Churchill Capital IV (CCIV.U) (NYSE: CCIV) started off the week like most special-purpose acquisition companies (SPACs) that have yet to announce a target company to merge with: Trading around $10 per share. As a reminder, SPACs are just piles of money sitting in a trust account and the vast majority of them are priced so that the net asset value (NAV) of each share is $10. But then Bloomberg dropped a bombshell: Churchill Capital IV is in talks to merge with Lucid Motors, which many investors have called the next Tesla (TSLA -2.62%).
Here's what SPAC-ulative investors need to know.
Lucid is on the cusp of starting deliveries
Lucid is one of the most prominent electric vehicle (EV) start-ups. Unlike many EV-related companies that have gone public and skyrocketed in recent months, sparking valuation concerns and talk of an EV bubble, Lucid is relatively more mature. Many of the more bubbly EV start-ups have seen their shares soar, even if they are development-stage companies with little to no revenue. In contrast, Lucid completed construction of its $700 million Arizona factory last month and is preparing to ramp production.
The manufacturing facility has initial capacity to produce and deliver 30,000 vehicles this year before expanding production to 400,000 vehicles annually in the years ahead. Deliveries of the flagship Lucid Air sedan are set to begin this spring, with the company borrowing a page out of Tesla's book and initially selling the most expensive ($169,000) trim before introducing successively more affordable models. Lucid is also already working on an SUV called the Gravity.
I interviewed Peter Rawlinson a few years back ahead of the company's Series D funding round. Rawlinson was CTO at the time but has since been promoted to CEO. Famously, Rawlinson was chief engineer of Tesla's Model S program before leaving that company nearly a decade ago.
Lucid has also been poaching ex-Tesla employees at many levels throughout the company. Lucid hired Tesla's former manufacturing exec, Peter Hochholdinger, in 2019. Tesla had hired Hochholdinger, an automotive production veteran who led Audi's A4 program for years and spent 24 years at the German automaker, back in 2016. While Tesla struggled with the Model 3 ramp under the executive's watch, many investors have long speculated that CEO Elon Musk did not give Hochholdinger sufficient autonomy to leverage his experience to do what he does best.
It seems that even Musk is at least a little concerned about the competition. When Lucid announced last fall that the standard price of the Air would be $69,900 (after federal tax credit), the eccentric billionaire cut the price of the Model S to undercut the Air, while characteristically including some of his favorite juvenile references.
The gauntlet has been thrown down!— Elon Musk (@elonmusk) October 14, 2020
The prophecy will be fulfilled.
Model S price changes to $69,420 tonight!
It's worth noting that Lucid is hiring for investor relations roles, as well as an SEC reporting manager. That shows that the company is interested in going public soon, but it doesn't necessarily mean it will be through a deal with Churchill Capital IV (or any other SPAC), nor does it indicate a specific timeline for doing so.
The speculative links
Before the formal announcement of a target company, investing in SPACs is largely a bet on the management team. Since a lot of it boils down to personal connections, SPAC investors also like to find links between SPACs and potential targets, even though there are many other factors to consider.
In this case, many investors have noticed that Andrew Liveris sits on Lucid's board of directors and is part of Churchill Capital IV's operating team. Other prominent members of Churchill Capital IV's team include Apple's longtime design chief Jony Ive, Silicon Valley venture capitalist Sam Altman, and former Ford CEO Alan Mulally. Churchill Capital is led by Michael Klein, a Wall Street veteran that used to run Citigroup's capital markets division.
Klein has also served as an advisor to Saudi Arabia's sovereign wealth fund, known as its Public Investment Fund (PIF). After Lucid closed its Series D funding round in 2017, the company secured a $1 billion investment from the PIF in 2019, which was used to fund the hefty capital expenditures related to building a car factory. With $2 billion in cash currently, Churchill Capital IV is one of the few SPACs that would be large enough to take Lucid public through a merger, considering the sheer capital intensity of the industry in which Lucid operates.
Klein participated in the ICR investing conference earlier this week, and host John Jannarone explicitly stated at the outset that Klein would not be able to discuss the "elephant in the room," referring to the Bloomberg report. The Churchill Capital CEO made various vague and cryptic remarks that are open to interpretation. It seems quite likely that negotiations are ongoing but that no agreement has been finalized.
The hype and speculation has been rampant all week, pushing Churchill Capital IV's units (which each include a share and a fifth of a warrant) up to around $18 and nearly $17 for the shares alone (both as of yesterday).
That represents a significant premium to the $10 NAV, one that many SPAC investors will balk at given no deal has been confirmed or announced. Additionally, SPAC merger deals can be structured in many ways, so even if Lucid agrees to a deal with Churchill Capital IV, the details -- like the PIPE (private investment in public equity) -- will have huge implications for public investors.
If negotiations fall through or a deal fails to materialize, Churchill Capital IV stock will likely tank, underscoring the significant risks of investing based on rumors and speculation. Theoretically, pre-target SPAC shares should never trade below $10 since that is what the pool of money is worth -- some SPACs have briefly traded below $10 but arbitrageurs are more than happy to help correct that market mispricing -- so that should be the extent of the downside risk.
But if the nascent EV maker and the SPAC ink (and subsequently close) a deal, public investors might very well be looking at the next Tesla.