SPACs dig Electric Vehicles
Electric vehicle startups such as Nikola, Canoo & Fisker are turning to Special Purpose Acquisition Companies or SPACs, as a way to go public and raise cash quickly during the pandemic.
Summary
The strong performance of the Tesla stock (TSLA is up 800% in the last 12 months and 400% up YTD) and outperformance of ESG stocks (Environmental, Social, and Corporate Governance) here & here is driving an investor frenzy in the electric vehicles space. Companies are looking to take advantage of the renewed interest in the sector to go public on the US stock markets, but are wary of the market timing and therefore choosing the SPAC route. SPAC (special purpose acquisition corporation) is a shell company that goes public with the intent to acquire or merge with a target business within a stipulated timeframe. 6 SPACs have already announced public listings of electric vehicle companies and I expect this trend to continue in the next few months.
Introduction
It has been a busy 2020 for SPACs (Special Purpose Acquisition Company). As per SPACInsider, over 125 SPACs have raised $48B in the year so far as compared to 59 deals in 2019.
SPACs have been around for more than 2 decades however they’re gaining mainstream importance nowadays thanks to well-named investors such as Bill Ackman, Chamath Palihapitiya, and Reid Hoffman entering the fray.
India’s second-largest OTA Yatra was listed on NASDAQ via a reverse merger with Terrapin 3 Acquisition Corp (TRTL) in 2016.
What is SPAC?
A SPAC is a “blank check company” with no commercial operations and is formed strictly to go public with the intent to acquire/merge with a company using the proceeds of the IPO within a specified timeframe. The process by which this happens is called a “reverse merger” because a private firm acquires the bigger publicly listed shell company.
A SPAC is formed by an experienced management team or a sponsor with nominal invested capital, typically translating into a ~20% interest in the SPAC (commonly known as founder shares/promote).
The remaining ~80% interest is held by public shareholders through “units” offered in an IPO where the process is relatively straightforward as there are no historical financial metrics to compare, and can be completed in up to 8 weeks.
How does it work?
Image courtesy PwC
SPACs raise money before announcing what business they are going to acquire.
In a typical SPAC IPO, public investors buy “units”, each consisting of one share of common stock and a fraction (usually 1/2 or 1/3) of a warrant to purchase a share of common stock in the future. The warrant portion of the unit is intended to compensate investors for agreeing to have their capital held in the trust account until the SPAC consummates a business combination or liquidates.
Until the closing of the IPO, SPAC cannot hold substantive discussions with a business combination target/target company. Post-IPO, SPAC begins to search for a target business to acquire/merge into.
The proceeds of the SPAC IPO are parked in an interest-bearing trust account and released to acquire the target or returned to investors in case no desirable target is found in the defined timeframe (typically 2-year window).
Once a target company is identified and a merger is announced, the SPAC’s public shareholders may alternatively vote against the transaction and elect to redeem their shares.
If the SPAC requires additional funds to complete a merger, the SPAC may issue debt or issue additional shares, such as private investment in public equity (PIPE) deal. This is where certain other private investors come in and usually at a discount.
What are the advantages of SPAC?
The traditional way for companies to go public has been - an IPO or a direct listing. While the former is a long, arduous, and expensive road that involves working with a financial firm as an underwriter and embarking on a “roadshow” for months in which the IPO price could fluctuate, direct listing allows a company to sell shares directly to the public.
The advantage of a SPAC allows a company to bypass a fluctuating IPO price, while also allowing it to offer new shares to raise new capital, unlike direct listings.
Speed: Once a SPAC has chosen a target, it only takes about three to five months to complete that process from approval to closing, as most of the hard work has already been done. On the other hand, a traditional IPO can take over a year.
Price certainty: During an IPO process, companies find out the price and appetite for their shares post the roadshow. Through a SPAC process, there is less reliance on market demand as companies negotiate a price with the SPAC once and it’s done.
Better during turbulent times: Since the money has already been raised during the IPO, there is no need for the company to fret about timing the market.
Less scrutiny: From as it avoids the public scrutiny that comes with a traditional IPO. WeWork is a prime example of a company that had to delay its IPO due to negative press and sentiment around its financials.
