Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Nearly three months after filing for an IPO, Playa Hotels & Resorts BV decided to take a different route to the public markets. 

The all-inclusive resorts owner and operator agreed on Tuesday to merge with Pace Holdings Corp., a "blank-check" or special purpose acquisition company backed by TPG. Companies like Pace, known as SPACs, are formed with the purpose of striking a deal within a certain time frame -- in this case 24 months -- after raising funds through initial public offerings of their own. 

Rising Tide?
Roughly $3.2 billion has been raised by U.S. special purpose acquisition companies in the year to date, slightly below the $3.7 billion raised last year. That capital is now being used for its purpose: dealmaking.
Source: Bloomberg

The deal is noteworthy because it gives Playa access to $500 million (which will be used for acquisitions and to drive its growth) while simultaneously allowing the company to trade as a public entity. That's a scenario rarely made possible in a traditional investment by a private equity firm because in such instances, companies generally remain private. (Firms tend to prefer making operational changes to companies away from the glare of public markets.)

It also means that TPG didn't have to miss out on a potentially lucrative deal, which may be something for the firm and its rivals to consider going forward. Unlike transactions struck via standard buyout funds, where private equity firms earn management and performance fees, these deals generate profit through the firms' ownership stakes in the listed companies (in this case, TPG's position will be amplified if the stock price meets certain hurdles).  

Blank-check companies are increasingly gaining favor as firms search for ways to differentiate themselves, especially in conversations with would-be sellers, at a time of heightened competition. In October, Avista Capital Partners raised $310 million for a vehicle of its own, while another SPAC that I wrote about earlier this year, backed by private equity firm Riverstone Holdings LLC, closed on a deal. And last month, Twinkie maker Hostess Brands LLC finalized its takeover by Gores Holdings Inc., an affiliate of private equity firm Gores Group LLC. 

The deal announced Tuesday appears to be attractive at a multiple of 9.7 times Playa's adjusted 2017 Ebitda:

Bargain Buy
TPG-backed affiliate Pace is merging with Playa in a deal that values the company at a discount to its peers across related industries
Source: Company presentation

Plus, the company should benefit from TPG's experience as an investor in travel-related businesses including Norwegian Cruise Line Holdings Ltd., Sabre Corp. and Airbnb Inc.

Added Benefit
Each unit change in the peso/dollar exchange rate represents a ~$6 million reduction in Playa Hotels & Resorts' operating expenses
Source: Bloomberg, company presentation
*80% of Playa’s costs are in local currencies and ~40% are in Mexican pesos

The scope for blank-check situations may be limited, in part because some potential targets may prefer to go public via the traditional route or be acquired by strategic buyers or private equity firms. Plus, a handful of SPACs that have filed to go public such as Dundon Capital Acquisition Corp. aren't yet trading, indicating that investors are discerning.

Still, if the current group of deals prove successful, one should expect private equity firms to lean on their track records and reach for the the repeat button.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. TPG initially had a 20 percent stake in Pace but has exchanged some of those shares for warrants in the combined company. 

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net