Katapulting on to the Nasdaq

Katapult Holding Inc has announced its intention to go public but rather than do so via an IPO.

The consumer finance app has opted to use a SPAC or Special Purpose Acquisition Company more commonly referred to as blank cheque companies.

Katapult, who help shoppers make purchases by spreading their payments for goods, will reverse into a Nasdaq shell FinServ Acquisition Corp and once the deal is completed the business is expected to be valued at the billion US dollar mark.

The transaction will also see investors Tiger Global and Neuberger Berman participate in $150 million PIPE deal. PIPE stands for Private Investment in Public Equity in which the investors effectively lend money to a company but are repaid through the issue of stock, warrants or options over the same. The stock or securities are issued to the investors at a substantial discount to the prevailing market price.

The SPAC deal is expected to be concluded within the first half of 2021 and Katapult has its eye on the ticker KLPT for the merged entity.

FinServ came to the market at the end of October and was floated for the specific purpose of merging with a company in the financial services or fintech space that was looking to list in the public markets. That IPO valued FinServ at $250.0 million.

The transaction with Katapult could prove to be very lucrative for FinServ’s CEO Lee Ebinder and CFO Howard Kurtz because the sponsors behind a SPAC usually end up with a decent stake in the equity of the new business that reverses into the vehicle. Which can run to as much as 20% of the combined entity.

For example, Chamath Palihapitiya, once of Facebook, was the sponsor of the vehicle through which Virgin Galactic recently went public and he ended up an 11% stake in the company.

Hedge Fund manager Bill Ackman was recently quoted by the FT on the attractions of SPAC’s Mr Ackman said that: “You get 20 per cent of the company tax-free until you sell the stock.”

In the case of the Virgin Galactic deal, Mr Palihapitiya’s stake rose to be worth as much as $870 million when the price of the newly listed stock rallied strongly. Katapult is a far smaller deal but a still a potentially lucrative one for FinServ’s backers.

It’s perhaps no surprise that SoftBank expressed its interest in listing SPACs, over the weekend. The shell companies could be an ideal way for SoftBank’s Vision Fund to monetize some of its private equity investments whilst retaining a stake in those businesses. SoftBank is expected to file paperwork for a SPAC listing with US authorities as early as today.

Katapult’s business model and that of Swedish rival Klarna have come in for criticism this year for encouraging consumers to make purchases that they can’t really afford but buy anyway because they can pay using instalments.

Katapult transacts with its customers on a lease to own basis and acts a bridge between the consumer and the seller of the goods usually a retailer or brand. Whilst Klarna charges the retailer a fee for driving traffic to their sites and boosting sales therein. While allowing the consumer to buy now and pay later.

These extended payment methods seem to have struck a chord with younger consumers, however, who are happy to buy things now and spread the payments. Even if that means paying a higher price than if they were buying the goods for cash. From the retailer’s standpoint, the apps provide an additional sales channel without the need for them to extend credit or HP terms.