TMX POV - Capital Pool CompanyⓇ Program: A Strategic Approach to Roll-up Acquisitions

In today's rapidly evolving business landscape, growth and expansion are paramount to many firms. Acquisitions have emerged as common strategies to achieve this, but traditional methods may frequently require significant capital and can result in increased debt. This is particularly crucial in an environment of rising interest rates, where the cost of capital has increased compared to just a few years ago. Against this backdrop, the Canadian invention of the Capital Pool CompanyⓇ Program (CPC™) has gained prominence, especially in the context of roll-up acquisitions.

A Capital Pool Company (CPC) is a unique listing vehicle that enables earlier-stage private companies to complete a go-public transaction. First, seasoned directors and officers form a CPC with no assets other than a minimal amount of capital, especially relative to forming a Special Purpose Acquisition Company, and no commercial operations. Then, the CPC raises additional capital from the public through an initial public offering (IPO) and is listed on TSX Venture Exchange (TSXV).

Once the CPC is listed on TSXV, it identifies investment opportunities in growing businesses, conducts due diligence, engages with private companies and may raise concurrent financing for the purpose of completing its initial acquisition (Qualifying Transaction or QT). Once the CPC has completed its QT and acquired the private company, the shares of the combined entity resume trading on TSXV under the entity's new name.

The CPC approach to going public differs from the traditional IPO model. It offers a process for going public that may provide greater flexibility, more certainty, and may allow the company going public to have more control over the process. Furthermore, it establishes a connection between a growth-oriented company and seasoned corporate directors who may not only serve as long-term investors, but also as directors for the company. The CPC Program is the most popular way companies go public on TSXV, with approximately 2,800 CPCs formed since its inception. These CPCs have facilitated the public listing of over 2,400 companies, resulting in the raising of more than CDN$81 billion (as of December 31, 2023).

Let's shift our focus back to the roll-up strategy, which involves acquiring multiple smaller companies, sometimes referred to as "bolt-on acquisitions." The primary objective of this strategy is to establish a significantly more valuable company that surpasses the collective worth of its individual components. While this approach is more prevalent in fragmented industries, it can be applied wherever these bolt-on acquisition opportunities present themselves.

To facilitate the implementation of a roll-up strategy, a CPC can leverage the unique advantages of public stock. Public companies possess a transparent, market-driven valuation, which may provide liquidity for their shares. This characteristic enables the utilization of stock as a currency for acquisitions. Moreover, public stock holds appeal for target company owners, offering them a potentially liquid asset with the opportunity for appreciation should the combined entity perform well. Additionally, public companies have more options for raising capital, including the issuance of new shares. This approach can provide the necessary funds for acquisitions without the need for expensive debt financing.

By utilizing roll-up strategies, companies can acquire smaller, promising businesses that may contribute to EBITDA growth. This transformation creates a "Platform Company" that may be attractive to strategic and public market investors. Roll-up strategies can amplify synergies between various businesses more effectively and quickly within public companies. Public companies typically have more sophisticated management teams, facilitating easier and faster implementation of these strategies.

Sterling Partners, a diversified investment management firm in Chicago, recently formed its first CPC, SP Strategic Acquisition Corp. (SPSA). SPSA offers Sterling Partners an avenue for investment while providing guidance and long-term strategic support to early-stage companies. Brian Kabot, a Senior Advisor at SPSA, highlights the advantages of Sterling Partners' CPC and said, "What I love about Sterling's CPC is that it makes raising capital easier, and it combines the infrastructure and capabilities of a large, diversified investment management firm with the benefits of streamlined access to the public markets."

In summary, the combination of the CPC Program and roll-up strategy may offer an effective approach for companies aiming for growth. By utilizing the liquidity and valuation benefits of public stock, companies may be able to implement a roll-up strategy more efficiently. This strategy may require less capital and may avoid the burden of debt, enabling companies to pursue expansion and consolidation opportunities.

Sources:

1. "SPACs - From Setup to IPO." n.d. SPAC Consultants. Accessed July 29, 2024.
   https://spacconsultants.com/spacs-overview/spac-setup-ipo/.
    

2. "Capital Pool Company® Program." n.d. Toronto Stock Exchange. Accessed July 27, 2024.
   https://tsx.com/en/listings/listing-with-us/listing-guides/ways-to-list/capital-pool-company-cpc-program#sample.
     

3. Jasperson, Hans D. n.d. "Going Public: What It Is and How It Works." Investopedia. Accessed July 29, 2024.
   https://www.investopedia.com/ask/answers/what-does-going-public-mean/.
    

4. "Bolt-on acquisition." 2022. Wikipedia.
   https://en.wikipedia.org/wiki/Bolt-on_acquisition.
    

5. "Cash vs. Stock Acquisition | M&A Differences + Pros/Cons." 2022. Wall Street Prep.
   https://www.wallstreetprep.com/knowledge/how-buyers-pay-in-ma-cash-vs-stock/.
    

6. "Platform Company - Understand How Platform Companies Work." 2024. Wall Street Oasis.
   https://www.wallstreetoasis.com/resources/skills/deals/platform-company.
    

7. "Sterling Partners Forms its First Capital Pool Company – Sterling Partners." 2023. Sterling Partners.
   https://sterlingpartners.com/sterling-partners-forms-its-first-capital-pool-company/.

Copyright © 2024 TSX Inc. All rights reserved. Do not copy, distribute, sell or modify this document without TSX Inc.'s prior written consent. This information is provided for information purposes only. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this article, and we are not responsible for any errors or omissions in or your use of, or reliance on, the information. This article is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied upon for such advice. The information provided is not an invitation to purchase securities listed on Toronto Stock Exchange and/or TSX Venture Exchange. TMX Group and its affiliated companies do not endorse or recommend any securities referenced in this publication. Capital Pool Company, CPC, TMX, the TMX design, TMX Group, Toronto Stock Exchange, TSX, TSX Venture Exchange, TSXV, The Future is Yours to See., and Voir le futur. Réaliser l'avenir. are the trademarks of TSX Inc. All other trademarks used in this article are the property of their respective owners.