. Ross and our management team have developed through their experience investing in approximately 135 portfolio companies. We intend to leverage the operational experience and financial acumen of our management team and the investment team of WL Ross to identify structurally complex opportunities where we believe we have the ability to unlock value for the benefit of our stockholders.
Are Underperforming Their Potential Peak Operational and/or Financial Performance Capabilities.  Companies underperform operationally and financially for various reasons, including due to cost mismanagement, weak relationships with organized labor groups, poorly strategized market positioning, capital investment misallocation, capital structure inefficiencies and ineffective management teams. We believe that given our management team’s experience with value-oriented investing, we are well-positioned to identify investment situations where additional capital investment, effective sponsorship, board of directors supervision and, often, a new management team, will result in improvements in operational and/or financial performance.
Offer a Value Proposition that is Not Recognized by the Market.  Our management team and the investment professionals of WL Ross typically conduct substantial due diligence with respect to potential acquisition targets, with a goal to uncover value that is unrecognized by the market and would allow us to invest in companies and buy assets at prices that we believe to be below intrinsic value. Our due diligence process typically involves an in-depth analysis of the target’s industry, including competitive positioning and barriers to entry; a strategic, operational and technical review; an analysis of downside protection and alternative channels through which we can realize value; a detailed historical and projected financial review focusing on revenue potential and earnings margins, which is done in concert with a stress test of projected financials and, often, a quality of earnings review; capital structure analysis; and an evaluation of a company’s management team and their financial incentives. 

This is a pretty big SPAC, I think, with $500,250,000 in cash held in the trust account.  Common stock outstanding subject to redemption is 47,789,319 shares.  That's a bit more than $10.00/share redemption value ($10.00/share is an estimate and not a guaranteed or fixed redemption amount).  Included in the trust account is deferred underwriting commission of $18,309,150 which is to be paid upon the closing of a deal.  Excluding that, you have $10.08/share in cash in the trust account.

Here's an interesting twist on the deferred underwriting commission:
The underwriters have agreed to waive their rights to their deferred underwriting commission held in the trust account in the event we do not complete our initial business combination within 24 months from the closing of this offering and, in such event, such amounts will be included with the funds held in the trust account that will be available to fund the redemption of our public shares.
So if a deal is not closed within two years, this underwriting commission doesn't have to be paid and will instead go to the public shareholders (shares offered in the IPO).  That would be an extra $0.38/share.  If none of the trust account cash is touched, the redemption value would be $10.46/share if a deal is not done.   With the stock currently at $9.85/share, that implies a 6.2% return over two years (actually, 1.8 years through June 11, 2016); that's 3.4% annualized return.  With interest rates so low, you can see how this might not be such a bad idea.

If a hedge fund can get 7x leverage with funding at Libor+50 bps (which might amount to 70 bps funding cost today), then a hedge fund can earn 18.9%/year ((3.4% - 0.70%) x 7).  

[ Correction after the fact:  The above analysis is not correct, please see comments section; redemption value should be based on 50 mn shares, not 47.8 mn shares ]

Not bad at all in this environment.  7x leverage is usually for long / short positions, but since this position is basically against cash held in a trust, it may be doable.  But I don't know.  Liquidity and other factors might make the economics not applicable here.

Think about that.  They can earn 18.9%/year with optionality; if a nice deal happens, they get a nice pop.

Others would have to settle for 3.4%/year with possible upside.  You can see why the Special Opportunities Fund folks like it; as a basket, it's a reasonable proxy for cash with some upside potential.

This sort of basket approach has never been that interesting to me as you would need a lot of them to 'pop' for your returns to get interesting without leverage.

In this case, you only get that nice return if a deal doesn't get done and the underwriting commission doesn't get paid (and instead goes to the public, non-founder shares).

If a deal goes through and you redeem your shares for cash, then you wouldn't get that extra $0.38/share; at this point you would get only $10.00 (or $10.08 according to my math, but I'm not sure what else is in the trust that I may not have accounted for).  In that case, it's only a 1.5%-2.3% return over 1.8 years.  I'm assuming the cash will generate no interest income.

