Letter number 151 of July 2023

  • NEW

News : News from our friends the SPACs

While SPACs have been losing momentum very rapidly in the world since beginning 2022:

Nevertheless, two despackings on major media assets have been completed in Europe in 2022: Banijay/Betclic (under the name of FL Entertainment), with a market capitalisation of €4.5bn, and Deezer, with a market capitalisation of €550m, were floated on the stock market by means of a merger with a SPAC.


In contrast, in the US, the largest SPAC ever raised ("Tontine" set up by Pershing Square which raised $4bn) announced that it was returning the funds raised to investors because it could not find a proper target. It happened for 138 other SPACS in 2022 and 69 just in the first quarter 2023…


There are many reasons for the slowdown in the US:

  • A market largely saturated by an incredible number of transactions in 2020/2021: more than 850 SPACs were floated, raising €240bn. The majority of these vehicles (nearly 200 as at April 2023) are still looking for a target!
  • Stronger regulatory constraints and particular attention paid by the SEC to this type of transaction. The new rules adopted in March by the US stock exchange authorities place greater legal responsibility on banks carrying out the SPAC IPO and bring the disclosure rules for despackings into line with standards previously reserved for "real" IPOs.
  • Investment banks are withdrawing from the market, which has become significantly more volatile and carries a greater reputational risk. For example, last May, Goldman Sachs and Bank of America announced that they would stop (with some exceptions) advising SPACs on their despacking and would no longer participate in the IPOs of new SPACs. This is a limited sacrifice at a time when the M&A market has largely quietened down and with a four-fold reduction in the number of SPAC IPOs in the second quarter. After having benefited greatly from the fees paid by the SPACs, it is probably wise to tiptoe out of a market in which there are bound to be many casualties (notably a large number of SPACs not finding a match).

  • A turbulent stock market makes despacking much more uncertain, even when the target has been identified. In June alone, a dozen or so deals announced to the market were cancelled due to market conditions.

The dynamics seem much healthier in Europe:

  • There are far fewer vehicles on the market (fewer than fifty in all), which makes despackings more credible.
  • More homogeneous sponsors (no stars or other unconventional sponsors).

Although the structure is interesting in many respects and certainly has its place in the financial manager’s toolbox (we refer our reader to the captivating exchange we had with Emmanuel Hasbanian on the subject[1] ), SPACs seem to us to be somewhat of a fool's bargain:

  • Investors in SPAC's IPO do not actually take any risk as they can ask for their shares back at the time of despacking. The funds entrusted are placed in escrow to prevent them from being spent by the SPAC in its search for a target. Investors even receive a free option (a warrant generally exercisable at $11.5 or €11.5 when the initial share price is typically $10 or €10). This option is kept by investors even if they request to redeem their shares. The SPAC IPO market turned very quickly to hedge funds interested only in the option and with no intention of leaving the funds at the time of despacking. As a result, redemption requests reached more than 80% of the funds initially raised... And for what?

Source: S&P Capital IQ; SPAC Insider


  • Despacked groups do not take the risk of going public but generally have a low free float and therefore truncated liquidity. The market risk is eliminated and replaced by a private negotiation with the SPAC’s management. Once a deal is agreed, it can be announced without (theoretically) risking the ability to complete the transaction. There are two caveats to this: we have recently seen announced deals not go through due to market conditions. We understand the reluctance of companies to start their stock market life in such a turbulent market environment. Furthermore, some deals require raising funds through a PIPE (Private Investment in Public Entity), which is almost impossible for significant amounts when markets are so volatile.
  • When it comes to SPACs, sponsors seem to be the big winners because they receive free shares generally representing 20% of the capital before despacking. This is to forget that they have invested a few millions initially to cover the costs of the SPAC before despacking (IPO and operating costs of the SPAC in its research phase). This money is lost if SPAC does not find a match, a scenario that is far from unlikely. Furthermore, they sometimes have to make concessions (giving up part of their free shares) during despacking negotiations.
  • The name SPAC is now misleading. The A in SPAC stands for Acquisition, but it is a long lost illusion. SPACs do not (or no longer) acquire their targets (or only do so very infrequently): they merge with it. But a SPMC (with an M for merger) doesn’t have quite the same ring to it.


However, the market is not moribund: out of 181 IPOs in 2022 in the United States, almost half (86) were still SPACs. It is true that it is easier today to sell a risk-free paper thanks to the option to sell it back at par value at the time of despacking than a share in a tech company! And for investors that are required to hold all or part of their portfolio in shares, the SPAC bucket of a portfolio is a haven of stability in a bearish stock market context and warrants constitute a free option when the turnaround comes.


The market will undoubtedly normalise, and the delirious volumes of 2020/2021 will most certainly never be seen again. This does not mean that the product is dead, because it allows you to go public even when the market is not in good shape. Although the Deezer share price has fallen by 58% since its IPO via a SPAC in July 2022, FL Entertainment has only dropped by 18%.


