Shares of Naked Brand Group (NASDAQ:NAKD) stock are up more than 20% in morning trading after the swimwear and lingerie company announced an unexpected and surprising merger.
Overnight, Naked Brand announced that it is merging with an early stage, privately held electric vehicle company called Cenntro Automotive.
The tie-up of a lingerie company and an electric vehicle maker took investors by surprise and it is not immediately clear where the two companies will find synergies. However, markets are reacting favorably to the merger news, sending NAKD stock up 20%. Year-to-date, Naked Brand stock is up 350%.
What Happened With NAKD Stock
Naked Brand has acquired U.S. electric vehicle startup Cenntro Automotive, giving the lingerie company access to the high-flying EV space. Naked Brand announced yesterday that it will swap 70% of its outstanding shares, plus $282 million in cash, for Cenntro Automotive, an electric vehicle developer that has, to date, sold nearly 4,000 commercial electric vehicles. Naked will swap every three existing NAKD shares for seven new shares to Cenntro shareholders. Together, Naked and Cenntro will have a market capitalization of approximately $2 billion.
The Cenntro Automotive deal is the latest step in Naked Brand’s evolution. In April, Naked Brand offloaded its brick-and-mortar stores in order to focus on an online-only lingerie business. Naked’s primary brand is Frederick’s of Hollywood, which the company says it now plans to divest after the acquisition of Cenntro Automotive is completed. The company says the transaction is likely to close by the end of the year.
What It Means
The move into electric vehicles is further evidence that Naked Brand is aggressively moving to reposition itself as its lingerie and swimwear business continue to underperform. But exactly where Naked Brand is heading and what it will ultimately become remains unclear. CEO Justin Davis-Rice, whose 10% stake in Naked Brand will drop to 3.5% after the Cenntro deal is finalized, has called EV an “explosive category.” But what that ultimately means for Naked Brand and NAKD shareholders is speculative at this point.
What is clear is that NAKD stock continues to struggle. While the share price is up sharply this year, it continues to trade below $1. On Oct. 27, the company received an 180-day extension to regain compliance with Nasdaq’s $1 minimum bid price requirement. In that context, the Cenntro Automotive deal could be seen as a Hail Mary pass to try and boost Naked Brand’s stock price above the $1 it needs to avoid being delisted. Additionally, Naked Brand is a meme stock, rising as high as $3.40 per share this spring before coming back down to earth.
Cenntro Automotive does seem like a legitimate startup. The company’s first vehicle in production is called the Metro, and it is a light electric commercial car designed for urban transportation purposes such as food and package deliveries. Trial production of Metro started in 2017 and, to date, the company has produced more than 4,000 vehicles. The Metro is currently sold in North America, Europe and Asia. Cenntro Automotive says it plans to introduce four additional electric vehicle models to serve the light-and medium-duty market by the end of this year. Whether Naked Brand can successfully pivot from lingerie to electric cars remains a question mark.
What’s Next for Naked Brand
Investors’ immediate reaction to Naked Brand’s acquisition of Cenntro Automotive appears to be a positive one given the stock’s big jump in morning trading today. Whether the deal will be enough to get NAKD stock above the $1 threshold needed to avoid being delisted is not clear.
Given that Naked Brand is a penny stock that is at risk of being delisted, investors may want to steer clear of the company for the time being. At least wait until the Cenntro Automotive deal closes to see what comes of NAKD.
On the date of publication, Joel Baglole 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.