A transaction helping Lucid to become Tesla’s most powerful rival?

On July 30, 2020 Michael Klein completed the initial public offering of Churchill Capital Corp. IV.  On February 22, 2021 the merger agreement with Lucid Motors was announced with the aim to create an electric vehicle manufacturer able to compete against Tesla.

Companies’ Overview:

Lucid Motors

Based in Newark, California, Lucid Motors (“Lucid”) is an Electric Vehicle startup led by the former Tesla engineering executive Peter Rawlinson and other seasoned executives with a track record of bringing disruptive products to markets such as Model S and iPhone. Lucid was founded in 2007 under the name Atieva, to focus on electric battery technology, and then changed its name in 2016 – shifting to an electric vehicle manufacturer. In 2018 Lucid received $1 billion from Saudi Arabia’s Public Investment Fund (PIF) to progress its expansion plans. Lucid defines a new generation of EVs from the following perspectives.

As the company’s first and flagship product, the Lucid Air Pure electric luxury vehicle – planned to launch in the second quarter of 2021 – targets the “post-luxury” segment with up to 517 miles of EPA-estimated all-electric range and as much as 1080 horsepower. The Air also mixes practicality with technology, sporting capacious storage options and no shortage of driver assists. Rawlinson expects the Air to be the catalyst and cornerstone for a lineup of future products including an SUV starting production in early 2023 and more affordable vehicles in higher volumes.

With 403 patents filed, 80% of which have been issued, Lucid’s technology is designed to be highly scalable and modular for both power and energy, creating opportunities for a wide range of potential applications. For battery technology, Lucid has more than 10 years of experience in the design, engineering and manufacturing of battery packs. Moreover, the battery management software has accrued millions of real-world vehicle miles of data through collaboration with the world’s premier EV racing series.

To achieve mass production, Lucid has a manufacturing facility in Arizona, which is the first greenfield purpose-built EV manufacturing facility in North America and is already operational for pre-production builds of the Lucid Air. Scheduled to expand over three phases in the coming years, the Arizona facility is designed to be capable of producing approximately 365,000 units per year at scale. Additionally, with directly-owned retail locations open in California and Florida, Lucid will continue to expand its retail and service footprint across the U.S. throughout 2021. 

What is a SPAC?

A SPAC (Special Purpose Acquisition Company), also known as “blank check company”, is a shell corporation listed on a stock exchange with the purpose of acquiring a private company, thus making it public without going through the traditional initial public offering process. 

According to the U.S. Securities and Exchange Commission (SEC), “A SPAC is created specifically to pool funds in order to finance a merger or acquisition opportunity within a set timeframe. The opportunity usually has yet to be identified”. In that sense, SPACs can be considered shell companies because they usually don’t have any operations of their own. Their purpose is to raise money through an IPO, and then using the funds to acquire and merge with a private company (target) through a direct or reverse merger.

It’s important to say that the money SPACs raise in an IPO is placed in an interest-bearing trust account and that these funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated (no target has been selected).

While the IPO is the more traditional way of taking the company public, SPAC has become increasingly popular in recent years due to different factors, such as:

  • Faster Initial Public Offering process, because the IPO has already taken place
  • Some of the risks associated with a conventional IPO – like uncertain listing values – might be avoided, because the price is negotiated between the parts and it is not formed by the book building process
  • SPACs can benefit from the knowledge and expertise of the initial sponsors, who could receive seats on the board of the private company once it goes public

But there are also some cons of listing with a SPAC, such as:

  • The benefit from the long-term expertise of the initial sponsors might not be realized if they sell their stake shortly after the merger is completed
  • SPACs don’t require the same level of due diligence as the traditional IPO process.

According to Dealogic, SPACs have raised nearly $75 billion this year and now account for more than 70% of all initial public offerings, up from 20% two years ago.

Churchill Capital Corp. IV

Michael Klein, the manager of the SPAC, has achieved most of his career in investment banking. The highlight of his career is his promotion as Head of Corporate and Investment Banking at Citigroup in 2003. He was seen as a potential CEO but left in 2008 to create his advisory firm, M. Klein and Co.

Michael Klein has switched his focus starting in 2018 to become a front-runner in the listing of SPACs, which he launched using the same naming scheme “Churchill Capital Corp.” plus a number going from 1 to 7.

Of the SPACs that were launched prior to Churchill Capital Corp. IV, all of them merged with operating companies:

  • Churchill Capital Corp. (1) merged with Clarivate Analytics, a firm providing intellectual property services in a transaction valuing the target at $4bn.
  • Churchill Capital Corp. II merged with Skillsoft, a company providing corporate eLearning services in a transaction valuing the target at $1.7bn.
  • Churchill Capital Corp. III merged with Multiplan, a company providing healthcare cost management solutions, in a transaction valuing the target at $11bn.

