For several weeks, rumors swirled that Churchill Capital IV (NYSE: CCIV) was preparing to merge with Lucid Motors. Lucid, one of the hottest electric vehicle (EV) start-ups, is about to start delivering its luxury sedan, the Lucid Air, in a few months. Finally, the companies confirmed the deal last night, announcing that Churchill Capital IV and Lucid Motors have entered into a definitive merger agreement. The shares promptly plummeted in prolonged negotiations.
Last week, I suggested that I wouldn’t be surprised if it turned out to be a “buy the rumor, sell the news” situation. This saying refers to a common phenomenon in the market when an event does not live up to expectations. See why investors may be disappointed with the deal.
Image source: Lucid Motors.
How the business is structured
Over the weekend, Bloomberg said a deal could be imminent, suggesting that the announcement could be made on Tuesday. The valuation that Lucid was supposed to achieve was about $ 15 billion. The structure of the business would always be a big risk for anyone who invested in Churchill Capital IV based on speculation.
The transaction will include $ 2.1 billion in cash from Churchill Capital IV, plus a $ 2.5 billion PIPE (private equity investment) anchored by the Saudi Arabian Public Investment Fund (PIF) – which is currently the majority shareholder of Lucid – and other familiar institutional heavyweights such as Black stone and Loyalty. PIPE trades are usually done with the same net asset value of $ 10 as the special purpose acquisition company (SPAC), but in this case, PIPE investors are buying at $ 15 per share due to the meteoric increase in shares in the last month.
After all is said and done, the deal implies a pro forma equity value of $ 24 billion for Lucid. This is significantly higher than the $ 15 billion that investors expected. Churchill Capital IV shareholders will end up holding approximately 16% of the combined company, according to the presentation to investors.
Valuation matters
Generally speaking, when a SPAC is negotiating a merger agreement with a target, they have different incentives for assessment. SPAC prefers a lower valuation, as it allows it to acquire a larger shareholding in the target company with the money at its disposal. The target prefers a higher valuation, which benefits existing shareholders, while requiring a lower stake sale to SPAC.
As soon as rumors spread and Churchill Capital IV’s stock soared, Lucid had the upper hand in the negotiations. Investors have been clamoring to buy shares, raising the price to almost $ 65 out of pure speculation. Lucid could then argue that it justifies a higher valuation, pointing to market activity. In other words, the $ 24 billion negotiated valuation would look great to Lucid at the expense of Churchill Capital IV investors, at least as far as the structure of the deal is concerned.
However, there may be some confusion surrounding the assessment numbers due to the unique circumstances. The $ 24 billion valuation is based on PIPE’s offer price of $ 15 per share. In the standard $ 10 NAV, that would imply a $ 16 billion valuation – not far from the expectations of the Bloomberg report.
There are still some evaluation concerns. At yesterday’s closing price of around $ 57 (before the announcement), Lucid’s implied market capitalization would be an incredible $ 91 billion before delivering a single car.
The deal is expected to close in the second quarter. Investors should then shift their attention away from the merger structure to whether Lucid’s EVs become viable competitors in the automotive industry.