SPACs gaining traction in MENA

In the Middle East, SPAC sensation is beginning to gain traction following their exponential growth across key US and European markets.

To date, there have been three Middle Eastern companies that have listed on the US-based Nasdaq exchange via SPACs (special purpose acquisition companies).

These flagship MENA SPACs include National Energy Services Reunited (NESR), which was the first energy-centric MENA SPAC to list on the Nasdaq more than three years before the 2020 SPAC boom. Thus, becoming the first company to successfully list several GCC companies from Saudi Arabia, Oman, Qatar, and the UAE on the Nasdaq via a SPAC.

More recently, Anghami — a leading MENA music streaming platform - executed a $220 million merger and listing with Vistas Media Acquisition Co. Soon after, Dubai-based transit and mobility services provider SWVL, carried out a larger $1.5 billion listing. Having both listed on the Nasdaq during a SPAC-happy 2021, VMAC & SWVL not only capitalized on the momentum, but also harnessed market popularity for the technology and software services sector.

What is a SPAC?

A SPAC is an investment vehicle that raises capital by selling shares in an entity that is not yet operational.

‘Blank-check firms’ as they are also known, list on the stock market and place raised capital in a trust. They then generally have two years to merge with a company, or a combination of companies that have been identified prior to their launch.

SPACs must either take companies public or return raised capital to their shareholders, in the event of deal failure or their dissolution.

This way of bringing private firms to public markets, seemingly a win-win for both imaginative sponsors and forward-thinking early investors, has gained global momentum in recent years.

Nearly 70% of all SPACs launched and capital raised since 2010 occurred in 2020 and 2021.

For example, in 2019, 59 SPACS raised $13 billion but in 2020, 248 of them raised $83 billion. During the first half of 2021, 330 SPACs around the world raised $105 billion, according to SPAC Research.

SPACs — a risky business?

The increasing interest in SPACs coincides with rising concerns that some of them, which are generally less regulated than traditional IPOs, have suffered poor market performance. This may explain the decline in SPACs’ ability to raise capital during the second half of 2021. The valuations of the largest SPACs that have announced a merger are also down by 32 percent this year, on average, according to the CNBC Post SPAC Index.

In May, SEC Chairman Gary Gensler told the US House Appropriations Committee that his body was investigating protection for small investors who have poured cash into this area in recent years.

Some investors redeem their holdings from a SPAC at the point of bringing a public firm to market. This leaves a newly acquired firm with less cash in its coffers for investment and leaves longer-term shareholders holding a stock that has seen its value cut.

“There are some real questions about who is benefitting and investor protection,” Gensler told the US Congress.

Moreover, a study published by Stanford Law School professor Michael Klausner, NYU School of Law assistant professor Michael Ohlrogge, and Emily Ruan of Stanford University, found that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized.

“Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share,” the study found.

“We find, first, that for a large majority of SPACs, post-merger share prices fall, and second, that these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that investors are bearing the cost of the dilution built into the vehicles’ structure, and in effect subsidizing the companies they bring public. We question whether this is a sustainable situation,” they concluded.

NESR — the original MENA SPAC

Despite existing challenges, the Chairman and Chief Executive Officer of NESR, Sherif Foda, saw the 2017 SPAC principally as a means of creating the first-and-only pure play oilfield services consolidation vehicle in the MENA region.

By combining National Petroleum Services and Gulf Energy SAOC in 2018, NESR created the largest national industry-leading provider of integrated energy services and solutions in the Middle East and North Africa regions.

The Nasdaq listing provided NESR access to much-needed growth and M&A capital, which allowed the company to invest in leading MENA industries and communities.

With the closing of the acquisitions, NESR had an aggregate market capitalization of approximately $1.1 billion in 2018.

Major shareholders included SCF Partners along with the Olayan Group, and Waha Capital PJSC. A combination of resilient Middle East upstream investment, and NESR’s nimbleness and field execution have driven appreciable financial outperformance versus larger, global peers.

SPACs — taking leading GCC companies global

While structural changes to SPACs are essential to ensuring minimum dilution and proper distribution of warrants, they continue to be very attractive vehicles to enable the listing of national local companies from the GCC on the US liquid market. They are also a fast way for young companies to attract the capital required to grow.

It is safe to assume that we will see more MENA companies listing in the US market via SPACs in the coming years.

If well managed, the potential of SPACs to attract international investors to MENA markets could be instrumental for growth. From creating employment opportunities for locals, to localizing supply chains and expanding local manufacturing capabilities and R&D in the MENA region, these vehicles can drive much needed diversification and economic growth in the region.

• Hawazen Nassief is the Vice President of Environmental, Social and Governance (ESG), and external affairs at National Energy Services Reunited Corp.