What happened
Shares of special-purpose acquisition company Property Solutions Acquisition (PSAC) were sharply higher on Friday morning. After weeks of speculation, the SPAC confirmed that it has struck a deal to merge with California electric-car start-up Faraday Future earlier this week.
As of 10:45 a.m. EST, Property Solutions' stock was up about 29.1% from Thursday's closing price.
So what
Property Solutions confirmed on Thursday what had been rumored for a few weeks: It's merging with Faraday Future in a deal that will take the long-struggling electric-car start-up public by the end of June.
It's a good moment for a deal like this: Shares of electric-car start-ups have been white-hot in recent months, fueled by the meteoric rise of Tesla stock and the success of others, including Chinese Tesla rival NIO.
Faraday expects that it'll be able to get its electric luxury sedan, the FF 91, into production about a year after the merger deal closes. Image source: Faraday Future.
Here are the key points of the deal:
- Property Solutions will bring about $230 million in cash.
- A PIPE (for "private investment in public equity") funded by outside investors including Chinese automaker Geely Automobile Holdings (OTC: GELYF) will add another $775 million.
- The post-merger company, which will retain the Faraday name, will have a valuation around $3.4 billion.
Post-merger, Faraday is expected to net about $750 million in cash from the deal. That's enough, CEO Carsten Breitfeld said, to get its FF 91 electric luxury car into production in about a year.
Now what
Any investment in a start-up is speculative, of course, But I think auto investors should be extra careful with this one.
While electric vehicle sales are almost certain to soar over the next few years, Faraday is a company with a (relatively) long and troubled history. After making a big splash at the Consumer Electronics Show in 2016, it burned through $2 billion and nearly went bust (a co-founder did actually go bankrupt) and lost most of its early employees, including much of its engineering team.
Brietfeld, a former BMW executive, has worked to get the company back on its feet since his arrival in 2019. Faraday now says it has 14,000 pre-orders for the FF 91, and it thinks it can sell more than 400,000 vehicles over the next five years.
That latter figure is a key component of the post-merger valuation, but it's a lot of cars for a company that has yet to show that it can deliver a single one. Proceed with caution here.
