Why the Nikola Deal Is in Flux

In this episode of MarketFoolery, Chris Hill chats with Motley Fool analyst Maria Gallagher about the latest headlines from Wall Street. They talk about layoffs, especially with regards to Disney (DIS 0.16%), and Nikola (NKLA -2.44%) deal negotiations. Also, a new company is coming public in the collaborative software space and much more.

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This video was recorded on September 30, 2020.

Chris Hill: It's Wednesday, September 30th. Welcome to MarketFoolery. I'm Chris Hill, joining me from the financial capital of the United States of America, it's Maria Gallagher. Good to see you.

Maria Gallagher: Nice to see you too, Chris.

Hill: Happy International Podcast Day. Shout-out to the dozens of listeners. Thank you whoever you are, wherever you are, across America, around the world. We really appreciate you taking the time to listen to us, so thank you for that.

Today we have an automotive deal that looked like it was falling apart, maybe it's not; this is very much in flux, we'll get to that. We have a newly public software company to get to, but we're going to start with the house that Mickey built.

Walt Disney Company is laying off 28,000 employees at their theme parks. This is roughly a quarter of the people who work at Disney's U.S. parks. And Maria, for all of the talk of Disney+, and the studios, and TV, and the merchandise, this is a reminder of just how big the theme parks are to Disney's business.

Gallagher: Exactly. So, this segment was actually 37% of the company's total revenue. So, like you said, they've laid off 28,000 employees, 67% of those are part-time. They blamed COVID, they also blamed the California governor for not letting them reopen the way that they had reopened in Shanghai, Japan, Paris, and Florida. So, it's interesting that it's one of those things where you don't know what you would have necessarily done better, most of these employees had been furloughed, they were still getting paid benefits and now they're going to be completely laid off. So, it's definitely a really unfortunate situation.

Hill: Well, and you know just for today, part of a larger layoff story, because we got announcements of layoffs from Royal Dutch Shell, Marathon Petroleum, Dow Chemical, so it's tough to see. It's not going to be the last we see of it, just the way the economy is going. I do think, however, I mean having -- I don't think I dismiss the other parts of Disney's business, [laughs] but I did sort of push them aside for a moment. That being said, I think it is the fact that Disney is a diversified company that it's not hard to imagine the theme parks bouncing back at some point, particularly in California, and those jobs returning. You know, it's not like in the restaurant business, where we're seeing an industry where a lot of restaurants are just going under completely.

Gallagher: Yeah, I think that's a really important point. And like you said, there are other layoffs going on as well. So, Universal Orlando laid off 5,400 employees. SeaWorld laid off almost 2,000. And it's interesting, because Disney, most of their employees are actually unionized, so I'm interested to see as this goes out, what kind of deal the laid-off employees get or what the unions will do for them as opposed to some of these other employees who aren't unionized, what rights Disney employees will be able to get. And like you said, Josh D'Amaro, who is the Chairman of Disney Parks, Experiences, and Product, who made this decision, he's the one who wrote the letter to the employees. It did imply in the letter, he was hoping to bring them back, he's hoping that as parks can get up-and-running again, even as some of their parks have opened, they just haven't had the influx of people that they thought they would have had with the new safety measures they have to include and all of those different aspects of the parks reopening. People aren't as willing to go back as I think they thought they would be.

Hill: Three weeks ago, on this show, we talked about Nikola, the electric truck maker, because on that day shares of Nikola were up more than 35% on the news of its partnership with General Motors. That was a lifetime ago. The deal was supposed to close today, that's not going to happen in terms of it closing today. And this seems like a story in flux, Maria, because a couple of hours ago I was looking at the available information and thinking to myself, boy! I think GM is backing out of this deal. We had the whole thing with Nikola and the Founder, Chairman of the Board resigning immediately, deleting his social media accounts, [laughs] allegations coming out. And it seemed like, a couple of hours ago, maybe GM was just backing off altogether. Now it looks like they might be just negotiating better terms, because shares of Nikola were down first thing this morning, then all of a sudden, they spiked up 11%, 12%. Where do you think this is going?

Gallagher: It's really interesting. So, Nikola has ambitions to make electric- and hydrogen-powered trucks. They want to sell and lease battery- and hydrogen-powered semi-trucks to businesses; for anyone who wasn't sure what the company did. So, what this deal was supposed to be, GM would get $2 billion in Nikola stock paid for with services in various GM parts and components, and then GM would engineer and manufacture the battery and fuel cell versions of Nikola's Badger truck. So, at that time, when they were talking about it three weeks ago, which feels like a lifetime ago, $2 billion was an 11% stake, because Nikola, at one point, their value was up over $30 billion, which is larger than Ford, and now that market cap is less than $7 billion. So, that $2 billion went from an 11% stake to almost over a 20% stake. So it's interesting, if they're negotiating different terms, what that will look like going forward, because $2 billion is now a much more sizable chunk of that company than it was a week or two weeks ago.

