Breakingviews - SPACs and electric cars drive hype feedback loop

The Lucid Air speed test car is displayed at the 2017 New York International Auto Show in New York City, U.S. April 13, 2017.

MELBOURNE (Reuters Breakingviews) - Trust one of Wall Street’s best-known dealmakers to strike the biggest blank-cheque merger in history. Former Citigroup executive Michael Klein on Monday used one of his special-purpose acquisition companies, Churchill Capital IV, to snap up electric-car maker Lucid Motors. It takes the hype for both trends to a new level.

First there’s the transaction itself. The merger with Klein’s SPAC will bring Lucid $2.1 billion in cash and values it at just under $12 billion – chunky sums for this kind of merger. But that’s just the first part. The second involves the carmaker raising additional cash from other investors via a structure increasingly used in conjunction with a SPAC, the so-called PIPE: private investment in public equity.

Often, this kind of complementary PIPE capital raise is executed at or close to the value of the SPAC merger. In this case, the $2.5 billion being committed – an amount which also raises eyebrows for this kind of deal – is at a price that doubles Lucid’s market value.

Yet investors, including BlackRock, Franklin Templeton and Saudi Arabia’s Public Investment Fund, which currently owns 85% of Lucid, are not put off by such froth. They’re buying in at an enterprise value of just under 4.5 times 2023 sales, using Lucid’s estimates.

That’s higher than rivals like Fisker and Canoo, which have also been swallowed by SPACs. But Lucid is one of the better upstarts. Peter Rawlinson, the 14-year-old firm’s chief executive, was the chief engineer of Tesla’s Model S; before that he was at Lotus and Jaguar. He’s surrounded by executives who have worked for Ford Motor, Audi, Hyundai and other automakers, as well as at technology giants like Apple. Moreover, its first car, the Lucid Air, is set to go on sale later this year, with 7,500 reservations already placed.

Churchill Capital IV shareholders have revved the engine too much, though. After weeks of leaks about a potential deal, the stock rose more than fivefold. Even following an after-hours pullback on Monday to reflect the terms of the merger, the stock still trades at a level implying a valuation north of $65 billion and an enterprise value of 11.5 times 2023 sales, surpassing even Tesla’s heady valuation. Such an overcharged transaction risks an electric shock.


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