Cross-Border Mergers - SPAC or Spin Off?

Neptune Orient Lines is in talks with TUI AG to merge to form the world’s third largest container shipping enterprise. Neptune is Singapore based and TUI is a German company.

In order to limit its exposure to TUI’s leisure lines of businesses, Neptune’s parent company Temasek Holdings Pte. Ltd, which is a Singapore state-owned investment company, would prefer to limit its investment to Hapag-Lloyd. This would call for Hapag-Lloyd to be spun off as a separate entity. TUI’s management has so far restricted such demands from TUI shareholders but this might be right impetus for them to spin off Hapag-Lloyd.

What might be another way to achieve what a spin off would provide to the acquiring company? A Special Purpose Acquisition Company (SPAC) that limits the parent company’s exposure to litigation and other risk might be one way to go but that is the perspective from the acquirer. SPACs, also known as blank check companies, allow for an easier way to raise funds for an acquisition, based on the reputation of its founders. It is also considered a back door way to go public, especially in volatile markets. They can be structured so that founders get the majority of the stake in the company. Another way is to spin off the merged entity and have focused and autonomous management. A spin off would be more ideal if the time table is longer than what a SPAC can afford, which is typically 24 months. A spin off would be successful if the spun off entity is diverse enough from the parent companies and is able to get higher valuations as a stand alone entity. How the value in unlocked of often key to the success of a spin off. A spin off is a suitable option when it gives the incumbent management the opportunity to focus on the core business.

Given that this is a cross border merger, would there be other cultural issues that would have to be dealt with in order to spin off or create a SPAC. Since 70% of the mergers fail because of cultural issues, I sure would like to see this as a Case Study of what to do rather than what not to do, which we have seen quite a few.