So of course, someone will just buy up a ton of shares and then make sure a deal doesn't get done.   To prevent that, they have this provision:
Limitation on redemption rights of stockholders holding more than 15% of the shares sold in this offering if we hold stockholder vote
Notwithstanding the foregoing redemption rights, if we seek stockholder approval of our initial business combination and we do not conduct redemptions in connection with our business combination pursuant to the tender offer rules, our amended and restated certificate of incorporation provides that a public stockholder, together with any affiliate of such stockholder or any other person with whom such stockholder is acting in concert or as a “group” (as defined under Section 13 of the Exchange Act), will be restricted from redeeming its shares with respect to more than an aggregate of 15% of the shares sold in this offering. We believe the restriction described above will discourage stockholders from accumulating large blocks of shares, and subsequent attempts by such holders to use their ability to redeem their shares as a means to force us or our management to purchase their shares at a significant premium to the then-current market price or on other undesirable terms. Absent this provision, a public stockholder holding more than an aggregate of 15% of the shares sold in this offering could threaten to exercise its redemption rights against a business combination if such holder’s shares are not purchased by us or our management at a premium to the then-current market price or on other undesirable terms. By limiting our stockholders’ ability to redeem to no more than 15% of the shares sold in this offering, we believe we will limit the ability of a small group of stockholders to unreasonably attempt to block our ability to complete our business combination, particularly in connection with a business combination with a target that requires as a closing condition that we have a minimum 

Also, there are some more complicated issues that you have to think about, but the above is basically the gist of it.

The reason why I made this post is not because I am interested in SPACs or that this one has a particularly interesting structure; it's because it is run by Wilbur Ross, a well-regarded distressed investor.  I have known about him for a while and even doubled my money in International Coal a while back and have a very good impression of him.  Of course, I don't know him or understand him as well as, say, Buffett or Dimon.  But still, he seems like a decent, straight-shooting dealmaker.

This would also be interesting if this entity became a platform for further acquisitions and not just a one-off deal situation.  One of the bullet points in the investment criteria (Offer Opportunities to Create Investment Platforms for Consolidation or Growth) seems to suggest that this may be the case.

So anyway, this is not for everyone.  I thought I would just make a quick post as it was interesting to me that there is an entity to invest with Ross with this SPAC twist today.

And for those market scaredy-cats, this is a 100% cash investment, so what is there to fear?!  If you owned this you would wish for a crash, and as soon as possible too!


  1. This comment has been removed by a blog administrator.

    1. Oops, sorry. I hit the wrong button and accidently removed your comment.

      Anyway, yes, you are missing something. The cash held in trust is held only for shares purchased in the IPO. They are known as shares subject to redemption, or some such thing. There is another 20% of shares outstanding but those are the Founders' shares, and they have no redemption right.

      It's a little confusing, but that's how these things work.

      Thanks for reading.

    2. Nevermind, ok thanks for clarifying. In the IPO 43.5m shares were sold and there exists an option for buying additional 6.5m shares, so thats how you get to 500m. I assume not all options were exercised until now. (therefore common stock outstanding +47m)

  2. Any guess what's the motivation for Wilbur Ross doing this SPAC?

    1. I would guess it's a way to get permanent capital. Private equity funds have to keep raising funds to replace old funds. The industry has always envied the Buffett / Berkshire model because they have permanent capital to work with.

  3. somewhat interesting timing wise as well... PE has trouble raising funds when assets are cheap. impossible to read too much into it, but one could choose to interpret this as Ross saying he thinks there will be great opportunities to put cash to work in the next 2 years, meaning he expects a major sell off. pure speculation obviously.

  4. I think using 47,789,319 shares of "stock subject to possible redemption" is incorrect and throwing off your redemption value. From reading the S-1, i think that number is a theoretical maximum number of shares that the SPAC could allow to redeem while still maintaining >$5MM of stockholders equity and thus avoiding some penny stock regulations. Notice how the Total stockholders equity in the 10-Q equals as close to 5,000,000 as possible in $10 increments.