Given the previous success, Michael Klein was well-experienced when he launched Churchill Capital Corp. IV. The initial public offering was completed on July 30, 2020. It was planned to raise $1.8bn (180m units of $10 each), but it finally amounted to $2.07bn including the “green-shoe” option that was exercised by underwriters.

It is to be noted that the IPO remains a costly transaction even for a SPAC. In the 10-Q report of Q3 2020, it was disclosed that transaction costs amounted to a total of $109m. Michael Klein and his partners (in the form of a management company called “Churchill Sponsor IV LLC”) received 42.85m warrants in the SPAC (exercise price of $1) and were given 51.75m founder’s shares. The proceeds for the IPO were invested in money market funds and short-term treasury bills.

Electric Vehicle Industry:

Increasing demand for fuel-efficient, low emission but high-performance vehicles along with strict government regulations on climate imprint of conventional cars caused the growth of the electric vehicle market over the last years. Moreover, depleting fossil fuel reserves and a growing tendency of companies to gain maximum profit from these reserves gave rise to advanced fuel-efficient technologies. 

The global electric vehicle market was valued at $162.34 billion in 2019, and it is projected to reach $802.81 billion by 2027. Asia-Pacific was the highest revenue contributor, accounting for 52% of the market in 2019, while Europe accounted for around 22.5%. However, the high manufacturing costs and low fuel economy with poor serviceability are expected to dampen the growth of the market. Meanwhile, technological advancements and proactive government initiatives could enhance its growth over the next decade.

The growth caused shifting regional dynamics, with Europe slowly surpassing China and the United States. Electric vehicle sales remained constant in China in 2019, at around 1.2 million units sold, and dropped by 12% from the previous year in the US, with only 320,000 units sold. At the same time, sales in Europe rose by 44% to 590,000 units. These trends continued in the first quarter of 2020 as sales decreased from the previous quarter by 57% in China and by 33% in the United States. In contrast, Europe’s EV market increased by 25%.

Electric vehicles are advantageous over conventional cars, but costs of the former are higher. Innovation in electric vehicles requires a huge initial investment, and since the vehicles have not been mass-produced yet, they still have to witness economies of scale with respect to some parts, especially batteries. Moreover, the slow growth in infrastructure related to electric vehicles, such as countrywide coverage with charging stations, directly affects their demand. 

Key players accounting for a major market share in the industry include Tesla, BMW, Toyota, Volkswagen, General Motors, Daimler and Ford. With announced launches of new electric models spiking, both automakers and suppliers are increasing their global footprints in target markets by localizing the production of vehicles and components. For instance, Tesla began construction of its Shanghai plant in January 2019 and delivered the first locally produced electric vehicle already in December of the same year. The company plans to finish its next production plant in Germany by 2021. Similarly, Volkswagen and Toyota have announced plans to set up major plants in China.

Deal Structure:

After rumours of negotiations happening with Lucid Motors started to emerge in mid-January 2021, the stock started to significantly increase in value (while as a blank-check company, the fair value of the share was $10, corresponding to the corresponding cash-holdings). At closing on January 15, the stock was worth $18.36. As the rumours continued and became progressively optimistic, shares continued rising until the day of the announcement.

On February 22, an 8-K form was released when Churchill Capital Corp. IV announced having entered into a merger agreement with Lucid Motors. The deal consists of entirety Churchill Capital Corp. IV’s holdings ($2.1bn) and of $2.5bn brought by institutional investors (Saudi Arabia’s Public Investment Fund, BlackRock, and Fidelity) in a PIPE deal.

There has been some confusion around the valuation at which the deal is performed. It has been first reported that the valuation was $24bn. However, such an amount only considers the $2.5 PIPE deals as the valuation benchmark. Here, institutional investors entered in the transaction, not like SPAC investors (for which the net asset value is $10 per share) but at $15 per share due to the rise of CCIV’s shares. If we consider the $10 per share brought in by CCIV investors, the valuation is $16.3bn

For existing Lucid Motors investors, a high valuation is a great thing as it decreases the incurred dilution for a given amount of proceeds. At the same time, a SPAC investor wants to get the highest possible number of shares for its contribution and thus would want the SPAC’s sponsor to negotiate the transaction at a lower valuation.

References: SEC, FactSet, Bloomberg, CNBC, Investopedia, IG, WSJ, Goldman Sachs Investment Research, Companies’ websites, Financial Times, CNBC, McKinsey, Deloitte, Allied Market Research, IEA Global EV outlook

To contact the authors:
Paul Camincher
Dietmar Del Vecchio
Luca Venturelli
Yuting Yan