[1] In the Vernimmen.com newsletter of 143, available at the end of this link.

Statistics : Employee share ownership in Europe

On average, employee share ownership represents 3.26% of the share capital of European companies (compared with 2.37% in 2006)[1]. Behind this average lie very different situations in different countries:


France, for example, emerges as a European champion in terms of democratic employee share ownership, with more than 5% of capital held by employees (and the majority outside management). Germany, on the other hand, has less than 2% of its capital held by employees (which is certainly compensated for by the active participation of employees in governance, as most board of directors include 50 % of employee representatives). In France, 75% of listed companies have more than 1% of their share capital held by employees, compared with only a third in Germany, but 49% in Italy and 62% in the UK.


[1] Annual Economic Survey of Employee Share Ownership in European Countries - European Federation of Employee Share Ownership - Survey of 3149 companies in 32 countries, representing 34.5 million jobs.

Research : How can unicorns be properly valued?

With Simon Gueguen, lecturer-researcher at CY Cergy Paris University


Since the late 1970s, a third of American companies have included venture capital in their financing at the time of their IPO. This method of financing has been extremely successful, and now includes some very large companies, such as Uber and Airbnb. There are hundreds of unicorns (companies financed by venture capital and valued at over a billion dollars) around the world. However, valuing these companies poses a particular challenge. Each share issue usually corresponds to a new class, the last being the most favourable to the holder. Not only are there preference shares, but these shares also have different degrees of seniority. The last shares issued may offer a guaranteed return in the event of an IPO, a veto right on the IPO, or a degree of protection in the event of bankruptcy.

However, the usual practice in the venture capital industry is to value companies according to the price of the most recently issued shares. As a result, the published values overstate the intrinsic values of the companies concerned. Previously issued securities carry lower expected cash flows and higher risk, and this effect is not taken into account in valuation practice. Solving this problem is not straightforward, since there is no observable price for these securities. The article we present here[1] proposes a valuation model specially designed for venture capital. It shows that the traditional method leads to a very high overvaluation of the companies concerned. The characteristics of the equity securities issued differ not only from one company to another, but also from one issue to another for the same company.

The general idea of the model is to take into account the contractual specificities of the different classes of shares and value them starting from the last class issued. The value of the previous classes is obtained by deducting from the last class the flows obtained thanks to the favourable clauses. The model is then applied to a large sample of equity issues by 135 US unicorns between 2004 and 2017. On average, the equity of each unicorn in the sample is made up of eight different classes of shares. The results are highly material: the enterprise values published at the time of the issue are all overestimated, by between 5% and 188% (and 48% on average). By applying the model, almost half of them (65 out of 135) lose their unicorn status. The advantages most frequently granted to the last shares issued were seniority (30%), veto over IPOs (24%) and guaranteed returns in the event of an IPO (15%).

The authors' message is clear: the method of valuing a company by multiplying the market price of the last shares issued by the total number of shares is only valid if there is only one class of shares. In the case of venture capital, there are multiple classes and the first class issued, generally held by the founders and certain employees, does not benefit from the advantages granted to subsequent classes. However, the naïve method of multiplying the price by the number of shares as for a single-class company is very often applied and published in the specialist press (notably the Wall Street Journal, Fortune, Forbes and Bloomberg).

The authors also criticise the fact that venture capital funds use this valuation method, which leads to the publication of overestimated mark-to-market performances. Similarly, the value of stock options held by employees is overestimated, and this effect can lead to a significant overvaluation of their total wealth. Although the proposed model requires more work than the usual valuation method, its use would make it possible to publish fairer values for companies financed by venture capital and to estimate the performance of funds more accurately, to the benefit in particular of investors and employees in this industry. At the very least, and failing the use of this complex method, it is important to be aware of the fact that the traditional method leads to systematic and significant overvaluation.


[1] Gornall (W.) et Strebulaev (I.A.), « Squaring venture capital valuations with reality », Journal of Financial Economics, 2020, vol.135(1), pages 120 to 143.

Q&A : What is the Arbitrage Pricing Theory?

In some ways the APT (arbitrage pricing theory) model is an extended version of the CAPM. The CAPM assumes that the return on a security is a function of its market risk and therefore depends on a single factor: market prices. The APT model, as proposed by Stephen Ross, assumes that the risk premium is a function of several variables, not just one, i.e. macroeconomic variables (V1, V2, … , Vn) as well as company “noise”.

So, for security J:

The model does not define which V factors are to be used. Ross’s original article uses the following factors, which are based on quantitative analyses: inflation, manufacturing output, risk premium and yield curve.

Comparing the APT model to the market portfolio, we can see that APT has replaced the notion (hard to measure in practice) of return expected by the market with a series of variables which, unfortunately, must still be determined. This is why APT is a portfolio management tool and not a tool for valuing stocks.


