Information on legal and business topics from Canadian business lawyer Shane McLean

CPC Combinations Part 1

Posted by Shane McLean on August 9, 2009

I have previously posted information about the TSX Venture Exchange’s Capital Pool Company Program (see here).  This is the program that allows for a shell company to go public on the TSX Venture Exchange and then look for an operating business to acquire.  Usually, this means finding an operating private company to combine with.

Less known is that the TSX Venture Exchange’s policies also permit CPC shell companies to “combine” with other public companies.  Essentially, this means that the CPC shell invests its cash into another public company instead of finding a private company to acquire or invest in.  There are some ways to  structure this type of transaction to get it done fairly efficiently, but the key hurdle is convincing the board of directors (and then the shareholders) of the CPC shell that it’s a good idea.

Usually, a CPC shell company views itself as having a valuation that is at some premium to both  its IPO value and the amount of cash in the bank.  The logic is that, having gone through the process of obtaining a public listing, the CPC shell has an intrinsic value that is in addition to the value of the funds it has in the bank and a total enterprise value that is greater than the valuation used on its IPO.     This allows the directors of a CPC shell to show some  increase in valuation to their IPO investors on closing of the qualifying transaction and may help justify the decision to enter into a particular qualifying transaction.

From the CPC shell’s perspective, the downside to negotiating a combination with another public company includes:  (a) the fact that other public company doesn’t value your listing because they are already publicly listed, and (b)  the TSX Venture Exchange’s policies prevent the CPC shell from being valued at anything other than cash value on this type of deal.   As a result, directors of the CPC shell may be loathe to recommend to shareholders that they bet on an existing public company because they may not see as much instant (i.e. paper) upside.

However, depending on what market the other public company is listed on,  the other public company can usually offer to issue shares to the CPC shell at  some discount to its market price, thus giving the CPC shareholders some notional return on their investment.  If the other public company appears poised for growth, the CPC shell directors and shareholders just might be able to see the benefit of a public to public deal.  This may be especially true if the CPC shell is getting close to its deadline for finding a qualifying transaction.

Another kind of “CPC Combination” involves combining multiple CPC shell companies into one entity in order to pursue a larger qualifying transaction.  I will talk about this kind of transaction in a later post.


One Response to “CPC Combinations Part 1”

  1. […]    CPC Combinations Part 1 (August 9, […]

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