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Europe

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Italy

Investing in the backbone of Italy’s economy – thesmall and medium-sized enterprises (SMEs) thatspring forth from Italy’s ingenuity and entreneur-

ship – has traditionally been challenging for the aver-age investor. Private equity funds are closed to thegeneral public and require substantial minimum in-vestments; and only 328 of Italy’s six million companysare actually publicly traded. Special Purpose Acquisi-tion Companies, or SPACS, allow the average retail in-vestor the opportunity to invest alongside manage-ment teams in their pursuit of acquiring growing SMEs.SPACS allow investors around the world to participatein Italy’s economic recovery.

On February 10, 2012 Prime Minister Mario Mon-ti visited the New York Stock Exchange in an effort toconvince investors that Italy had turned a corner, bothpolitically and economically. He received a standingovation from individual and institutional investors,the Italian-American community, the business com-munity of Italy in the United States, and other ob-servers. In response to Monti’s visit to NewYork, whichhas been followed by concrete labor and fiscal reformsat home, there is anecdotal evidence that investors, in-cluding Americans, are returning to Italy. Whether ornot the reforms are long-lasting and the anecdotal ev-idence proves to be true, investing in Italy, which maybe at the end of its severe economic crisis, deserves se-rious study.

According to theWorld Bank’sWorld DevelopmentIndicators database of 2010, the last year for whichdata is available, Italy is the eighth largest economy in

the world, with a GDP of $2.05 trillion. Prior to theeconomic crisis, in 2006, the GDP was $2.1 trillion andforeign direct investment was $30 billion, an increaseof 50% relative to 2005. In 2010, however, foreign directinvestment in Italy had fallen to only $9 billion, and $23billion actually flowed out of Italy.

Nevertheless, Italy is a highly enterprising countrywith nearly six million registered companies, or onecompany for every ten people, the highest ratio in Eu-rope. Italy also has the highest patent productivity percapita in all of Europe. In sectors such as fashion andleisure goods, household goods and furnishings, foodand drink, and engineering, Italian creativity is often atrendsetter in style, design and the use of new featuresand materials, representing a significant level of inno-vation.

According to Bank for International SettlementBasel II criteria, 3,600 companies in Italy are classifiedas large, with an average annual sales volume of $250million, and 33,000 are classified as medium. Of these,large and small companies, only 328 are publicly trad-ed; the remaining are private and most are familyowned. The weight of SMEs in the Italian economy isvery high, with 57% of Italians employed in manufac-turing in firms with less than 50 employees. This per-centage grows to 77.5% in firms with less than 250 em-ployees.

Recently, two distinct phenomena are forcing Ital-ian SMEs to alter ownership structures and to consol-idate, making this an ideal time to pursue investmentopportunities in Italy:

SPACs,a no brainer

Everyone agrees.What Europe needs right now is growth.But how to encourage economic growth in areas that are stillcoming to terms with a deep recession? In countries like Italy,where production tends to come from small to medium-sized

companies, the use of Special Purpose Acquisition Companies issmart solution to the problem of raising capital.

Palazzo Mezzanotte,home of the ItalianStock Exchange inMilan.

by richard greco and achille teofilatto

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Italy

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The first is the changing dynamic of family-runbusinesses which will need to change their insularmanagement structures to thrive in an increasinglycompetitive environment. Entrepreneurs who partic-ipated in Italy’s post-World War II economic miraclehave grown elderly and now face an epic decision: ei-ther to leave their businesses for their heirs to ownand manage or to partner with outside owners andprofessional management. In many cases, the heirsare either unwilling or incapable of managing the en-terprise in the way the entrepreneur would hope, mak-ing generational transition problematic.

The second is the increasing importance of glob-alization and the heightened need for Italian compa-nies to maintain their competitive positions througheconomies of scale and innovation. Entrepreneurs inItaly are now awakening to the opportunities and thechallenges of post-ColdWar globalization. Italy is well-positioned geographically to reach 600 million con-sumers in Europe, North Africa and the Middle East,with which Italy has had historical economic and po-litical ties for centuries. While world consumers seekthe superior quality engineering, craftsmanship, andstyle of Italian products and are willing to pay a pre-mium for it, many Italian entrepreneurs lack the know-how, capital, and network to expand internationally.And even though Italy enjoys relatively low overallbusiness costs, intense global cost competition is forc-ing Italian companies to consolidate or move portionsof production to low-cost environments.

