Lucid Motors (NASDAQ:LCID) announced on Sept. 8 that it would redeem all 41.4 million of its outstanding public warrants to buy LCID stock.
On the surface, the early redemption of the warrants is a no-brainer. However, the move does come with potential consequences.
Here are the pros and cons.
The Pros of Redeeming LCID Stock Warrants
If you look at the press release announcing the redemption, you will see the following three things:
- The 41.4 million public warrants were issued on July 29, 2020, as part of Churchill Capital Corp. IV’s initial public offering. The SPAC (special purpose acquisition company) issued 180,000 units at $10 per unit, raising gross proceeds of $1.8 billion.
- The holders of the warrants will undertake a cashless redemption, whereby the redemption price falls to 1 cent per warrant and, for that cent, receives 0.4458 shares of Lucid stock.
- The redemption will occur at 5 p.m. on Oct. 8. Assuming all warrant holders deliver a fully and properly completed Election to Purchase by the redemption date and time, all 41.4 million warrants will be exercised.
The best news from this cashless redemption is that the original warrant dilution of 41.4 million shares (2.6% of its 1.62 billion outstanding shares) doesn’t happen. Further, the holders of the warrants don’t have to come up with any cash.
Suppose you bought 1,000 units in Churchill Capital Corp. IV’s IPO and you still hold the shares and warrants, post-redemption, your $10,000 investment is worth $26,793 [1,000 shares plus 200 warrants multiplied by 0.4458 shares] as I write this.
That’s a pretty good return over 14 months. But there’s a downside.
The Lost Funds
Two groups lose something from this cashless redemption.
First, the company loses out on $476.1 million in cash generated from the exercise of those 41.4 million public warrants at $11.50 a pop. Now, the company had $2.07 billion in marketable securities at the end of June, so it’s not hurting for cash, but $476.1 million is still a 23% bump to its cash hoard.
If you’ve followed the history of Tesla (NASDAQ:TSLA) and most electric vehicle manufacturers, they tend to burn cash as fast as avid cannabis users smoke joints.
Second, a $12,300 investment [the original $10,000 plus $11.50 exercise price multiplied by 200 shares] would be worth $29,520.
So, in the cashless scenario, an investor would have a 168.41% return on their $10,000 investment. Based on the original warrant scenario, they’d have a 140% return. So, for now, the cashless redemption is the better investment.
However, down the road, if the company were ever to pay a regular or special dividend, the original warrant scenario – based on a $200 share price and a $2 annual dividend payout – would provide an additional $110.84 per year to the shareholder, pulling even after approximately a decade.
Ok, maybe I’m stretching the validity of my argument.
The big issue is that Lucid is betting that when it does need $476 million in funding, it will get it for much less than the issuance of 41.4 million shares.
The Bottom Line
As I said in mid-September, I think LCID shareholders’ biggest concern is what its majority shareholder – Saudi Arabia’s Public Investment Fund (PIF) – does in February when its six-month lock-up ends.
“Saudi Arabia’s PIF originally invested $1 billion into Lucid in 2018. In total, it’s estimated to have invested $2.9 billion. It currently owns 63% of Lucid’s shares. So even at less than $20 a share, it’s made more than $17 billion on its investment,” I wrote on Sept. 13.
By the time February rolls around, PIF will have held its investment in Lucid for a good three years. For a sovereign wealth fund, that’s not a long time, so I’d be shocked if it exited its position for at least a couple of years.
On the whole, however, the move allows it to issue an additional 22.9 million shares [41.4 million less 18.5 million issued from cashless redemption] in the future without diluting shareholders to any further extent.
It’s like a get out of jail free card. I like it.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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.
