Thursday, January 21, 2021

Auto tech start-ups take a wild ride with Spacs

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Auto tech startups catapulted into the U.S. stock market via blank check vehicles have together amassed a market capitalization of nearly $ 60 billion, while several have yet to make a single dollar in revenue or make a product.

the electric vehicle The industry proved to be a fertile hunting ground last year for special-purpose acquisition vehicles, which take companies public by raising money from investors and then making deals.

After the stock markets recovered from the March slump when the pandemic hit, blue chip mutual funds, private equity firms and retail investors invested money in Spacs, who often bought companies with big ambitions but limited track records.

With the technology disrupting the auto industry, investors have rushed to gain exposure to potential winners – be they battery makers, makers of other forms of energy storage, or sensor developers. “Lidar” that some consider essential to the development of autonomous cars.

Yet, according to a Financial Times analysis, the nine automotive technology groups listed via a Spac last year forecasted revenue of just $ 139 million between them for 2020. They include QuantumScape, a battery company backed by Bill Gates and Volkswagen; the start-up of the Nikola hydrogen truck; and the lidar company Luminar Technologies.

While the past 12 months have proven to be a hot market for tech groups IPOs, bankers and lawyers say the Spac process gives companies – and the vehicles that acquire them – more leeway in disclosing future financial projections. The nine auto tech companies, for example, collectively forecast their revenues to reach $ 26 billion by 2024.

Spacs often justify stratospheric projections by pointing to large “addressable markets” like electric vehicles, where even a small market share can be lucrative and make valuations based on predictions of future revenue appear cheap.

“There is a regulatory arbitrage between the Spac model and traditional IPOs,” said Gary Posternack, head of global mergers and acquisitions at Barclays.

“In the process of marketing around Spac combinations, it is possible to discuss projections or forecasts, whereas in traditional IPOs companies cannot provide this information. Regulators can ultimately try to narrow this gap, but for now the difference creates real opportunities, ”he added.

Money pouring into the industry – and not just through blank check vehicles – is a gamble that electric vehicles will eventually become ubiquitous. Market research firm IDTechEx estimates that electric vehicles will make up up to 80% of the global market by 2040, while heavy trucks such as Volkswagen and General Motors are investing billions of dollars to develop their own models.

But even if electric vehicles become dominant, it won’t happen overnight. And as the talismanic performance of electric vehicle pioneer Tesla – now with a market value of nearly $ 800 billion – helps support the investment mania of automotive technology groups, venture capitalists specializing in supporting start-ups Risky-ups warn of potential dangers.

“If you expect your first revenue to be in 2025 and you need to build a model based on a product you haven’t built yet, I think that’s really tough,” said Arjun Sethi, partner at Tribe Capital, a venture capital firm. based in San Francisco. “That’s one of the reasons you have venture capitalists.”

QuantumScape’s short history as a public company underscores the volatility that investors face. Riding a wave of demand, the group’s shares peaked at $ 131 in late December, a thirteen-fold increase from the $ 10 that Spacs are typically listed on.

From Stanford University, QuantamScape has released data that it says shows advancements in solid-state battery technology, which could help improve the range of electric vehicles. The company’s market capitalization, which expects no revenue until 2024 and no profit for three years after that, briefly eclipsed that of Ford and Fiat Chrysler last year.

However, the stock has since plunged 60% from its peak. QuantumScape did not respond to a request for comment.

Scatter plot showing that most Spac deals in 2020 are currently trading above $ 10 per share, the standard IPO price

Luminar Technologies is another Spac with a brief but so far striking life as a public enterprise. The shares of the group, which develops laser imaging sensors, or lidars, that can be used for autonomous driving, have almost doubled since its listing in December.

Founded by Austin Russell, a 25-year-old engineer, the Silicon Valley company signed a production agreement with Volvo is expected to start in 2022, which sets it apart from the competition. But its valuation of around $ 10 billion overshadows the automotive lidar market, which Northland Securities analyst Gus Richard said will be worth $ 2.5 billion in 2025. Luminar declined to comment.

A seasoned Wall Street lawyer who has worked on numerous Spac deals said the enthusiasm of retail investors has been a key feature of the auto tech industry’s mania.

“If the trading strategy is’ I’m going to buy across the spectrum because there will be winners and I know there will be losers” then this is not a crazy investment strategy, ”said the Spac advisor. “But not all electric vehicle companies will survive. They just can’t, there are too many of them.

Retail investors have been among those trapped in the crisis that ravaged Nikola, an American electric truck start-up and one of the earliest beneficiaries of the investment craze. After peaking in June, shares of Nikola fell in September after the short film Hindenburg Research alleged that the business was a “complex fraud”. Its founder Trevor Milton, who resigned in September, has denied any wrongdoing.

Despite the turmoil, shares of the nine auto tech companies that used Spacs to go public last year are trading well above $ 10, with a median price above $ 20. Indeed, the shares of nearly three-quarters of the 37 Spac deals concluded last year are trading above $ 10. More than a third are trading above $ 20.

There is also no indication that the wave of interest has peaked. Lucid Motors, a California electric vehicle group controlled by Saudi Arabia’s sovereign wealth fund that has yet to deliver a single model, is in talks to merge with one of the Spacs launched by former investment banker Citigroup Michael Klein, according to people with direct knowledge of the matter.

However, some warn that the combination of auto tech mania and Spacs will likely remain combustible this year.

“It’s not sustainable because at some point things are going to normalize and investors are now buying these things blindly,” said a senior executive at a stock selling bank.

Additional reporting by Arash Massoudi in London

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