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Polestar's $20bn SPAC Merger with Gores Guggenheim

By Haozhe (James) Huang, Friedrich von Storch, Yujia Bao (IE Business School)

Photo: Redcharlie (Unsplash)

 

Overview of the deal


Acquirer: Gores Guggenheim

Target: Polestar

Total Transaction Size: $20 billion

Announcement Date: 27th September 2021

Expected Close Date: H1 2022

Acquirer Advisor: Deutsche Bank, Morgan Stanley, Guggenheim Securities, Barclays

Target Advisor: Citi


Swedish premium electric vehicle maker Polestar has announced to merge with a special purpose acquisition company, Gores Guggenheim. Upon closing of the proposed merger, the combined company will be named Polestar Automotive Holding UK Limited, which is expected to be listed on Nasdaq under the ticker symbol “PSNY”. The implied enterprise value of the combined company is roughly $20 billion. And current Polestar shareholders will retain 94% ownership after the transaction.


The merger will provide Polestar with $800 million in cash previously raised by the SPAC. Furthermore, top institutional investors have committed an additional $250 million PIPE investment to the combined business. All proceeds will be used to fund Polestar’s investment in new models and expansions into new markets. The SPAC merger will also add $10 billion to Volvo’s valuation, which is expected to raise $2.9 in an upcoming IPO.


With this merger, Polestar sets an ambitious goal of increasing its sales volume from 10,000 in 2020 to 290,000 annual EV sales in 2025. Additionally, Polestar aims to expand from the 14 markets it currently serves to 30 markets by 2023, as well as increasing the number of sales locations to at least 150 and the total number of service points to over 800.


“ In Alec and the Gores Guggenheim team, we have found a partner with an impressive track record of bringing leading companies to the public markets. The proposed business combination and listing position Polestar as a financially strong, future proof, global electric car company.” - Thomas Ingenlath, CEO (Polestar)

Company Details (Acquirer - Gores Guggenheim)


Gores Guggenheim is a special purpose acquisition company sponsored by an affiliate of The Gores Group, founded by Alec Gores, and by an affiliate of Guggenheim Capital. Gores Guggenheim completed its initial public offering in April 2021, raising approximately USD 800 million in cash proceeds to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses.


Founded in 2020, headquartered in Boulder, Colorado (USA)

CEO: Alec Gores

Market Cap: $1B (as of 10/10/2021)


Company Details (Target - Polestar)


Polestar is a Swedish automotive brand established in 1996 by Volvo Cars' partner Flash/Polestar Racing and acquired in 2015 by Volvo, which itself was acquired by the Chinese automotive company. Geely in 2010. In 2017, Polestar became an independent brand of premium electric performance cars founded by Volvo Cars and Geely.


Founded in 2017, headquartered in Gothenburg, Sweden

CEO: Thomas Ingenlath

EV: $2.0bn

Forecasted revenue: $1.6bn (2021E), $6.7bn (2023E)

Implied EV/Revenue: 12.5x (2021E), 3.0x (2023E)


Projections and Assumptions


Short-term consequences

The SPAC merger will shape Polestar into a more reputable and serious player in the electric vehicle space, and fuel its ambitious growth plan. The billion-dollar capital raised will insulate Polestar from pressures of rapidly growing cash needs: for the launch of Polestar 3, an SUV model to be assembled in South California as early as 2022, as well as two additional models in 2024. Post-transaction, existing Polestar shareholders will retain 94.1% ownership, while Gores Guggenheim shareholders and PIPE Investors will own 3.8% and 1.2% respectively. The remaining 0.9% stake in Polestar will be held by the SPAC sponsor Gores Guggenheim.


The listing will also be a major recognition of Geely’s transition to new energy cars, and long-term ambition to make premium cars. Geely now envisions Polestar as a full separate brand that would reply on platforms shared with Volvo.


