SPACS (Special Purpose Acquisition Companies) have been a vehicle of choice over the past few years with more than $12 billion underwritten in 2007. However, a better looking cousin is new on the scene that has the potential to steal SPAC'S glory away. Take a look at the family resemblance, and advantages, of MUNI-ACS.
MUNI-ACS raise capital through the issuance of bonds, however offer a return scenario resembling nothing like a traditional bond. Similar to their SPAC cousins, the bond pool is not yet backed by any revenues. Rather, they create a pool of cash used for acquisitions of publicly traded power and utility companies by tax-free local government utilities. Once the bonds are sold to investors, the entity performs as an acquisition vehicle with the exempt municipal utility as the managing members.
Armed with cash, the exempt utility then has cash-in-hand to either make a friendly, bear-hug, or down-right hostile takeover of some of those publicly traded utilities that have recently underperformed the market and are selling near or below their equity values.
MUNI-ACS may become the up-and-coming vehicle of choice for exempt, tax-free public utilities desiring to join the big leagues in regards to size, infrastructure and capital. Tired of being trodden by the big publicly traded utility companies, these tax-exempt public utilities are now ready to come into the limelight by taking their rich competitors under public, tax-free municipal entity ownership. MUNI-ACS are basically the tool that allows "David" to take on "Goliath".
Why would a tax-exempt public utility want to buy-out the big guys? Since exempt utilities do not pay Federal or State taxes, the benefit to restructuring a publicly traded company in this way doubles the bottom line. These are funds that can be used by tax-exempt public utilities to fund their projects at home and benefit local populations to a greater degree than they do currently. More money for local projects equates to more local jobs, economic development, local taxes, and yes, an increased demand for utilities.
So what's the benefit for investors?
Once an acquisition is completed, the tax exempt utility spins off assets to the MUNI-AC listed company, that then changes to an MLP (Master Limited Partnership), in exchange for the bonds that investors originally purchased. There may even be a few bonds left over as an added bonus to investors.
MUNI-ACS offer tangible value to the investor in that the transaction is carried out by a tax-exempt utility, meaning that there are not any taxes related to the purchase of the target company or the subsequent sale of the target's infrastructure assets. MUNI-ACS, therefore, are able to purchase for less and sell assets for less money than other types of vehicles. The MUNI-ACS allow for the average investor to benefit through this lower price of assets and then continue the benefits of these tax savings through an MLP that provides the bulk of yearly income as payouts to investors.
Like their brethren SPACS, the MUNI-AC bond sale funds are held in trust with a 24 month time-line for the managers to complete an acquisition. Otherwise, the funds in trust are returned to investors, minus a small percentage for the listing and management fees.
Investors in MUNI-ACS have another advantage: Time. Exempt utilities are not expected to issue a MUNI-AC without a target, and backup targets, in mind. Although there is a 24-month time-frame allowed for an acquisition to occur, it is likely that most MUNI-ACS will announce a target soon after issuance. Therefore, it is unlikely the extended, excruciating waiting game for investors in SPACS would apply to investors in MUNI-ACS.
MUNI-ACS are structures allowing investors fill a war chest for a TBA (to-be-announced) takeover with a possible short-list of candidates already in mind. In contrast, SPACS look for friendly acquisitions, many times in the form of a private company, where a suitable match cannot sometimes be found.
Tax exempt utilities commonly express their disdain of taking the back seat while the publicly traded utilities eat away at their territories and snag projects due to their large capital bases. Many publicly traded utilities actually became so large because they bought up many of the smaller exempt utilities. Now with MUNI-ACS, exempt utilities will have access to substantial war chests to turn the tide back in their favor while the market cap of many utilities has plummeted and left them vulnerable to being picked up on-the-cheap.
MUNI-ACS may not be palatable for all types of investors. Those who prefer a "smiley, happy people holding hands" kind of takeover may not find MUNI-ACS a proper fit for their portfolio. However, for those investors having an appetite for SPAC-type structure and profits, the new MUNI-ACS may provide significantly lower cost of assets, tax advantages, an ultimate MLP with profit distributions and all without the associated SPAC waiting game. Generally, the wait time is long for utility acquisitions. However, an additional attraction to the MUNI-ACS is that tax-exempt utilities save additional time as the are also exempt from many of the SEC and other regulatory bodies that must approve acquisitions by non-tax-exempt entities.
Potential suitors?
The opportunity arises for investments into MUNI-ACS to be made by other publicly traded utilities. Provided the company buys into a controlling stake of a MUNI-AC offering, it is a way in which they can control an MLP and its assets without having to be a party to a takeover of a competing company. These publicly traded utilities may decide to sit back and gain control of a competitor's assets while remaining independent of the process and free from the glare of public scrutiny as is common with most takeovers. This potential for participation in offerings by publicly traded utilities may provide an extra level of support for MUNI-AC issues and enhance returns for private investors above the common SPAC.
While it is highly doubtful that MUNI-ACS will overtake the dollar volume of SPACS, the advantages would seem to be beneficial to a wide array of potential investors so as to ensure that MUNI-ACS will be part of our financial lexicon well into the foreseeable future.