    I believe for the purpose of calculating the actual redemption or liquidation value of a share, the 47,789,319 number is completely meaningless. I'm not positive what the correct share count is, but I would guess its much closer to the 50,025,000 shares sold in the IPO.

    Love your blog, please keep it up!

  5. Me again- from farther down the 10-Q: (page F-8)

    Redeemable Common Stock

    As discussed in Note 3, all of the 50,025,000 common shares sold as part of the units in the Public Offering contain a redemption feature which allows for the redemption of common shares under the Company’s Liquidation or Tender Offer/Stockholder Approval provisions. In accordance with ASC 480, redemption provisions not solely within the control of the Company require the security to be classified outside of permanent equity. Ordinary liquidation events, which involve the redemption and liquidation of all of the entity’s equity instruments, are excluded from the provisions of ASC 480. Although the Company did not specify a maximum redemption threshold, its charter provides that in no event will it redeem its Public Shares in an amount that would cause its net tangible assets (stockholders’ equity) to be less than $5,000,001.

    The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of the security to equal the redemption value at the end of each reporting period. Increases or decreases in the carrying amount of redeemable common stock are affected by charges against accumulated deficit.

    Accordingly, at June 30, 2014, 47,789,319 of the 50,025,000 Public Shares were classified outside of permanent equity at its redemption value.

    1. Thanks, you're right. I just saw that in the 10-q too. I don't know why I missed that. So if no deal goes through, the IB fee doesn't come due and there is enough cash to redeem $10.00 to the public shareholders at 50.025 mn shares, so there is no extra cash lying around even if IB commissions don't come due.

      That makes more sense, actually... Why would there be extra in it for the public shareholders? That doesn't make sense on further thought, lol...

      Well, the story is still the same for the most part. Hopefully nobody put this position on at 7x leverage hoping to make a fictional gain.

      It is more interesting to me as a potential PAH or some ongoing thing.

      Thanks for the correction.

  6. Kk, can you please elaborate on the incentives for Wilbur Ross and his team.

    I believe he receives 20% of the equity. Did he put up any capital or are these founder shares that are given to him with a nominal investment attached? Also, does Wilbur receive any ongoing management fees?

    Thanks again for a great blog!

    1. Hi, they paid $25,000 for the 20 percent of shares, and paid $10 million for 20 million warrants. They do pay a $10,000 per month fee for administrative services to the sponsor. Otherwise, executive and director compensation, management fees and other things will be subject to whatever deal they close so won't be decided until then... We won't know who will work for the new entity; Ross May not be CEO etc...

      Thanks for reading.

  7. This is looking interesting here. It's possible that WLRH could collapse after the deal ala PANL, that's an ugly one. If WLRH acquries some turkey like SD an extra $500M isn't going to make a difference and WLRH will sink to the level of the acquired. That would be bad. But at this point hard to believe there aren't multiple attractive candidates that would pop the stock higher upon a deal.

  8. I think WLRH also acquired some of the really corrupt mortgage service companies to take advantage of the windfall in foreclosed properties.

  9. Just curious if anybody had looked at this story recently. I believe WLRH only has a month or so before they need to take action on a deal (at least on a preliminary / term sheet basis). Interesting near-term opportunity perhaps but at least judging from a quick scan of news and filings it's pretty much radio silent from the sponsor. Anybody have clarity on dealflow and whether a deal seems likely here?

  10. I thought they had until June 2016, Ed ?

    1. I think the delisting notice is for not holding an annual meeting in 2015 or some such...

  11. based on the 10k I get $9.90 on a no deal cash back to shareholders value. Let me know if I am wrong. Thanks

    1. Hi, what exactly are you looking at? You have to look at the "common stock subject to possible redemption" as that class gets $10.00.

  12. They are buying Nexeo Solutions for $1.6B. It does look like a platform strategy based on comments in the press release by Wilbur Ross, Jr.. Secondary financing coming in as well, lots of moving parts.


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