Churchill Capital IV (NYSE:CCIV), an electric vehicle SPAC (special purpose acquisition company) is reportedly (according to CNBC) very close to inking a deal with private luxury sedan electric vehicle (EV) maker Lucid Motors. CCIV stock has now spiked to $60 (as of Feb. 19), up over 218% in the past month.
The problem now for investors is whether the PIPE (private investment in public equity) investors will get the standard $10 entry point for their investments in the SPAC. This would make no sense for shareholders of CCIV to allow this, since many of them don’t get this opportunity.
PIPE Investors’ Sweetheart Deal
For example, let’s assume that the PIPE offering is for a guaranteed amount of $300 million at $10 per share. This is typical of most SPAC deals. This complements the total amount of money, including that from the CCIV SPAC.
However, as the merger closes, the PIPE investors have an automatic gain of 5.5 times their money. At the close, they purchase shares at $10 per share that are immediately worth $55.
This, in effect, turns out to be a sweetheart deal for the PIPE investors.
SPAC investors in Churchill Capital IV are likely to balk at approving this boldfaced transfer of wealth from them to the PIPE investors. A more sane approach would be to force the PIPE investors to pay a price at a specified discount to the current market price. For example, this could be a 10% or 20% discount.
Another approach would be to eliminate the PIPE portion completely and announce a secondary offering once the deal is closed. This would give SPAC investors a larger stake in the final Lucid Motors deal. The dilution from the secondary offering would be much lower, since the offering would be done at a market price.
This is exactly what happened with the recent Tilman Fertita SPAC deal (Landcadia Holdings II) with Golden Nugget Online Gaming (NASDAQ:GNOG). The deal closed on Dec. 30 without any PIPE deal.
As a result, the SPAC investors ended up with a 46% stake in the combined company. This is much higher than the typical 20% to 25% stake SPAC investors get with PIPE deals. The company is now free to do a secondary offering if it wants at a much higher price than the typical $10 SPAC PIPE deal.
What to Do With CCIV Stock
There is simply no doubt that this is the single most speculative SPAC stock ever. It has no definitive deal to merge. It does not even have a letter of intent (LOI) that is non-binding, at least as far as the market knows. As one author put it, “the rumor better be true.”
However, on Feb. 16, Reuters came out with a story that a deal is likely nearing completion, as the SPAC sponsor Churchill Capital is now seeking financing. The market value was said to be at $12 billion. However, if that is based on a $10 price, then the real valuation will be 5.5 times that amount today.
The deal was said to have a $1 billion PIPE deal offering. However, this could increase to as much as $1.5 billion. I suspect, however, that if the PIPE deal comes out at a pricing of $10 per share, many SPAC investors in CCIV might object.
The reason is that many, if not most, of the investors in CCIV stock do not have a $10 entry price. Therefore, even though the Churchill Capital SPAC will likely contribute its shares in the reverse merger at an effective price of $10 per share, most of the SPAC owners do not have that cost structure. This is what might make the PIPE deal at $10 seem unfair to them.
If enough CCIV stock owners balk at approving the deal, we could see the deal terms change. In fact, the PIPE financing terms become more competitive and less dilutive for both Lucid Motors owners and the SPAC owners.
On the date of publication, Mark R. Hake does not hold a long or short position in any stock or security mentioned in this article.