Hill: Yeah. And just in terms of Nikola stock, I mean, three weeks ago on the show, when we were talking about it, it was $50/share, today it's below $20 even with this little bump-up that we're seeing. And I want to, sort of, give the benefit of the doubt to Mary Barra, the CEO of General Motors, and her team, because she's a very experienced -- you know, for whatever you think of GM, the company, and whatever you think of the stock, and from a stock perspective it has not been a particularly great place to be over the last five to 10 years. That being said, she's an experienced professional in this [laughs] business, so I want to give her and her team the benefit of the doubt.

I don't know, though. I look at everything that is unfolding, and I have the thought that I've had at various points in my life as an investor, I look at either an individual company or just an evolving situation, [laughs] and I just conclude, there are too many question marks here. [laughs] There are too many unknowns, there are too many question marks. I kind of want to wait for the dust to settle to see what the new terms are, if the deal actually closes, and then see where things shake out.

Gallagher: Yeah. I think Nikola is definitely more of a speculative investment, since they haven't actually manufactured a car yet, but I will say I am on the side of I really want them to do well, I hope that a deal works out with GM, because I think the future of electric-powered vehicles is one that we're moving toward, I think it's one that I would like to invest in. I think right now betting on them is completely speculative, because you have no idea what they can produce.

But I do think it's important to note that within all of this, it's shown that there is a demand. So, they had to order for over 2,500 electric garbage trucks from public services. There was an order for over 14,000 trucks from AB InBev, which are planning to use them for long-haul deliveries from breweries to distributors. So, I think it's important to note that no matter what happens with this company specifically, I think this trend is one that's going to have a lot of tailwind. So, if I was working at GM and I wanted to be a part of that, I don't think this is a bad option, I don't think that this deal is necessarily completely a bad idea for GM.

Hill: Asana, which is a collaborative software company, begins trading today under the ticker ASAN. And as we have seen repeatedly over the past few months, Maria, this is not an IPO, this is another direct listing, so no new shares are issued. The stock was, I think, supposed to be set at $21/share, it hasn't become public yet, although I'm seeing on Twitter that it's indicating somewhere around $25, $26 a share.

Collaborative software as an industry seems to be [laughs] a pretty hot area these days.

Gallagher: Yeah. It's interesting. So, their reference price, which is basically an average of all of the prices that had been traded at in the private market, so it's kind of an idea for what it could trade at, at the public market. So, the other two companies who did a direct listing recently were Slack and Spotify. Slack's reference price was $26; it opened at $38. Spotify's reference price was $132, and it opened at $167. So, generally the reference price seems to be a lower indicator and then the actual opening price will be higher. This would imply evaluation of about 15X sales, which, when you're thinking about other software companies, that's actually pretty reasonable.

But like you said, work management is definitely one of the hotter industries right now. It says it has 3.5 million free users, 1.4 million paid users. The work management system in general is expected to grow from a $23 billion market to a $32 billion market by 2023. So, it's a fast-growing sector of the market, which I guess implies that there are a lot of companies who want to dominate the space because it's obviously something that's growing pretty fast.

Hill: They're not raising any money though.

Gallagher: No, because it's a direct listing.

Hill: So, not to be greedy, but like, what is the financial incentive [laughs] for them to do this?

Gallagher: I think it's probably just to provide liquidity for their shareholders' interest, and maybe they could do a secondary offering that would raise money if they needed at some point, if they think that they can get a good valuation, because it's a hot IPO market right now and they can get in and then they can do well in the future as a public company. There are lots of reasons, but definitely they are not making money with their direct listing today.

Hill: It's always fascinating to me to see how wrong I can be. [laughs] I never get tired of being interested in the fact that I'm completely wrong frequently. And I'm thinking, in particular, of earlier this year when the pandemic started and we started seeing all these reports of mergers and acquisitions just drying up, because people aren't able to sit across from one another, go out to dinner, you know, do deals. And I said several times on this show, I was like, forget about public offerings, forget about IPOs, like, we're not going to see any more new public companies in 2020. And instead quite the opposite has happened.

And as we talked about it, it's more of this type of listing, I'm wondering if, you know, at least part of why someone would go the direct route here is to essentially just cut out the middlemen and women, you know, cut out the investment banks. Because investment banks can be really helpful in taking a company public, but we've certainly seen plenty of examples where they just get the pricing very, very wrong and companies are leaving a lot of money on the table.

Gallagher: Yeah, going through direct listings or going through Special-Purpose Acquisition Company, SPACs are what they're usually called, and that's what Nikola did. That is definitely the flavor of the month, is not to do a traditional IPO route, which I think is an interesting implication for the future of what investment banks will do in terms of IPOs, and underwriting IPOs, and how they might change in the future to, kind of, work with companies in a different way if they have more options to do either a direct listing or go public through reverse merger in a SPAC.

Hill: Maria Gallagher, always love talking to you. Thanks for being here.

Gallagher: Thanks so much for having me.

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear.

That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd, I'm Chris Hill, thanks for listening, we'll see you tomorrow.