Santa Monica Blank Check Files for $125 Million IPO

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By MITCH DEACON

Staff Reporter

The stock market may be in retreat amid fears of a recession, but so far it appears not to be slowing interest in Wall Street’s latest financing craze: blank check companies.

Santa Monica-based Consumer Partners Acquisition Corp. was among several companies also known as special purpose acquisition companies, or spacs, that have filed for initial public offerings this month.

The offerings turn traditional IPOs on their heads, asking investors to give their money to a management team with no business, only a plan to acquire an as-yet-unidentified one.

In the case of Consumer Partners, it is attempting to raise $125 million and then focus its acquisition efforts on the consumer products and retail industry, according to a prospectus filed with the Securities and Exchange Commission.

The company is an affiliate of Broadband Capital Management LLC, the underwriter of the IPO. The shell company also will have access to the resources of Piper Jaffray & Co., a middle market investment banking firm, and Aria Partners, a hedge fund, according to the filing.

An official with Consumer Partners declined comment.

Blank checks have emerged as an increasingly attractive alternative for equity investors. The number of blank check IPOs jumped to 66 in 2007 from 13 in 2004, with proceeds increasing to $12 billion from $484 million over the same period, according to investment banking research firm Dealogic.

One big reason behind their popularity: They tend to be more accessible to small investors than private equity funds and hedge funds, which generally require seven or eight figures worth of capital to participate.

“It’s a poor man’s private equity vehicle for people who want to play the mergers and acquisitions game,” said Lloyd Greif, president and chief executive of Greif & Co., a middle market investment bank in Los Angeles.

Spacs also feature certain advantages over hedge funds and venture capital. Any acquisition proposed by management must be approved by shareholders, who usually have options to withdraw from a spac if they decide not to participate in an approved acquisition.


Marketing opportunities

And while venture capital funds focus on early stage companies, spacs seek to purchase established firms with proven business models and experienced management teams. Spacs also offer marketing opportunities for those seeking to sell private companies.

“Investment bankers who are representing companies in the size range (specified by the spac) will have the opportunity to show them a deal,” said Ed Villeneuve, a managing director with Lazard Middle Market, which underwrites spacs.

Among the highest profile blank check deals was last year’s acquisition of trendy Los Angeles apparel manufacturer and retailer American Apparel Inc. Endeavor Acquisition raised $129 million from an IPO in late 2005 and used leverage to cover the balance of the transaction, which closed a month ago.

So far, the deal appears to be playing out well for both the investors in Endeavor and American Apparel, along with its eccentric and flamboyant founder Dov Charney, who has been the object of sexual harassment lawsuits by employees. Through the transaction, Charney gained control of the majority of shares of the company, which has since been renamed American Apparel Inc.

Endeavor’s share price more than doubled over the past year, rising from just under $8 per share to nearly $16 per share when the deal was finalized. At the same time, American Apparel’s work force grew from about 5,000 to 6,700 employees, while the number of retail locations expanded from 143 to 175 and that’s all before it even had access to the IPO money.

Still, in many ways, blank check companies entail greater risks than hedge funds, private equity or venture capital funds.

While private equity funds and VCs back several companies in order to diversify their investments, blank checks will often invest in a smaller number of firms, in most cases in a single enterprise.

“It basically comes down to buying a black box and betting on the management team,” said Dirk Jenter, professor of finance at Stanford University.

And while blank check must return the capital to shareholders if they fail to purchase a company in a specified period of time typically between 18 and 24 months this can provide strong incentives for the management team to find a company to buy, even if it is not necessarily a good prospect.

“The management team will almost surely find a company to acquire,” Jenter said. “At the end of the day, they are investing someone else’s money. If they win, they look good and make a lot of money for themselves. If they lose, it is (mostly) other people’s money that is being lost.”

Indeed, according to the Consumer Products prospectus, the founders are committing $5 million of their money up front for warrants that could ultimately give them an 11 percent discount on the stock price. At the same time, $125 million is being sought from public investors.

“A ‘promote’ for management is normal for such a vehicle. The question is, how much?” Greif said.

Writing Checks

Blank check IPOs have surged over the past four years.

Year Number Total Value

2004 13 $484 million

2005 30 2.11 billion

2006 40 3.38 billion

2007 66 12.0 billion

Source: Dealogic

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