Fisker Inc (NYSE:FSR) closed its merger with a SPAC (special purpose acquisition company) on Oct. 30. The company says that it received “in excess of $1 billion” at the close of the merger. Since then, Fisker announced it will receive up to $264 million more from the sale of Fisker stock to warrant holders.
That will be a boon to the company once the warrant holders sell their stock. I estimate the stock is still worth up to 45% more.
The capital raise and warrant issue can be seen on page 4 of the prospectus filed with the SEC on Dec. 1. It also shows the list of selling shareholders, which include some very interesting investors.
Who Is Selling?
For example, on pages 117 to 123 of the filing, a list of insiders who participated in the PIPE (private investment in public equities) offering and related warrants is exposed. Most of these investors were able to buy in at $10 per share and their warrants can be exercised to buy shares at $11.50. Right now, Fisker stock trades a little over $15, so these shareholders are keen to book their profits.
For instance, the list includes a familiar cast of institutional characters like Citadel and BlackRock. But there are also a number of Canadian institutions like the Ontario Healthcare Plan, BMO Nesbitt Burns and Alberta Investment Management Corp.
This might be partly due to the fact that a Canadian company, Magna International (NYSE:MGA), will be building Fisker’s electric SUV. Fisker signed a “cooperation” deal with Magna on Oct. 14, shortly before it closed its SPAC reverse merger.
As my InvestorPlace colleague Vince Martin recently pointed out, originally Fisker was going to use Volkswagen (OTCMKTS:VWAGY) to make its SUV, called the Ocean. He pointed out that this new “cooperation” deal is not actually a definitive manufacturing agreement. Nevertheless, Magna is still getting warrants and shares in Fisker.
Another set of investors from Scandinavia is interesting. For example, the Central Bank of Norway has a big stake in the company (3.25 million shares). And then there is a famous actor, Nickolaj Coster-Waldau. This Danish actor (who often plays American bad guys) has a small stake in Fisker that he may be looking to sell. I watch all his movies, as they are always cool. Clearly, this guy is connected. He got in at $10 per share as well.
What Fisker Will Do With the Money
When Fisker announced its SPAC merger on July 13, it said that the capital from the merger would be enough to fund its SUV production. It emphasized this as well in its slide presentation associated with the deal.
Now Fisker says that it will be able to “fully fund Fisker operations and the development of the Fisker Ocean program through the planned start of production in Q4 2022.”
In other words, it won’t need to raise any more capital that would dilute existing shareholders. However, with the proceeds of these warrant sales, shareholders will be diluted once all the warrant holders exercise their warrants to buy shares. I estimate the extra capital raised will dilute shareholders by about 9% or so.
The company received $1 billion from the merger and now it will have an additional $261 million. That $1.26 billion acts to lower its enterprise value (EV) and valuation, as I show below.
Expected Value of Fisker Stock
In my previous article on Fisker last month I wrote that Fisker would make a 2025 EBITDA of $2.8 billion. I estimated that amount is worth about 50%, or $1.392 billion, on a present value basis. I used a 15% discount rate to derive that EBITDA number.
Today Fisker’s market value is $4.67 billion, but it also now has $1.26 billion in cash, including the exercise of warrants. That means its pro forma enterprise value (EV) is now $3.41 billion (i.e., $4.67 billion minus $1.26 billion).
Therefore, its present value EV-to-EBITDA ratio is very cheap. It works out to just 2.5 times (i.e., $3.41 billion divided by $1.39 billion).
A more normal valuation would be 5 to 6 times or an EV of $7 billion to $8.35 billion. The implied market value would be $1.26 billion higher since one must add back the cash.
Therefore, this means that Fisker’s equity value should be $8.26 billion to $9.6 billion in five years. That works out to 76% higher than today (i.e., $8.26 billion divided by $4.67 billion market cap today). Using the higher multiple, the stock is worth 105% more (i.e., $9.6 billion using 6 times multiple divided by $4.67 billion market cap today)
Therefore, Fisker stock is worth significantly more than its present price. The stock should be higher by 76% to 105% higher. Given the Dec. 10 of $15.03, Fisker is worth between $26.45 and $30.81 per share.
What to Do With Fisker Shares
Keep in mind that this assumes EBITDA reaches $2.8 billion by 2025. There are a lot of risks around this event actually happening. Despite the fact that we used a 15% discount rate with that EBITDA number, we should also risk-adjust the probability of this happening.
For example, let’s assume that there is a greater than even chance, say 60% that the stock hits $30.81. However, let’s also assume that there is a 30% chance that the stock stays level over the next year. Lastly, let’s make a bet that there is a 10% chance Fisker stock could run into trouble and fall 20% over the next year.
Therefore, what analysts call the “expected value” is forecast by adding up these weighted probabilities. The 60% chance of $30.81 works out to a price of $18.49. We add that to the 30% chance the stock stays level at $15.03 (i.e., add in $4.51). That sum is now $23.
However, with a 10% chance it falls 20%, we subtract $1.20 (i.e. 80% of $15.03 is $12.03, times 10% is $1.20). Therefore the expected value for Fisker stock is $21.80 (i.e., $23 minus $1.20).
That represents a potential return of 45% over today’s price. For most investors that is a great ROI.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.