As a result of these pressures to find additionalcapital and know-how, exacerbated by the bankingcrisis which has cut off traditional sources of financing,and in an effort to increase brand awareness and to

lower costs, Italian family-runcompanies are increasinglyturning to alternative sourcesof capital like private debt andprivate equity, or the publicmarkets, and on an interna-tional scale. In addition, the en-trepreneurs of companies infragmented industries, such asshoes, furniture, biomedical, ce-ramics, and textiles, often op-erating in close geographicproximity within Italy, are in-creasingly consolidating, orrolling-up, their activities.Thesetrends were evident in the pre-crisis period, which by 2008 sawan increasing number of privateequity transactions and initialpublic offerings.

With the introduction of thenew“AIM Italia” (Alternative In-

vestment Market) and, more recently, of the “MIV”(the electronic Market for InvestmentVehicles) by Bor-sa Italiana SpA, it is now possible to list a shell companyin the form of Special Purpose Acquisition Company,or SPAC, also in Italy.

SPACs are newly-formed companies offering initialpublic offerings on stock exchanges to raise cash for thepurpose of acquiring operating companies. In otherwords, SPACs are shell companies that raise cash frominvestors who trust the SPAC’s management to acquirea privately held company at favorable terms. SPACs al-low average investors, including international in-vestors, the opportunity to participate in unique “pri-vate equity” deals with greater transparency and cer-tainty than the typical private equity fund offers byvirtue of being publicly traded vehicles with strict re-porting requirements. In the US in 2011 there were 15IPOs by SPACs, raising a total of $1.07 billion; 19 SPACswere filed, and 12 of those have gone public.

In Italy, in 2010 and 2011, two SPACs were listed, re-flecting the growing interest for an instrument whichis already well known and respected internationally –Italy1 Investment Company and Made in Italy 1. Italy1,a SPAC promoted by Vito Gamberale, Roland Berger,Carlo Mammola and Florian Lahnstein, is a SPAC in-corporated under Luxembourg law, listed in January2011 on the MIV segment of Borsa Italiana. It raised€150 million, a prerequisite for a medium-size deal,and sought to acquire within two years an Italian com-pany with an equity value between €300 million and€1 billion. The acquired company would be mergedinto Italy1, immediately becoming a public company.Italy1 Investment has recently announced that it hassigned an agreement with IVS Italia, one of the leading

foodservice operators in Italy and the largest group inthe Italian vendingmachine sectorwith revenues of ap-proximately €280 million.This merger will allow IVS togo public without passing through the usual place-ment process because the placement process alreadyoccurred when Italy 1 was raised. Made in Italy 1 is thesecond SPAC listed in Italy (since June 2011 on theAIM segment of Borsa Italiana), the first incorporatedunder the Italian law, promoted by Luca Giacometti,Matteo Carlotti and Simone Strocchi. It raised €50million among Italian and foreign investors and itstarget is Italian SMEs with values between €100 millionand €300 million, with high growth potential, activeboth nationally and internationally. Made in Italy 1 iscurrently at an early stage of negotiation with Peuterey,the Italian brand that produces down jackets.

The incorporation of a SPAC and its listing are of-ten promoted by a small group of sophisticated in-vestors or experts in specific industries (so-called“founding stockholders”), or managers specialized inM&A, usually from the private equity or hedge fund

world, and who have a track record of success and aproprietary edge.

Investing in any company entails risk. Investing ina SPAC entails extra risk, and SPAC managers make noeffort to hide this fact from their investors. Primaryamong these risks is the lack of operating history uponwhich investors can base a prediction of future per-formance. Instead of looking to past performance of thefund, SPAC investors must rely on the competence,reputation and past performance of the managementteam as a forecast of how the SPAC might perform(“bet on the jockey, not the horse”). It is precisely forthis reason that SPACs are founded andmanagedby ex-perienced and skillful individuals who are often well-known and well-connected figures in the businesscommunity.

