By James Muse, Omar Santos, Sean Salamante (Columbia University), Lindsay Dempsey, Adil Amlaiky, Anish Umasuthan, Blake Dal Santo, Greta Horn and Éve Bouffard (McGill University)
Overview of the deal
Acquirer: Churchill Capital IV (NYSE: CCIV)
Target: Lucid Motors
Total Transaction Size: $24 billion
Announce Date: 22 Feb 2021
Expected Close date: Q2 2021
Target Advisors: Citigroup, Davis Polk & Wardwell LLP
Acquirer Advisors: BofA Securities, Citigroup, Guggenheim Securities LLC, Weil, Gotshal & Manges LLP
Churchill Capital IV, the fourth of seven SPACs led by former Citigroup Vice-Chairman Michael Klein, has agreed to a combination with EV company Lucid Motors at a transaction equity value of $11.75 billion, and an implied pro forma equity valuation of $24 billion. This transaction marks the largest private placement in public equity (PIPE) to date, with $2.5 billion of capital raised in the structure. The PIPE investment was led by the Public Investment Fund (PIF) of Saudi Arabia and includes various firms such as BlackRock, Fidelity, Neuberger Berman, and Winslow Capital. Churchill Capital will also commit an additional $2.1 billion in cash. Lucid Motors was founded in 2007 and consists of previous Tesla, Volkswagen, and Mazda executives. Lucid Motors’ current CEO and CTO, Peter Rawlinson served as the VP of Engineering at Tesla and was the Chief Engineer of Tesla’s Model S. This transaction represents the all-time high activity of SPACs in the United States and is viewed as the first domestic competitor to Tesla. Yet, Rawlinson has repeatedly stated that Lucid Motors is not a direct competitor to Tesla because of the difference in price points; Lucid Motors focuses solely on the luxury EV market. Lucid expects deliveries of 20,000 vehicles in 2022, producing sales of $2.2 billion, and forecasts revenues of $5.5 billion in 2023, and $9.9 billion in 2024, imputing a CAGR of 36%. The luxury EV maker estimates a positive EBITDA of $592 million in 2024. Lucid Motors’ flagship luxury sedan, called “Air”, starts at $169,000, has a maximum horsepower of 1080, a projected range of 517 miles, takes 20 minutes to charge 300 miles, and goes from 0-60mph in 2.5 seconds. Air is expected to launch after the Churchill acquisition closes in the second half of 2021.
“I see the SPAC as just a tool, another lever to pull on, where we can accelerate our trajectory...This is a technology race. Tesla gets this. It’s why they are so valuable and Lucid also has the technology.” -- Lucid CEO Peter Rawlinson
Company Details: (Acquirer - Churchill Capital IV)
Churchill Capital IV is the fourth special purpose acquisition company (SPAC) that was founded by former Vice Chairman at Citigroup and managing partner of M. Klein and Company, Michael Klein in 2020. The company was founded to identify companies that complement their expertise and execute a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more of those companies.
(Source: Churchill Capital IV Website)
Founded in 2020, headquartered in New York, NY
CEO: Michael Klein
Number of employees: N/A
Market Cap: $6.314B (as of 03/06/2021)
EV: $7.396B (as of 03/06/2021)
LTM Revenue: N/A
LTM EBITDA: N/A
LTM EV/Revenue: N/A
LTM EV/EBITDA: N/A
Company Details: (Target - Lucid Motors)
Lucid Motors is an automotive company that specializes in luxury electric cars. It was founded by Sheaupyng Lin, Sam Weng, and Bernard Tse in 2007. The company manufactures electric vehicles with the goal of creating an efficient, sustainable, autonomous, and intuitive source of mobility.
(Source: Lucid Motors Website)
Founded in 2007, headquartered in Newark, CA, USA
CEO: Peter Rawlinson
Number of employees: 2000
Market Cap: N/A
LTM Revenue: N/A
LTM EBITDA: N/A
LTM EV/Revenue: N/A
LTM EV/EBITDA: N/A
Projections and Assumptions
As speculations rose and confidence grew that Churchill Cap IV and Lucid Motors would reach an agreement, CCIV shares rose around 470% from the start of January to the stock’s peak of $58.05 on February 18, 2021. However, once the deal was made official on the 22nd, the stock dropped just under 40% the following day and is currently trading around 60% lower than its peak at $24.40 (as of 3/5/21). As a result of the acquisition, the Churchill Cap IV ticker, CCIV, is expected to become LCID and continue to trade on the NYSE.
Reasons for the drop in share price may include a case of “buy the rumor, sell the news” as is usually the case for highly anticipated deals such as Lucid’s, dissatisfaction with the structure of the deal, and disappointment in the delay of the delivery of the company’s Lucid Air.
Lucid’s CEO Peter Rawlinson released a statement on February 25, 2021, citing COVID-19 as a reason for the delay and is now targeting a start of production in the early part of the second half of 2021. Lucid plans to use the funds from the deal to expand its production capabilities and reach this goal.
As Lucid continues to grow, they will have to identify themselves as the luxury brand of the EV market in order to differentiate themselves from Tesla’s mass-market strategy as Lucid’s CEO Peter Rawlinson stated.
(Source: Lucid Website and Bloomberg)
Following the SPAC merger, Lucid will be able to gain enough capital to keep manufacturing in-house which will allow the company to maintain high quality while keeping costs low. Similarly, by driving down production prices, Lucid aspires to offer more affordable car models in the future to compete against rival tech giant Tesla. Interestingly, the company expects a negative free cash flow of around $10 billion through 2024. Lucid is ambitiously projecting revenue to rise to $22.8 billion in 2026, despite a lack of market validation.
Over the next year, Lucid expects to invest heavily in product development and plan to grow their employee base from 2000 to around 5000, according to CEO Peter Rawlinson. They plan to explore products outside of the luxury vehicle market; this includes a project to develop batteries with the ability to power homes and utility-scale devices, similar to Tesla’s Powerwall initiative. Currently, there is speculation around a potential future partnership between Lucid and Apple to produce luxury electric vehicles. This would present a promising opportunity for Lucid as Apple’s luxury branding fits well with their target market. However, Lucid would have to significantly ramp-up production capacity to meet obligations in this rumored partnership. While the SPAC merger with Churchill will provide capital for increased in-house manufacturing capability, further funding will be necessary to capture market share in the electric vehicle space and compete with already established players.
Risks and Uncertainties
According to Lucid Motors’ Investor presentation from February 2021, the contractual restrictions and business uncertainties of the COVID-19 pandemic may lead to staff departures which would negatively affect Lucid’s post-transaction operations and financial condition. Considering the lack of sales and market validation, the outlook on the future of Lucid’s operations is highly uncertain and poses many risks. Prior to the deal announcement, Churchill’s peak price translated to a market cap comparable to that of NIO, a Chinese electric vehicle competitor. NIO has cumulatively delivered almost 83,000 EVs as of January 2021, while Lucid has sold none. Based on its stage in its life cycle, Lucid should not be compared to Tesla, it may follow a closer path to NIO, which came close to bankruptcy and needed a 1 billion dollar bailout from the Chinese government in 2020 to rise again. Analysts argue that the SPAC frenzy is approaching inflationary territory and that the forecasts presented in the investor presentation were unrealistic, especially in Lucid’s current early stage in its lifecycle. Investors were expecting a pro forma equity value of 15 billion, but the deal actually implied a pro forma equity value of 24 billion. Taking into account the combined aforementioned factors and the delays, there is much uncertainty surrounding this deal. Only time will tell how the deal will fare, especially during our current environment of uncertainty.