Rumors have been spinning it for a few weeks Churchill Capital IV (NYSE: CCIV) was preparing to merge with Lucid Motors. Lucid, one of the most popular electric vehicles (EVs), will start delivering its luxury sedan, the Lucid Air, within a few months. Finally, the companies confirmed the agreement last night and announced that Churchill Capital IV and Lucid Motors had entered into a definitive merger agreement. Shares are immediately included in long-term trading.
Just last week, I suggested that I would not be surprised if it finally ‘buys a rumor, sells the news’. This proverb refers to a common phenomenon in the market when an event does not meet expectations. This is why investors may be disappointed in the deal.
Image source: Lucid Motors.
How the transaction is structured
Over the weekend, Bloomberg reported that an agreement could be imminent, indicating that the announcement could already take place on Tuesday. The rumors that Lucid would fetch according to reports were about $ 15 billion. The structure of the transaction would always be a major risk to anyone who would invest in Churchill Capital IV based on the speculation.
The deal includes Churchill Capital IV’s $ 2.1 billion in cash, plus a $ 2.5 billion (private equity investment) PIPE anchored by Saudi Arabia’s Public Investment Fund (PIF) – which is currently Lucid’s is a majority shareholder – and other well-known institutional heavyweights such as BlackRock and Fidelity. PIPE transactions are often done at the same net asset value of $ 10 from the specialty acquisition company (SPAC), but in this case, PIPE investors buy in $ 15 per share due to the meteoric rise in the stock over the past 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. According to the investor offering, Churchill Capital IV’s shareholders will own approximately 16% of the combined company.
Valuation matters
Generally, when a SPAC negotiates a merger agreement with a target, they have different incentives for valuation. The SPAC prefers a lower valuation because it enables it to acquire a larger stake in the target company with the money at its disposal. The target prefers a higher valuation, which benefits current shareholders while requiring a smaller sale of the stake to the SPAC.
As soon as the rumors broke and Churchill Capital IV’s stock skyrocketed, Lucid gained the upper hand in the negotiations. Investors have said they want to buy shares, raising the price to nearly $ 65 on pure speculation. Lucid can then argue that it guarantees a higher valuation, indicating market activity. In other words, the $ 24 billion negotiated valuation looks good to Lucid at the expense of Churchill Capital IV investors, at least in terms of the transaction structure.
However, there may be confusion around the valuation figures due to the unique circumstances. The valuation of $ 24 billion is based on the PIPE offer price of $ 15 per share. At the default value of $ 10, this would imply a valuation of $ 16 billion – not too far from the expected Bloomberg report.
There are still issues with valuation. At yesterday’s closing price of about $ 57 (before the announcement), Lucid’s implied market capitalization would amount to an incredible $ 91 billion before he delivered a single car.
The deal is expected to close in the second quarter. Investors should then focus their attention from the merger structure on whether Lucid’s EVs will become viable competitors in the automotive industry.