In order to incentivize management’s search foran advantageous acquisition, SPACs have an uncon-ventional compensation scheme: managers typicallypurchase 20% of the SPAC’s common equity (known assponsors’ promote) as “founders’ shares” for a nominal

Management autonomy post-combination

PARTNERING WITH: PRIVATEEQUITY

SPAC STRATEGICPARTNER

TRADITIONALIPO

Instruments to incentivize management

Cost of the operation

Uncertainty about the offering and valuation

Access to capital for growth

Flexibility of owners to retain ownershippercentage of choice or to exit

Visibility on global �nancial markets

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EVALUATION OF SPAC PARTNERSHIP ADVANTAGES

Source:Filangieri Capital Partners

Raise money from institutional andretail investors

Sponsors buy “at risk” warrants(2-3% of IPO proceeds)

Most of IPO proceeds placed inTrust (98-100%)

Offering expenses (underwriters,legal, audit etc.) paid out of IPOproceeds

Sponsors’ loan repaid

Units, common stock and warrantstrade in market

Search for target - value must beat least 80% of SPAC’s funds heldin trust

Sponsors reimbursd by SPAC fordeal-hunting expenses out ofinterest carned by Trust

Announce de�nitive agreementand begin communicaion withinvestors

File proxy with SEC (2-4 monthreview)

Mail proxy to shareholders inadvance of vote

File Form S-1 with SEC, like anoperating company

2-3 mouth SEC review process

SPAC becomes normal operatingcompany

Sponsors’ “Promote” crystallized(subject to lock-up)

Sponsors’ warrants crystallized(subject to lock-up)

24 MONTHS

FORMATION OF SPAC POST-CLOSING

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CHAPTER 3

THE VOTE

FILE REGISTRATION

STATEMENT

Reposition stock with ongoingfundamental investors

Vote must meet pre-speci�edshareholder approval threshold(60-80%)

Dissenting shareholders have rightto claim their pro rata share ofTrust

“Yes” vote: acquisition closes

“No” vote: Trust (including interestearned) liquidated and returned toinvestors

Sponsors pay nominal amount inexchange for Founders’ stock(“Promote”)

Sponsors lend $100-200k to fundexpenses

Choose counsel and underwriters

SPAC LIFE CYCLE

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sonalized portfolio of securitieswith an exposure private equitystyle, with the advantage of aliquidity typical of a public mar-ket and the right to vote on theproposed acquisition. Ofcourse, SPAC investors also facesignificant risks, particularly be-cause a SPAC is not an operat-ing company, has no revenuesand has not even identified oneor more target companies at thetime of the IPO. As such, invest-ing in a SPAC is like“a blind leapof faith.” If no business combi-nation is completed within thedeadline, an investor faces a po-tential loss of part of its initialinvestment, with the size of theloss depending on the percent-age of IPO proceeds depositedinto the escrow account.

SPACs can be underwrittenby both institutional investorsand retail investors. Since SPACstypically must announce a dealwithin 18 months of their IPOsor return to investors the mon-ey raised (with interest), hedgefunds often see them as safeplaces to park cash while po-tentially profiting from the price

fluctuations between a deal’s announcement and itsclose – a sort of arbitrage play. Unlike investments inprivate equity funds, SPACs provide immediate liq-uidity and allow investors to participate in a private eq-uity style investment in listed securities.

SPACs offer significant advantages over private eq-uity, which often is out of reach of the average investor,due to large investment minimum thresholds. For theowners of companies, the advantages are clear. A SPACcan offer more money to owners than a private equityfirmbecause public companies enjoymultiples that aregenerally higher than privately held companies. Thefollowing characteristics of publicly traded companiesare reasons offered for this premium: greater marketliquidity, motivation for profit maximization versustax minimization, more flexible and disciplined capi-tal structures, greater product and geography diversi-fication.

Through a SPAC, owners can monetize all or part oftheir company but still keep control if they wish be-cause a SPAC provides a private company with the op-tion of accepting publicly traded stock as currencyversus only cash in a private equity transaction. Evenwhere private equity offers equity ownership, the eq-

investment. This management stake with a highamount of potential value puts a SPAC’s management’s“skin in the game” and aims to ensure that the man-agement team’s interests are aligned with those of in-vestors.While the requisite investment by members ofthe management team is not very sizeable, it oftenrepresents their only chance at profiting from the ven-ture. At the end, a SPAC’s management only profits if itsinvestors profit.

The yield of the sponsor is determined by two com-ponents: on the one hand, the market trend of theshares underwritten at par value upon a SPAC’s incor-poration, and, on the other hand, the spread betweenthe shares’ market price (net of the warrants’ purchaseprice) and the cash outlay for the strike price when ex-ercising the warrant. It should be pointed out that thesponsor’s return always stands at very high levels incase an acquisition is completed, even if the shares aresubsequently traded at a value lower than the IPOprice.This is because the sponsor has underwritten theshares at face value and not at the units’ issue price.