New : Comments posted on Facebook

Regularly on the Vernimmen.com Facebook page[1] we publish comments on financial news that we deem to be of interest, publish a question and its answer or quote of financial interest. Here are some of our recent comments.


HSBC's long and costly exit from the French retail banking market

A small player in the French market with 244 branches (less than 0.7% of the national total) and 0.8 million customers, HSBC has lost $500 million over the last two years. HSBC signed an agreement in 2021 with the investment fund Cerberus to sell its assets to Cerberus for €1, in return for a bailout of around €1.9 billion, giving the banking group a negative value of this amount.

At almost 4 times its losses, HSBC's exit from the French retail market was not particularly cheap, since most loss-making assets are sold for between 1 and 3 times their annual losses.

Rising interest rates (and the collapse of Silicon Valley Bank) have increased the size of the cheque to be paid, which the parties have just agreed.

Cerberus, which knows how to count, renegotiated the agreement and obtained that HSBC keeps for itself approximately one third of the loan portfolio of HSBC France retail banking, probably in capital losses due to the rise in interest rates, which would have had to be carried at an interest rate higher than that of the interest received on this loan portfolio. In addition, HSBC will invest €407m in the holding company that will take over these assets, on which its potential capital gain is capped, while Cerberus will only reinvest an additional €225m. In total, HSBC is losing $2.7 billion on this transaction, or more than 5 times its annual loss, which to our knowledge is a new record for disposals of loss-making assets. And as HSBC's 2023 P/E is 6 times, the deal is marginally value-creating for the UK banking group.

But as HSBC bought the UK subsidiary of Silicon Valley Bank for £1 in one weekend to prevent it from going bankrupt (lost a third of its deposits in one Friday) in the same way as its Californian parent company, and made a pre-tax profit of £1.5bn in the process, HSBC could afford to be generous. We can trust Cerberus to have understood this, since after HSBC's purchase, it was rumored that it would pull out of the French deal in which it was the only buyer, just as HSBC was the only buyer of SVB UK.


Do less stupid things than your neighbours

This was the wise advice of Wilfrid Baumgartner, Governor of the Banque de France in the 1950s, then Minister of Finance and finally CEO of Rhône-Poulenc, France's largest market capitalisation in the 1960s.

Our British neighbours did not follow this advice, and alongside the Brexit, popularised by liars and incompetents, they made another major mistake, squandering one of their greatest advantages, the London Stock Exchange, which is now being shunned by a number of British companies that find higher valuations in the United States (CRH, ARM, Ferguson, etc.). While the market capitalisation of companies listed on the London Stock Exchange was twice that of Paris in 2000 (around €3,000bn compared with €1,600bn), they are now equivalent (at €3,600bn, including secondary listings). While London's market capitalisation was 159% of British GDP in 2000, it is now only 95%.

The reason for this lies in the proportion of UK pension funds' portfolios invested in equities, which has fallen from 50% in 2000 to 4% in 2022, while the proportion invested in fixed income products has risen from 15% to 60% in the same period. As a result, the UK government has been able to finance its budget deficit cheaply. British listed companies, meanwhile, have seen their relative value plummet. The UK's top 20 market capitalisations have risen from a cumulative €1,529bn in 2000 to €1,657bn in 2023, an increase of 8% in 23 years, with an average P/E of 15; compared with 20 for their Paris-listed counterparts, which have risen from €1,031bn in 2000 to €2,148bn in 2023, an increase of 108%.

This trend is all the more incomprehensible given that if there is one investor who can aim for the long term, it is pension funds, which systematically outperform fixed-income products by capitalising over the long term. In conclusion, we should not underestimate the role of stupidity in history. Here is an example that is less well known than Brexit, but just as harmful.


Capex and dividends

With €88bn of investments, the CAC40 groups have beaten their all-time record according to EY's annual study (if we set aside 2012 when EDF, France's biggest investor in 2022 with €18.3bn, was still a member of the stock market index).


This high did not prevent the 2022 dividends of the CAC 40 from also reaching an all-time high in 2022 at €57bn (see our annual study of January 2023).

Anyone who thinks that, at macroeconomic level, dividends constrain or even reduce investment can only be surprised by this finding, which can be explained by 2 facts.

Margins are currently at their highest (13.5% current operating margin), which greatly simplifies matters.

Furthermore, while at company level, an entrepreneur with a stable level of debt is more likely to slash his dividend in order to increase investment than vice versa, this is not true at global level, given the heterogeneity of groups in terms of maturity and capital intensity. Within the CAC40, Air Liquide, ArcelorMittal, Stellantis and STMicroelectronics account for 22% of investments, but only 9% of dividends paid. In fact, at a macroeconomic level, dividend growth enables investment growth, once we understand that it is not the same groups that are the dividend champions and the capex champions. The dividends of the former help to finance part of the investments of the latter, via the capital increases carried out in recent years by Air Liquide, ArcelorMittal and Stellantis, for example.



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