By: Brian Brodrick, Phillips Nizer Partner
Ermenegildo Zegna N.V., a world-renowned Italian luxury fashion group, has completed its previously announced “going public” business combination with Investindustrial Acquisition Corp. (NYSE:IIAC) (“IIAC”), a special purpose acquisition corporation (SPAC) sponsored by investment subsidiaries of Investindustrial VII L.P. The shares of the newly combined company started trading on the New York Stock Exchange on Monday, December 20, 2021 under the ticker symbol “ZGN.”
Zegna was founded in Trivero, Italy in 1910 by Ermenegildo Zegna. The company was in its third generation of family ownership and operation at the time of the initial public offering (IPO). It is internationally recognized for the distinctive heritage of craftsmanship and design associated with its Zegna and Thom Browne brands and the noble fabrics and fibers of its in-house luxury textile and knitwear business. Zegna designs, manufactures, markets and distributes luxury menswear, footwear, leather goods and other accessories under the Zegna and the Thom Browne brands, as well as luxury womenswear and childrenswear under the Thom Browne brand.
The transaction delivered approximately $761 million in gross proceeds (before transaction expenses and the repurchase of shares from the controlling shareholders), consisting of $169 million cash from IIAC’s trust account (after redemptions), a fully committed $250 million private offering (which, in light of strong investor demand, was upsized by $50 million versus the original target amount), $125 million from the additional backstop private offering previously announced, and approximately $217 million in a forward purchase agreement with Strategic Holding Group S.à r.l., an affiliate of IIAC’s sponsor (“SHG”).
According to a statement released by the company, based on the transaction value, the merged entity is expected to have an initial enterprise value of $3.1 billion, an initial market capitalization of $2.4 billion and will be well capitalized. The Zegna family will continue its long-term stewardship of the company through an ownership stake of nearly 66%.
Although all indications are that the IPO was carried out in a manner worthy of the Zegna brand, the vehicle chosen for the process, the SPAC, has recently drawn regulatory attention.
A SPAC is effectively an inactive company that offers securities for cash and places substantially all the offering proceeds into a trust or escrow account for future use in the acquisition of one or more private operating companies. Following its IPO, the SPAC will identify acquisition candidates and attempt to complete one or more business combination transactions; the company will then continue the operations of the acquired business as a public company.
SPACs first appeared in the 1980s but have gained accelerating popularity in recent years, especially since 2020. SPAC sponsors generally raise money in IPOs for future acquisitions of other private companies. Because finding acquisition targets can take time (typically two years), the cash raised (typically $10 per share) is held in a trust while the sponsors search for a target. After the SPAC completes a merger with the target company, the privately held target company becomes a publicly listed operating company. This last step of creating the listed successor company is referred to as a “de-SPAC” transaction.
A SPAC is required to keep 90% of its IPO gross proceeds in an escrow account through the date of acquisition. The SPAC should complete acquisitions reaching an aggregate fair market value of at least 80% of the value of the escrow account within 36 months. If the acquisitions cannot be completed within that time, the SPAC must file for an extension or return funds to investors. At the time of de-SPAC transaction, the combined company also must meet stock exchange listing requirements for an operating company.
According to statements released by the staff of the Securities and Exchange Commission (SEC), over the past six months, the United States securities markets have seen an unprecedented surge in the use and popularity of SPACs. The SEC has noted a number of concerns about the increased use of SPACs in IPOs, including risks of excessive fees, conflicts of interest, and sponsor compensation. It has also identified risks of reliance on celebrity sponsorship and baseless hype, and the sheer amount of capital pouring into the SPACs.
The staff at the SEC has announced that the agency is continuing to look carefully at filings and disclosures by SPACs and their private targets; the staff has announced proposed guidelines for increasing such disclosure.
For Zegna, so far so good. For SPACs in the broader marketplace—this is one of those situations in which time will tell.