Steve Burns pulled together several pieces of a business operation last year: His company, Lordstown Motors, designed an electric pick-up truck, acquired a plant and machinery from General Motors, and picked up thousands of orders.
However, Mr. Burns is still struggling to raise enough capital. This month, he ignored that critical piece by voting to merge Lordstown Motors with a special-purpose company, or SPAC, a deal that will net the truckmaker $ 675 million and a listing on Nasdaq.
Another upside: Unlike a conventional initial public offering, a SPAC merger will only take a few months, said Mr. Burns. “The traditional IPO time is maybe a year and a half,” he said. “We are in a race to be first with electric trucks. We wanted to get it ready and at the company of building the car. “
SPACs are suddenly in the spotlight.
These companies have long existed on the sidelines, providing small and approximate companies with capital and the ability to list their shares on a stock exchange – things to which they would not otherwise have access. Sometimes called companies with low control, SPACs increase money from investors without having a detailed business plan. Their sole purpose is to find another company to buy within two years. If that does not happen, the company will be satisfied and investors will get their money back.
Although industry watchdogs say SPAC fraud is rare, one purchase of SPAC last year from Modern Media Acquisition, a music streaming company whose books later became fraudulent, gave some investors a break. And some aspects of the SPAC business model – namely the fact that sponsors of these acquisition companies are often able to buy substantial stakes in the company they are merging with minimal cost – have raised questions about their advantage over typical shareholders.
In recent months, investors behind SPACs in particular have fallen in love with electric car companies amid growing expectations that such cars and trucks will soon start moving from cars powered by fossil fuels. Shares of Tesla, the world’s leading electric car manufacturer, have been made so large that its market capitalization is almost twice as large as Toyota Motor’s.
SPAC transactions with automotive companies have so far raised nearly $ 10 billion in total – a trend that Kristi Marvin, a former investment banker who now owns the SPACInsider data site, called the summer of “deals with wheels.”
In June, Nikola, which aims to make heavy trucks powered by electricity and hydrogen fuel cells, merged with a SPAC. Investors have set its valuation at around $ 15 billion – more than half of what the market thinks Ford Motor is worth – even though Nikola has not started commercial production.
Apollo is just one of several leading investors that have embraced SPACs. At the end of July, Pershing Square Tontine Holdings, which is managed by hedge fund manager Bill Ackman, raised $ 4 billion in an offering on the New York Stock Exchange. Social Capital, which is run by a former Facebook executive, Chamath Palihapitiya, has a handful of supporters, including one who merged with Virgin Galactic last year.
Michael Klein, a former executive Citigroup, has raised a handful of purchasing companies under the name Churchill Capital. Last month, one of its companies announced a $ 11 billion deal with healthcare provider MultiPlan.
So far this year, SPAC activity per dollar volume has nearly doubled from last year, setting a record $ 31.3 billion, according to SPACInsider. Credit Suisse has been the most active bank in signing the deals, reports SPACInsider, followed by Goldman Sachs and Citigroup.
“It’s always challenging to do a big IPO above $ 1 billion, especially in today’s volatile environment and the time it takes to invest your story and tell it to investors,” said Boon Sim, the founder and managing partner of Artius Capital Partners, a private equity firm. Last year, for example, WeWork moved its IPO after investors weighed in on the management and financial perspectives of the office space.
In June, Mr. Sim is teaming up with Charles Drucker, a former chief executive of payments company Worldpay, to start a $ 525 million SPAC looking to buy technology as a fintech company.
Pension funds, mutual funds and other investors have warned against SPACs in part because low interest rates have forced them to look for higher returns.
Since 2018, SPACs have primarily taken over technical and industrial companies, followed by energy and finance companies, with a typical deal value of close to $ 1 billion, according to a recent analysis by Goldman Sachs. Shortly after announcements were made, the average SPAC performed better than the stock market, Goldman found, but left the broad market behind after completing a purchase.
Mr Ackman’s SPAC is the largest ever. His company says that because it has the right to buy additional shares of the target company, the purchasing power of Pershing Square Tontine could be as high as $ 7 billion. To make the deal more attractive to future investors, Pershing plans to eliminate a feature typical of purchasing companies that allows the sponsor – in this case Pershing – to buy 20 percent of the company it’s merged with virtually free of charge.
The seven-person investment team of Mr. Ackman researches broadly for a purchase purpose. It is looking for what it calls a “mature unicorn”: a high-quality company, with venture capital support considering an IPO; an emergency company owned by private equity backers; or perhaps a business in business. Pershing hopes to sign a deal next summer.
“There are more large-scale private companies today than ever before,” Mr Ackman said. Contrary to some of the more speculative deals he has observed, he stated, “we are trying to merge with a company that we may have a decade.”
Mr. Burns of Lordstown Motors said his deal came to fruition after he did not make much progress with raising money from investors through conventional means. Many people he spoke to were hesitant to take a chance on an untest business, especially as the coronavirus pandemic took hold this spring.
Managers at Goldman Sachs linked him to David Hamamoto, a Goldman alumnus who had a successful investment in real estate. The SPAC of Mr. Hamamoto, DiamondPeak Holdings, had considered more than 150 companies for a potential deal.
Joining in early June, the two men traveled to Los Angeles to see a prototype of Lordstown Motors’ truck, the Endurance, and toured the company’s company, a former GM factory in Lordstown, Ohio. In July, it began holding six to eight Zoom talks a day with institutional investors. After three weeks, they had raised about $ 500 million in what is known as a private investment in a public entity, from companies such as GM, Fidelity, BlackRock and Wellington Management.
The deal gives Lordstown Motors an estimated $ 1.6 billion, and Mr Burns said the company now plans to start pickups next year.
Mr Hamamoto said he was keen to invest in electric cars. He acknowledged that electric cars accounted for only about 2 percent of the U.S. market, but added that number could climb to more than 50 percent within 20 years, according to some analysts.
“You see what Tesla has done over the past year, and now everyone is taking note of this secular shift to electricity,” he said.
Other start-ups are trying to compete head-to-head with Tesla, which also plans to make an electric pickup, but Lordstown Motors is focusing on what is currently a relatively troubled space – work trucks bought by electric utilities, construction companies and other companies.
“The fact that we are going to the commercial float market is a differentiated value proposition,” Mr Hamamoto said.
Lordstown Motors had orders for 15,000 trucks before the SPAC deal was announced earlier this month, a number that shot up to 27,000 shots, or about $ 1.4 billion in potential sales, Mr said. Burns.
Of course, the company still faces challenges. Each wheel of the Endurance is driven and controlled by its own electric motor. This eliminates many moving parts such as drive shafts and axles, but the design is relatively untested. Mr. Burns must also hire engineers, set up suppliers and set up an assembly line.
A few start-ups have succeeded in the automotive sector. Tesla, for example, has struggled for years before recently reporting on four consecutive profitable quarters. In 2019, their stock tumbled as sales sputtered.
Lordstown Motors’ deal with DiamondPeak is scheduled to close in October. Mr. Burns said he hoped the infusion of capital would be enough to get trucks from the assembly.
“We want to prevent enough to get all the way to the Promised Land,” he said.
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