Deezer and I2PO: SPACs the new standard for IPOs?

The april 26, 2022

Deezer and I2PO: SPACs the new standard for IPOs?


Deezer will go public through a merger with SPAC I2PO created last year by François-Henri Pinault (via Artemis), Mathieu Pigasse and Iris Knobloch. Deezer is expected to be listed on the Paris Stock Exchange at the end of July.


A second attempt

Spotify's competitor had indeed attempted an IPO in 2015, but had quickly given up due to unfavorable market conditions. This time it is thanks to the help of SPAC I2PO that the company will go public. The merger agreement was based on a valuation of 1.075 billion dollars.

It is possible to say that Deezer has stayed away from the subscription "boom" with its 9.6 million subscribers while Spotify proudly displays 400 million. However, by going public on Euronext, the company hopes to reach one billion in sales by 2025 and thus re-enter the competition. It should be noted that in the last two years the company has been able to renew itself by posting a turnover of 400 million euros in 2021, an increase of 5.5%.


SPACs: what are they?

SPACs or special purpose acquisition companies are companies that are created and listed on the stock market with one objective, to merge with a target company within a given timeframe. In reality these companies are empty shells, they have no activity.

These companies did not appear only in the 2010s, the ancestor of SPACs was the "blinds pools" that appeared in New York in the 1980s. However, this form had a bad reputation, unlike SPACs, investors in blind pools did not know what the company was going to invest in and they had no right of withdrawal, which caused some disappointments.

SPACs do not need to have a particular form, only a form that allows their securities to be admitted to a regulated market. Most of the time, these companies are created by financial personalities and investors adhere more to a management than to a project.


An atypical operation

The companies are created by "sponsors" who will acquire a large block of shares at a discounted price in order to make the structure work. SPAC will then go public and raise funds to finance a possible merger. At that point, the sponsors will typically have two years to find a target company, usually one that offers great promise for growth. At the end of the two years, if such a company has not been found, the SPAC must be dissolved and the investors must be repaid.


Advantages and disadvantages

Why an explosion of SPACs in 2020? This explosion can be explained by the volatility of the markets during the pandemic. It is necessary to remember that the classic IPO procedure lasts several months, most often six. This procedure involves investment banks, large sums of money to be deployed and a company that is scrutinized by investors and the regulatory authority of the market in question. The problem was that during the pandemic, it was impossible to know or predict whether the markets, six months later, would be ready for an IPO. SPACs were therefore the solution, with an accelerated market entry and a much more lax formalism, the operation not being an IPO but a merger and acquisition.

However, there are many risks. If these companies are called "blanck check companies", it is because they are. The investor does not actually have a precise idea of the target companies that will be considered. It is also wise to remember that the main interest of the founders is to find this company in order to recuperate their gains, so a clear conflict of interest is to be taken into account.

Finally, the lack of formalism can also be criticized. The solidity of the target companies is very little examined, contrary to a classic IPO. In some cases, the excitement of a merger with a SPAC can quickly fade away and result in very low returns. One example is the tech company Nikola, which manufactures hydrogen-powered trucks and wants to be Tesla's competitor. In 2020 the company merged with a SPAC and the stock was valued at $80. However, founder Trevor Milton was accused of fraud because he had inflated the company's financial health in order to boost the stock price. The stock quickly plummeted to around $8. If this disturbing result is linked to a fine for fraud, other companies have experienced the same fate, including Lordstown Motors which after merging with a SPAC saw its share price plummet from $27 to $2.33 today.

In conclusion, it will be interesting to follow the evolution of Deezer over the next few months to determine if the operation has been a success.

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Article by : Darina Attanasio

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