For investors, SPACs are an attractive investmentwith a limited downside from the IPO until the closingof the acquisition.Through SPACs, they canbuild a per-

uity remains illiquid. Through a SPAC, a company ac-quires a diversified ownership base and the beneficialdisciplines of the market including SEC regulations. Acompany is not beholden to a single private equity in-vestor and can be run in a way that is more transpar-ent than private equity. A SPAC offers the opportunityto be immediately publicly traded on a stock exchange,gaining immediate international exposure, wider ac-cess to equity and credit financing, and credibility.

In addition, there are no ongoing private equityfees for consulting, board participation, and other feesthat have become common among private equityfunds. All interests are fully aligned through equity. Itis interesting to note that recently the SPAChas becomean attractive means of exit for private equity firmsseeking to divest.

The SPAC also offers advantages over a traditionallocal country IPO. An entrepreneur can liquidate hisentire holding and still retain control through a part-cash part-equity deal. In a traditional IPO, an ownerthat seeks to retain control generally will float only30%-40% of the equity, but the controlling interest re-mains illiquid. Smaller companies often have difficul-ty reaching underwriters because underwriters preferbigger, more profitable deals. Owners avoid the 5%-7%IPO underwriting fee that it would incur if the compa-ny went public on its own. This is because the under-

writing fee has already been borne by the SPAC in-vestors in its IPO, and not the target. The target’s man-agement team also avoids the loss of one year’s time toprepare the company for IPO.This is crucial for small-er companies with limited resources.

There are risks with a traditional IPO, especially inan immature market, that a SPAC can mitigate such asunexpected delays that may result in diminished mar-ket confidence in management, damage to brandnames, and overall doubt about the direction of thecompany. Some argue that money is left on the tablein a traditional IPO as underwriters typically under-price in order to sell the deal. A SPAC can give some ofthis money back to owners and still underpay. A SPACand subsequent American listing offers a target com-pany instant international exposure and access to USmarkets and capital, especially low-cost debt capital inthe US, where the cost of debt is still relatively low.Thisallows a company to pay down high cost debt withequity, optimize capital structure, and re-lever withlower cost debt. A US listing can increase brand aware-ness, offer significant marketing and sales opportuni-ties, and thus increase revenue. This is particularlyuseful for an international company that principally ex-ports its products and has been hurt by a weak dollar.

For companies that must “import” managementtalent, due to a lack of local country talent and due to

Italian Prime MinisterMario Monti, right,visits the @oor of theNew York StockExchange onFebruary 10, 2012.

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WORKING CAPITAL FOR SPAC (YEAR 1)***

INTEREST EARNED BY TRUST (YEAR 2)***

WORKING CAPITAL FOR SPAC (YEAR 2)***

INTEREST EARNED BY TRUST (YEAR1)**

SPONSORS’ AT RISKINVESTMENT

OFFERING EXPENSES*

IPO PROCEEDS

90 %

AT IPO

% IN TRUST AT IPO

% IN TRUST (after 24 months)

AFTER IPO (24 months)

92 94 96 98 100

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*Including initial working capitalunderwriters’ upfront fees, legal,accounting, printing, listingregistration and miscellaneous fees

**Trust invests in risk-free governmentsecurities

*** Stated in dollar terms at IPO

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The SPAC’s proceeds are held inTrust and the sponsors arereimbursed for working capital outof the interest earned by the Trust

Source:Filangieri Capital Partners

ILLUSTRATIVE SPAC FLOW OF FUNDS (%IN TRUST)

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able and appropriate information about the securities,since they can rely only on intangible assets that,even in business contexts identified as “normal,” areusually not easy to quantify.