Bill Gurley, who is a big fan of the direct listing, has done a fabulous job of explaining the 3 routes here.
Why are we seeing so many SPACs for EVs?
In the last 6 months, we have seen 6 electric vehicle companies list publicly via SPACs raising a combined $4B. In my opinion, there are a few reasons why
ESG Stocks outperformance. With many exchange-traded funds putting on ESG mandates this year, there has been a significant flow of dollars in the sector driving up performance.
Tesla is on a tear despite the pullback in Sep’20.
Market turbulence. With COVID-19 there is huge uncertainty concerning pricing and appetite for newly public companies and as such, they are focusing their attention on SPACs.
Rise of the retail investor on Robinhood. I reckon Tesla split its stock to make it easy for Robinhood traders to buy/sell.
Here are some notable SPACs announced since Mar 2020 in EV space
Nikola On Jun 3, 2020, VectoIQ Acquisition Corp (a SPAC formed by GM execs) agreed to acquire the hydrogen-powered electric truck startup, Nikola Corp. The reverse merger valued the startup at $3.3B VectoIQ and infused $700M in cash that would be used to fund operations, support growth for its hybrid and electric Class 8 trucks. The combined company's shares started trading publicly on Nasdaq under the ticker "NKLA".
Image Source
In July Fisker raised $1B from Spartan Energy Acquisition Corp, SPAC sponsored by an affiliate of Apollo Global Management. The capital would be fully used towards the deployment of the full-electric Ocean SUV, which the company plans to launch in 2022. Post-transaction the company was valued at $2.9 B and trades under the SPAQ.UN ticker. PS: Some part of the car’s interior is made of recycled plastic reclaimed from the ocean, hence the name.
Image Source
Lordstown. On August 3, Diamondpeak Holding Corp. announced the acquisition of Lordstown Motors, which makes Endurance pickup truck aimed at contractors and other buyers in the commercial market. The reverse merger valued Lordstown at $1.6B and infused the company with $675M that will be used to ramp up production at its plant in Ohio. The merged company will trade on the Nasdaq under the new symbol “RIDE”.
Image Source
Canoo, a Los Angeles-based electric vehicle startup, has agreed to merge with Hennessy Capital Acquisition Corp. for a resultant market cap of $2.4B. The reverse merger will lead to an infusion of $600M of gross proceeds that will support the production and launch of electric vehicles (EV) featuring its advanced skateboard technology. Post-transaction Canoo will become a publicly-traded company listed on NASDAQ under the new ticker “CNOO”. Originally called Evelozcity, Canoo was founded in late 2017 by Stefan Krause and Ulrich Kranz after working for several auto-makers such as BMW, VW & Faraday.
Image Source
In Sep, Chargepoint announced it will go public by merging with Switchback Energy Acquisition Corp (SBE.N) in a deal that values the company at $2.4B. Switchback is a special-purpose acquisition company (SPAC) that raised $300M in an initial public offering in July 2019. Founded in 2007, ChargePoint Inc is one of the world's oldest and largest electric vehicle charging networks with over 115k charging points globally. The reverse merger will lead to an infusion of $493M into the company which it will use to expand in North America and Europe markets.
Image Source
Hyliion, the heavy-duty electric truck maker went public in Oct 2020 under the new ticker “HYLN” after a definitive agreement with the Tortoise acquisition Corporation. The reverse merger valued Hyliion at $6.7B and infused the company with $560M in cash, which will be used for ramping up production at its Austin plant. Unlike Tesla or Nikola that designed their vehicles from the ground-up, Hyliion has built an e-axle powered by Lithium-ion batteries that can be retrofitted into the drivetrain of a traditional Class 8 long haul semi-truck.
Image Source
Bottomline
As per notable startup investor Bill Gurley
The bottom line is that SPACs are a very legtimate path to the public markets. They have a lower cost of capital vs a traditional IPO. That cost of capital is falling due to market pressure, whereas it is rising for the IPO. The SPAC has fresh capital whereas the Direct Listing does not (yet), and the SPAC is clearly the fastest path to the public markets (which is a form of risk reduction). I fully expect to see high profile companies walk through Door #3.