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How Churchill Capital IV's Soaring Stock Led to a Better Deal for Early Investors

By Evan Niu, CFA - Feb 25, 2021 at 10:30AM

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The SPAC was able to put together a balanced deal that minimized dilution, although speculative investors still got burned.

Prior to confirming its merger with Lucid Motors, shares of special-purpose acquisition company (SPAC) Churchill Capital IV (CCIV) had soared as high as nearly $65 on the rampant speculation that had persisted for over a month. The situation was clearly getting overheated, and the meteoric rise undoubtedly complicated matters quite a bit.

The subsequent plunge following the official announcement wasn't all that surprising after shares soared 500% on rumors alone. It was a classic "sell the news" event, and speculative investors who bought near the top are nursing heavy losses. However, the surge did have a silver lining: It allowed Churchill Capital to negotiate a better deal for early investors.

Lucid Air on a tarmac

Lucid Air ships later this year. Image source: Lucid Motors.

The $15 PIPE

Most SPAC mergers include a PIPE (private investment in public equity) component, where large institutional investors bring additional money to the table to get a deal done. These financing commitments are typically done at the same $10 net asset value (NAV) of the SPAC shares.

But in this case, Churchill Capital was able to get the heavyweights to buy in at $15, a 50% premium to the NAV. The SPAC was able to secure that price by pointing to its skyrocketing stock price as evidence of investor enthusiasm. Lucid CEO Peter Rawlinson commented in an interview with Bloomberg this week that the PIPE was oversubscribed, leading to a much larger capital raise than originally intended.

"In an unprecedented manner, [the PIPE] committed at $15," Rawlinson added. "I believe this has not happened before."

Reducing dilution

The 50% premium represents a much better deal for early investors, as it minimizes the dilution associated with the PIPE. If the institutions were able to buy their shares at $10, they would have been able to buy far more shares for the same amount of money, diluting both existing Lucid shareholders and Churchill Capital IV investors.

Specifically, PIPE investors will be buying 166.7 million shares at $15 each to contribute $2.5 billion to the deal, or about 10.4% of the 1.6 billion shares that will be outstanding after closing. If those shares were sold at $10, it would require 250 million shares to raise the same amount of money, or 83.3 million more shares. Under the current structure, Churchill Capital IV investors will end up owning 16.1% of the combined company, compared to 15.3% if the PIPE was at $10 per share (again assuming the same size of $2.5 billion).

Lucid Air interior

Lucid Air is targeting the luxury market. Image source: Lucid Motors.

Saudi Arabia's Public Investment Fund (PIF), its massive sovereign wealth fund, is an anchor investor in the PIPE. Getting the PIF to agree to $15 per share is quite an accomplishment as well, since it is already Lucid's majority shareholder, giving it considerable leverage during negotiations. But with Lucid fetching a pre-money valuation of $11.75 billion (slightly lower than the rumors had suggested), the PIF is already enjoying a handsome return on its original investment of $1.3 billion in 2018. Besides, everyone loses if the deal had fallen apart.

Buckle up

Churchill Capital was able to ink a balanced deal under extraordinary market conditions, at least for anyone who was able to buy in as close to the $10 NAV as possible or shortly thereafter.

Lucid has little to no revenue currently. The company supplies electric vehicle (EV) technology to Formula E, but the electric racing league was suspended last year due to the COVID-19 pandemic. Like other pre-revenue start-ups, shares will remain extremely volatile until Lucid starts delivering vehicles later this year. Even at $30 per share, Lucid's implied market cap is around $48 billion.

Considering how impressive its technology is and how close it is to mass production, the company has a promising future. But it will face substantial execution risks, and a lofty valuation will contribute to wild swings. This one won't be for the faint of heart.

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