Italy is an ideal country in which to pursue a SPACgiven the predominance of SMEs. The ideal SPAC tar-get would have some of the following characteristics:SMEs in a consolidating industry facing acquisition bya competitor and inneedof cash inorder to acquire oth-er companies itself, taking advantage of economies ofscale and a consolidation trend; owners who do notnecessarily want to cash-out but whose companiesneed cash to take advantage of growthopportunities in-cluding acquisitions, particularly on an internationalscale (e.g., industry consolidation, internationalmarketexpansion, product diversification from a successfulplatform); owners who want to sell relatively quickly atthe highest price but do not want to wait for an IPO orthe hassle of an IPO; owners who might want to liqui-date their holding but maintain control; companiesthat face generational changes and need outside man-agement, access to low-cost capital, and internationalnetworks; companies facing low-cost production pres-sures and want to invest in low-cost production facili-ties abroad but need the capital and international net-work to do so; owners who want greater celebrity sta-tus by listing (famous designers, for example); compa-

generational changes, a company’s listing in the USmight make it more likely for an A-rated American orother international management team to join the com-pany. While multiples may be higher in local marketslikeChina, India, andPoland, the Americanmarkets aremore mature and stable. Italian multiples are general-ly lower than American multiples.

A company can also be acquired by a strategic part-ner, but in that case an actual merger and intensive in-tegration process needs to take place, along with as-sociated risks. In addition, in a sale to a strategic part-ner owners who are also managers are likely to leave.Through a SPAC, the management team of the oper-ating company generally remains in place.

The SPAC also has some disadvantages over tra-ditional private equity and local country IPOs, how-ever. The biggest disadvantage of a SPAC over privateequity is that deal closure in a SPAC is often lengthi-er, due to a shareholder approval process that re-quires 70%-80% of shareholders to agree to the ac-quisition. SPAC deals include warrants which if exer-cised may result in share dilution for investors andowners. Among other things, although the risk of ex-propriation is present in any IPO, it is even more pro-nounced in the SPACs because of the high informa-tion asymmetries between the insiders and the out-siders. The investors are, in fact, unable to have avail-

nies whose owners and managers recognize the needfor market discipline in order to focus on commercialdecisions rather than personal decisions, otherwisethey face going out of business; companieswhose own-ers seek to implement generational changewhilemain-taining liquid control; SMEs with little access to un-derwriters or exposure to private equity funds; andcompanies belonging to funds that sooner than laterwould be happy to exit through a listing.

It’s clear that SPACs can be an important tool in acompany’s life cycle, particularly in special situationsthat require skills and financial resources difficult tofind through more traditional ways. The SPAC, as alisted investment vehicle, is a good way to promote astart-up even in extreme early stage or as a means of aManagement Buy Out (MBO), for example. To neglectthis type of tool that is becoming increasingly popularin Anglo-Saxon countries would be contrary to the ob-jective of developing the financial and economic sys-tem as a whole. It could be a good way to promote pro-ductive and not speculative investments, especially tointernational investors. And this is precisely what Italyneeds and seeks. In order to introduce permanently theSPACs also in the Italian context, it is important notonly to promote and advertise them, but also to foster

a more intensive process aimed at protecting minori-ty shareholders (aligning the interests of insiders andoutsiders) and increasing the financial education of theaverage Italian investor.

The SPAC phenomenon, as a potential alternativeto the traditional model of private equity fund, is avery interesting investment model, but at the sametime it is also unique, because its success depends onthe promoters’ reputation and on their ability to raisecapital from experienced investors, which probablyhave already tested the managers’ ability to create val-ue.Their ability to raise large amounts of capital need-ed for growth, may represent an important factor fa-cilitating access on the stock exchange and to the av-erage investor by SMEs, thus becoming a significativegrowth factor for the Italian economy.

richard greco, jr. is the president of Filangieri Capital Partners,amerchant bankbased inNewYork.Hehas taught economics and,nance at theBocconi Scuola diDirezioneAziendale inMilanandat LUISS University in Rome.

Achille Teofilatto is anAssociate at Filangieri Capital Partnersand former Intern Analyst at Lazard & Co.

HOW SPACS ARE VIEWED

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A chocolate sculptureof the Colosseum,created by Italianchocolatier Mirco DellaVecchia, is displayed aspart of his “ChocolateWorld Heritage”exhibition in HongKong.

BY SPONSORS

• Dedicated pool of capital to pursue an acqui-sition

• One-shot vehicle for a control transaction• Rich rewards for success

BY TARGET COMPANIES

• Large pools of capital that can be used forde-levering and/or growth

• Alternative way to get public• Helpful support for those that are apprehen-

sive about going public on their own• Potential synergies with SPAC’s manage-

ment team

BY INVESTORS

• Listed, liquid forms of exposure to propri-etary acquisition @ow

• Multiple ways to invest: common stock, war-rants or both

• “Free look” at deal @ow from high-qualitysponsors

• Downside protection - get your money backif you don’t like the deal