For several weeks, rumors swirled that Churchill Capital IV (CCIV) was preparing to merge with Lucid Motors. Lucid, one of the hottest electric vehicle (EV) start-ups, is about to begin delivering its luxury sedan, the Lucid Air, within a few months. At long last, the companies confirmed the deal last night, announcing that Churchill Capital IV and Lucid Motors have entered into a definitive merger agreement. Shares promptly tanked in extended trading.
Just last week, I suggested that I wouldn't be surprised if this ended up being a "buy the rumor, sell the news" situation. That adage refers to a common phenomenon in the market when an event fails to live up to expectations. Here's why investors may be disappointed in the deal.
Image source: Lucid Motors.
How the deal is structured
Over the weekend, Bloomberg reported that a deal might be imminent, suggesting that the announcement could come as soon as Tuesday. The valuation that Lucid was rumored to fetch was around $15 billion. The structure of the deal was always going to be a major risk for anyone investing in Churchill Capital IV based on the speculation.
The transaction will include Churchill Capital IV's $2.1 billion in cash, plus a $2.5 billion PIPE (private investment in public equity) anchored by Saudi Arabia's Public Investment Fund (PIF) -- which is currently Lucid's majority shareholder -- and other familiar institutional heavyweights like BlackRock and Fidelity. PIPE deals are often done at the same $10 net asset value of the special purpose acquisition company (SPAC), but in this case, the PIPE investors are buying in at $15 per share due to the meteoric rise in the stock over the past month.
After everything is said and done, the deal implies a pro forma equity value of $24 billion for Lucid. That's meaningfully higher than the $15 billion that investors were expecting. Churchill Capital IV shareholders will end up owning approximately 16% of the combined company, according to the investor presentation.
Valuation matters
Generally speaking, when a SPAC is negotiating a merger deal with a target, they have different incentives in place for the valuation. The SPAC prefers a lower valuation, since that allows it to acquire a larger ownership stake in the target company with the money at its disposal. The target would prefer a higher valuation, which benefits existing shareholders while requiring a smaller ownership stake sale to the SPAC.
Once the rumors broke and Churchill Capital IV's stock skyrocketed, Lucid had the upper hand in the negotiations. Investors have been clamoring to buy shares, driving the price up as high as nearly $65 on pure speculation. Lucid could then argue that it warrants a higher valuation, pointing to market activity. In other words, the $24 billion negotiated valuation would appear great for Lucid at the expense of Churchill Capital IV investors, at least as far as the deal structure goes.
However, there may be some confusion around the valuation figures due to the unique circumstances. The $24 billion valuation is based on the PIPE offering price of $15 per share. At the standard $10 NAV, that would imply a valuation of $16 billion -- not too far off from the expectation-setting Bloomberg report.
There are still some valuation concerns. At yesterday's closing price of around $57 (before the announcement), Lucid's implied market cap would be an incredible $91 billion before delivering a single car.
The deal is expected to close in the second quarter. Investors should then shift their attention from the merger structure to whether Lucid's EVs become viable contenders in the automotive industry.
