After working together for a time to produce an electric vehicle (EV) in alliance, Ford Motor Company (NYSE:F) and Rivian Automotive (NASDAQ:RIVN) canceled their plans publicly on Friday, Nov. 19. Ford's CEO Jim Farley said Ford is now confident it can design and manufacture EVs on its own. The market reacted by bidding Ford's stock down slightly, while Rivian's shares jumped more than 4% before the close of Friday trading. However, this response may be overlooking a potentially strong upside for Ford.
The end of the alliance
After several years of building a significant stake in Rivian and planning to jointly develop a vehicle with the electric car company, Ford officially cut the cord last week, striking out into the EV market on its own. Farley said, "We have growing confidence in our ability to win in the electric space" in an Automotive News interview, Yahoo! Finance reports. Farley said the situation is very different than it was two years ago when the strategic alliance began, noting, "So much has changed: about our ability, about the brand's direction in both cases, and now it's more certain to us what we have to do."
After its shares jumped on the news, Rivian's market capitalization (market cap) surged to almost $110 billion, well ahead of Ford's $78.2 billion market cap. The electric car maker is now in third place among automotive stocks, behind Tesla and Volkswagen. The company's first deliveries of its R1T pickup truck, a machine with a base price of $67,000, are slated for this month, though supply chain problems and other difficulties have delayed many pre-order deliveries to dates as far as out as 2023.
Several data points indicate Farley may be right about Ford not needing Rivian any longer. Reservations for Ford's electric pickup truck, the F-150 Lightning, surpassed 150,000 units in September, leading to the company stepping up production measures. The Lightning is also more of a "workhorse truck" than the Rivian R1T, the latter featuring a high price and a 4.5-foot bed. The base model Lightning, by contrast, has a $39,974 MSRP, a 5.5-foot bed at launch and likely full-sized bed options in the near future, and is even built so it can serve in place of a generator for a home or worksite lacking other electrical sources. The model appears designed to springboard off the immense and lasting popularity of the Ford F-150 pickup, emulating much of its utility, while the R1T is currently being marketed mainly for recreation.
In late September, Ford also announced an $11.4 billion joint investment with SK Innovation, a South Korean battery maker. This includes construction of a six-square-mile factory complex to make EVs and EV batteries in Kentucky, dubbed Blue Oval City, along with a $5.8 billion battery factory in Kentucky and several other, smaller battery factories. Initial battery production will be 129 gigawatt-hours, about two-and-a-half times the production capacity of Tesla's planned Berlin "Gigafactory," which will initially be able to build 50 gigawatt-hours of batteries. Ford is starting with a trio of EVs, including the F-150 Lightning, and aims to have half its lineup electrified by 2030. With its aggressive investments, fast-moving construction of cutting-edge facilities, and strong progress on the Lightning, the strategy appears likely to develop as planned, making Rivian superfluous for Ford's electrification plans.
A potential tsunami of cash for Ford
Splitting up with Rivian gives Ford a potentially major boost for its EV plans, one it wouldn't have gained without separating from the EV start-up. The Blue Oval began buying Rivian stock back in 2019 and continued to do so for some time, eventually building a 12% stake in its former partner. CNBC reports that Ford accumulated approximately 102 million shares in all, spending a total of $820 million in the process.
From this data, Ford purchased its Rivian stock for an average of around $8.04 per share. Rivian's shares are now trading for about $128 per share as of the date of announcement, meaning Ford's 102 million shares are now worth approximately $13 billion. By selling these shares, which it now no longer needs since it is not partnering with Rivian on any future projects, it could gain a vast cash windfall to boost and accelerate its own plans.
Several caveats apply to Ford's potential sell-off of its Rivian stock. The company has not yet indicated it will do so, and will presumably have to wait for the lockup period following Rivian's Nov. 10 IPO to expire. The EV maker's share prices could drop during the lockup period, which is a legally enforced period during which insiders, company executives, and major investors (like Ford, in this case) aren't allowed to sell their shares. In this case, if Rivian's shares drop after the initial IPO euphoria, Ford's potential cash windfall could be severely reduced. Liquidation of so many Rivian shares would also drive down the stock's price. It's almost impossible for Ford to realize the whole $13 billion, even if it liquidates its entire position.
Why Ford might emerge a winner
Despite all of these complications, Ford currently has the near-future option to gain billions of additional dollars by selling its Rivian shares. These gains would be taxed, but would not add any additional debt to the company balance sheet. Ford would almost certainly make immense gains above the initial average $8.04 it paid, gaining funds to accelerate its own EV program or helping its turn around in other ways.
Adding this debt-free cash source to Ford's current strategic options can only be a positive for the company. It has taken aggressive action to sunset its junk bonds with a buyback, potentially winning back an "investment grade" rating from the three big rating agencies, thereby opening the door to lucrative institutional investment in the car company along with better financing options if it needs to borrow.
Its massive Blue Oval City EV and battery factories will support production of the Ford F-150 Lightning and the following EV lineup. The addition of a reserve of cash accessible by liquidating its Rivian shares simply gives Ford more flexibility and greater resources to execute on all of these initiatives, and makes Ford look like an even more bullish contender among electric car stocks.