This would be one of the largest recent SPAC in the EV space. For instance, EV start-ups Faraday Future (also backed by Geely), as well as Lucid Motors have raised billions of dollars in July through SPAC listing. While it is worth noting that earlier SPAC-listed competitors including Canoo, Romeo Power, Lordstown Motors have all missed their targets and suffered stock losses.


One week after the announcement, Volvo said it would file for an initial public offering on Nasdaq Stockholm exchange, expecting to raise up to $2.9 billion. Volvo’s stake in Polestar would also contribute $10 billion to Volvo’s firm value.


Long-term Upsides

In the long-term, the $1,050bn Polestar intends to raise through the SPAC and the accompanying PIPE funding will enable the EV-maker to extensively invest in the growth of the business. It plans to add three additional models to its already existing two models, which will include two luxury SUVs and one GT model. As a result, Polestar expects to significantly increase its sales volume from 29,000 that is forecasted in 2021 to 290,000 annual EV sales in 2025. Additionally, Polestar aims to expand from the 14 markets it currently serves to 30 markets by 2023, as well as increasing the number of sales locations to at least 150 and the total number of service points to over 800. Through increasing the presence in existing markets, expanding into new geographies and launching new models the company expects to grow its revenue by a CAGR of approximately 83% to $17.8bn in 2025, up from the forecasted $1.6bn in 2021. Polestar expects to break even on an operating level by 2023 and by the end of 2025 predicts to reach $1.6bn in EBIT at an EBIT margin of 9%.


The company can differentiate itself with an asset-light model as it can leverage the existing production facilities of backers Volvo and Geely to quickly and flexibly scale up its production according to demand. Polestar has direct access to factories globally with about 750,000 in production capacity, which makes it possible for the firm to focus its expenditures on R&D, leading to a higher return on capital in comparison with peers. As Polestar CEO Thomas Ingenlath explained: "We don't need the capital to build the factory. We can put the money raised into developing the technology and the market.”


Moreover, Polestar has ambitions to become a leader in sustainability in the industry. It plans to produce a climate neutral car by 2030 and intends to become climate neutral as a company by 2040. Also, the firm aims to introduce sustainable materials such as recycled and upcycled materials as well as natural fibres into the interior design of the car.


Risks and Uncertainties


One of the biggest risks for Polestar is the competition within the EV market. The industry remains very segmented with Tesla capturing the largest market share of 14.55% by sales volume, followed by VW Group with a market share of 12.52% and GM 8.55%. Traditional automotive manufacturers, such as Ford, BMW and GM are trying to eat into Tesla’s market share by releasing new models of electric vehicles. Likewise, new EV players such as Fisker (FSR), XPeng (XPEV) and Li Auto (LI) have all gone public in recent years to keep up the competition.


Meanwhile, as all Polestar vehicles are currently built in China, Polestar also faces challenges of starting new production lines in new geographic areas such as the US and Europe. As part of Polestar’s strategic plan, Polestar will build its first SUV, the Polestar 3, in the US, production of which is expected to begin globally in 2022; it, therefore, faces a high cost as high-quality parts and a manufacturing facility in the States are not cheap endeavours. The trustworthiness of Polestar would also be questioned as it had to recall all its global vehicles over faulty components last year. On a border picture, a major concern regarding the EV industry is its higher cost than traditional vehicles. How the industry could move forward in the following years vastly depend on the development of its upper stream, such as EV batteries.


Lastly, investors have become more uncertain about SPAC’s poor financial performances and a regulatory crackdown led by the U.S. Securities and Exchange Commission over their disclosures. In January, SPAC shares had rallied 28% on average on their first day of trading, compared to less than 1% in July, which is also much less than the 30% rise on the first day of trading after an IPO, according to Dealogic.


“I had the privilege of seeing the line-up of upcoming models, and the cars represent best-in-class innovation and industry-leading design that set the brand apart.” - Alec Gores, Chairman (Gores Guggenheim)



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