When Michael Klein’s latest SPAC announced its long-awaited merger with Lucid Motors, investors might have expected Churchill Capital Corp IV (NYSE:CCIV) stock to rise further. EV SPACs, after all, have seen post-merger prices triple or more in 2020. So, why not get in before everyone else?
Instead, the SPAC plummeted 50% on Tuesday, leaving shell-shocked investors scrambling to explain their stunning losses. A “buy the rumor, sell the news” sense certainly felt right – CCIV had climbed from $10 to over $64 in anticipation of the merger before getting crushed post-announcement.
But CCIV’s tumble had little to do with the merger itself. Instead, the stock’s epic rise was fueled by greed, FOMO, and a weak understanding of how SPAC accounting works. Though Lucid Motors looks primed as the next Tesla, the CCIV debacle highlights the perils investors face in trying to outsmart a market they don’t always understand.
CCIV Stock: A Crash Course in SPACs
Like any marriage, the CCIV/Lucid merger seemed destined to happen the moment they met. The financiers shielded the complex negotiations from prying eyes, but eagle-eyed reporters were right on the money in picking out Churchill Capital IV as Lucid’s eventual suitor.
But just like a marriage, there were also some rather overeager parents involved. Even before the engagement was announced, investors were already planning the honeymoon. So, as CCIV stock rumors spread, investors excitedly jumped on the bandwagon, believing the stock could only go up.
There’s just one problem: SPAC accounting doomed the run-up to $64 from the start. That’s because these mergers deal only in cash values, not market valuations. In other words, Mr. Klein could only sell CCIV to Lucid at a $10 per share valuation, not $64. Any higher, and Lucid would have just proposed to another $10 SPAC.
A Fair Deal for Lucid
Mr. Klein ultimately negotiated a valuation of 5.3 times estimated 2022 revenues for Lucid, or a $16.3 billion post-merger value. At that stunningly well-negotiated figure, CCIV would get a whopping 16.1% stake. PIPE investors, meanwhile, would get a 10.4% share.
Investors, however, were expecting even better. By pumping up CCIV to $64 per share (or a $13 billion market cap), they were more-or-less hoping that Mr. Klein could wrangle even better terms, perhaps a $7 billion post-merger valuation. That way, Churchill Capital’s cash would have granted CCIV investors a 30% stake in Lucid.
One can immediately see the flaws to that wishful train of thought. Why would Lucid shareholders agree to give up 30% ownership at a $7 billion valuation pre-merger when the company could be worth $43 billion immediately after? (That’s CCIV’s $13 billion market cap divided by its 30% stake). A straight IPO would have raised far more money at better valuations.
Alas, when markets are hot, these calculations are the first things to go out the window. So, when Lucid/CCIV announced final terms, investors saw their money melt away faster than an unwanted prenup at a marriage proposal.
Lucid to $200! (Yes, Really…)
Of course, these figures only represent the pro-forma values used for negotiating equity stakes. Markets have since pegged Lucid at a $45 billion valuation with CCIV’s $28 per-share price.
That means Lucid Motors is still a winning investment. As my colleague, Luke Lango, has made clear, the company is the most likely electric vehicle company to grow 10x in the coming decade. I, too, have a buy rating on CCIV stock.
There are plenty of reasons for investors to remain bullish on Lucid:
The company has an experienced management lineup that’s far more diverse than the strong-man culture at many other EV startups. CEO Peter Rawlinson brings 30 years of engineering experience from Tesla and others, while his team sports equally pedigreed backgrounds.
And we haven’t even started to talk about Lucid’s world-beating cars yet.
Their LEAP Platform (Lucid Electric Advanced Platform) pushes the envelope of the “skateboard” design. In short, buyers are looking at a 1,000 horsepower, 2.5-second 0-60mph platform that can go >500 miles on a single charge. And the sports cars also look good.
In the words of Mr. Lango, “it’s a dream car.”
And that alone makes CCIV stock a compelling investment. Lucid is sitting on strong IP, big dreams, and a $4.5 billion pile of freshly raised cash. It’s a company that could one day rival Tesla at its own game. And if that’s not the stuff of honeymoon dreams, I don’t know what is.
Lessons From CCIV and Lucid
Still, investors should take a clear lesson from the recent mania in SPAC investing: when it comes to pre-merger SPACs, don’t jump the gun.
Today, FinTrack, a financial tracking company, counts no fewer than 333 unmerged SPACs, up from just a handful a year ago. Pros run many of these firms — Chamath Palihapitiya, the “King of SPACs, has no fewer than a dozen outstanding. But other “blank-check” companies are run by celebrities with far less negotiation or financial experience.
All this spells trouble ahead. For all the star-power involved, managing a SPAC is harder than it seems. Firstly, SPACs need to find a compelling target to take public. Most marks are firms that don’t have the strength to pull off a traditional IPO; less experienced SPAC sponsors might fail to differentiate between a high-potential company and a failing one. And secondly, SPAC sponsors need enough guile to negotiate a large equity stake. It’s no use merging with a great company if you’re only receiving scraps.
In other words, no investor can realistically price a SPAC until the merger term sheet goes public. If CCIV had somehow negotiated a 40% stake in Lucid, for instance, the stock would be worth $80 or more today. Instead, Mr. Klein’s SPAC managed to wrangle a 16% stake – no small feat, but still not up to investors’ inflated expectations.
Think of it this way: imagine a set of parents whose only child is marrying a rock star. The kids have proposed, and the wedding date has been set. The prenup, however, hasn’t yet been opened. So, before you lose your head about how rich your kid is marrying, take a moment to peak at that financial contract. Because as much as the kids might love each other, you might not like what you see.
SPACs to the moon. Happy investing, all.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.