If you’re thinking about investing in Spartan Energy Acquisition Corporation (NYSE:SPAQ) and you’re not very tolerant of risk, there’s a more sensible investment than SPAQ stock.
On Oct. 15, Fisker, Spartan’s merger partner and designer of the Ocean electric sports utility vehicle that it hopes to bring to production by the end of 2022, announced that its manufacturing partner would be Magna International (NYSE:MGA), which currently builds the Jaguar I-Pace electric SUV at its assembly plant in Austria.
“We are very happy to be able to work with Fisker on such an exciting, sustainable product and to see what additional opportunities this cooperation may bring,” said Swamy Kotagiri, President of Magna. “This is a great example of our strategy to leverage our strong portfolio to scale for future mobility needs and utilize our full vehicle engineering and manufacturing capabilities.”
Now that Magna’s in the game, risk-averse investors ought to consider buying Magna stock as an indirect way to benefit from Fisker’s future growth without betting the entire farm.
Magna Will Own 6% of SPAQ Stock
The special meeting to approve the combination between Fisker and Spartan Energy takes place on Oct. 28. Until the vote is held and the SPAC’s shareholders approve the combination, FSR stock doesn’t exist.
However, assuming the deal is approved, Fisker will issue warrants to Magna to buy 6% of the electric vehicle startup’s stock.
According to the Securities and Exchange Commission filing, the Magna warrants vest in three equal parts (the third tranche is 33.4% to round to 100%) based on certain production timelines. The final third of the warrants occurs when Magna starts pre-serial production of the Ocean.
Assuming that Magna meets these timelines, it will have obtained warrants to buy 6% of Fisker, which has a current market value of approximately $4.6 billion based on 341 million shares outstanding, including the 19.4 million shares for Magna’s 6%.
Magna obtains the right to buy more than 19 million shares over the next five years for just 1 cent per share or $193,629. At current prices, those shares are worth approximately $260 million.
If Fisker is even remotely successful, this could be a very lucrative, not to mention inexpensive, long-term investment for Magna.
Magna’s Current Business
Magna’s stock hasn’t done too badly despite what the novel coronavirus has done to its sales. Year-to-date through Oct. 16, it’s got a total return of -0.40%.
On the top line, sales fell 58% during the second quarter ended June 30, to $4.3 billion from $10.1 billion a year earlier. As a result, it had an operating loss of $789 million during the quarter compared to a $595 million profit a year earlier.
However, for all of 2020, it expects to generate an adjusted earnings before interest and taxes (EBIT) margin of 2.9% to 3.3% on sales between $30 billion and $32 billion. At the midpoints — 3.1% margin, $31 billion in sales — Magna expects almost $1 billion in adjusted EBIT for fiscal 2020.
That’s without the potential upside of its relationship with Fisker. Magna views the stake as its way to ensure it’s compensated for the work it will do for Fisker.
“We really want to be the Switzerland for the automotive industry – neutrality. We’re not siding with one customer,” stated Magna’s president.
“This is a unique competitive position for us, particularly with new mobility players and [automakers] seeking to expand their electrified offerings.”
Currently trading at 0.51 times sales, investors get an indirect position in a growth company like Fisker at value pricing. Not to mention you’ll get paid a 3% dividend yield while you wait to see how Fisker turns out.
The Bottom Line
In my last article about SPAQ, I said that the lower Spartan goes, the more reason speculative investors ought to be buying its stock.
“At $17, I thought they were a fun buy for speculative investors. With nothing but good news in the past month, I don’t see why speculators wouldn’t be jumping on Spartan at prices below $14. Once it merges with automotive startup Fisker Inc., I suspect it won’t take long to get to $20,” I wrote on Sep. 28.
Trading a bit lower in the three weeks since, and a manufacturing partner in tow, my thought process hasn’t changed. If you’re a speculative investor, SPAQ remains a buy.
If you’re risk-averse, MGA might be the better play from a margin of safety standpoint.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.