- Discussing surprise backdoor listing announcement and key transaction terms.
- Company likely decided to pursue a backdoor listing after a recent funding round did not raise sufficient capital to execute on its aggressive business plan.
- Even after the proposed $525 million private placement, Nikola will likely be required to raise a major amount of additional capital by mid-2021 at the latest point.
- Company currently expects EBITDA profitability by 2024 but investors should take these projections with a huge grain of salt given the frequent delays experienced at Tesla and the company already having revised earlier projections.
- Despite these issues, Nikola might very well attract meaningful investor interest as market participants are eagerly looking for the next Tesla.
In an apparent twist of fate, emerging zero emission heavy duty truck developer Nikola Corporation ("Nikola") is now trying to ride the coattails of its nemesis, Tesla Inc. (TSLA) by becoming a public company:
Nikola Corporation, a leader in the design and development of BEV and FCEV class 8 semi-trucks, along with VectoIQ Acquisition Corp., a publicly-traded special purpose acquisition company, announces that the two companies have entered into a definitive agreement to create a company focused on the development of next generation smart transportation. Upon the closing of the transaction, the combined company will be named Nikola Corporation and is expected to remain NASDAQ-listed under the new ticker symbol "NKLA."
The transaction reflects an implied enterprise value at closing of $3.3 billion. Cash proceeds raised in connection with the transaction, which will primarily be used to fund operations, support growth and for other general corporate purposes, will be funded through a combination of VectoIQ's cash in trust and a $525 million private placement of common stock at $10.00 per share led by institutional investors including Fidelity Management & Research Company, ValueAct Spring Fund and P. Schoenfeld Asset Management LP. Current Nikola stockholders will remain majority owners of the combined company at closing.
The boards of directors of both VectoIQ and Nikola have unanimously approved the proposed transaction. Completion of the proposed transaction is subject to approval of VectoIQ and Nikola stockholders and other customary closing conditions, including a registration statement being declared effective by the Securities and Exchange Commission, and is expected to be completed in the second quarter of 2020.
Investors following the red hot zero emission transport space might wonder why the company did not use the renewed hype around the industry's posterchild Tesla to conduct a more traditional initial public offering ("IPO") at a potentially much higher valuation?
The most likely answers are: Time and risk avoidance. Merging into an already Nasdaq-listed entity shortens the going-public process by a couple of months or even quarters and given the current market jitters, a traditional IPO carries the elevated risk of not attracting sufficient investor demand at the initial price range set by the company and its underwriters thus Nikola's decision for a backdoor listing. In the current environment, the company could have even faced problems to convince leading investment banks to underwrite the IPO.
Photo: Nikola prototype on first zero-emission beer delivery for anchor customer Anheuser-Busch - Source: Company Website
To be perfectly honest, my personal advice would have been to pursue an IPO in Germany as Nikola has already caused a massive and ongoing hype around its hydrogen fueling station technology provider, Norway-based NEL ASA (OTCPK:NLLSF).
Since Nikola picked NEL "as the sole equipment provider to create the largest hydrogen network in the world" in late 2017, the company's stock price more than quintrupled at its recent peak with tens of millions of shares traded in both Norway and Germany each day.
Particularly hydrogen- and fuel cell companies have enjoyed frequent and highly favorable media coverage in Germany over the past couple of quarters. For example, daily trading volume in Germany-listed shares of fuel cell companies Ballard Power (BLDP) and Plug Power (PLUG) has increased from a couple of thousand to several million in recent months.
As the "Energiewende" (Germany's term for transitioning to renewable energy sources) continues to enjoy broad-based support by leading political parties and the general public, renewable energy stocks have seen heavy investor demand almost regardless of fundamental considerations.
The most recent rally correlates almost perfectly with the ongoing squeeze in Tesla's heavily shorted shares so I would assume market participants in both Europe and the U.S. have increasingly been picking up fuel cell- and other alternative energy stocks as sideplays here.
Given the highly favorable investor sentiment in Europe and the company's widely known association with NEL, I could have easily envisioned the company to achieve a valuation far above the $3.3 billion number stated in Tuesday's press release.
But, to be fair, there could be a less favorable explanation for the surprise reverse merger transaction. Remember, the company had been looking to raise more than $1 billion in a recent Series D funding round but the only public announcement has been a $250 million strategic investment by CNH Industrial (CNH), a former division of Fiat Chrysler (FCAU) well known for its IVECO truck brand in Europe. Comprised of a $100 million cash payment and another $150 million in services, the funds would likely have been insufficient to cover the company's anticipated near-term operating losses and capex requirements.
And indeed, there's a hint to this issue in the slide presentation filed by reverse merger partner VectoIQ Acquisition (VTIQ) or "VectoIQ" as the amount raised in the Series D funding round to date is stated at just $277 million on slide 33. In addition, Nikola's remaining cash on the balance sheet is stated at just $67 million while FY2020 EBITDA loss is projected at $211 million (slide 31), not to speak of an anticipated $156 million in capex.
Source: Company Presentation
With the Series D funding round efforts apparently having stalled, Nikola would have run out of funds within the next couple of months. Apparently, the company was in urgent need to get a deal done.
Key Transaction Terms
In effect, Nikola will be merged into publicly-listed shell company VectoIQ with existing VectoIQ shareholders (both public and sponsor) holding approximately 7.3% of the new company while existing Nikola equityholders will own 79.6%. The remainder will be held by new investors taking part in the proposed $525 million private placement:
Source: Company Presentation
Combining the funds held by VectoIQ ($237 million) and Nikola ($67 million) with the cash to be raised in the proposed private placement ($525 million) results in a pro-forma cash balance of $829 million but approximately $50 million in transaction expenses and a $70 million payout to founder Trevor Milton will reduce available cash to $709 million.
Looking at the company's financial projections above, Nikola expects to use more than $900 million of cash until the end of next year which would obviously require the company to raise more capital in mid-2021 at the latest point. Elevated capex and working capital requirements will result in additional cash outflows until at least 2024, the year in which the company currently expects its first EBITDA profit as the Coolidge facility becomes fully operational.
Given the frequent delays experienced by Tesla over the past couple of years, investors should take Nikola's projections with a huge grain of salt, particularly as the company appears to have abandoned previous plans to manufacture the first 5,000 fuel cell-powered trucks at Fitzgerald Glider Kits' Byrdstown, Tennessee facility. First deliveries were originally expected for mid-2020.
But Tuesday's presentation shows a very different timeline:
Even the much-touted test fleet start with Anchor customer Anheuser-Busch (BUD) appears to be way behind earlier projections with limited beta-testing now scheduled for mid-2021 and construction of the first large-scale hydrogen fueling station near the Anheuser-Busch brewery in Van Nuys, California not expected to be completed before 2022:
Source: Company Presentation
With the company currently anticipating to build a hydrogen fueling station near each of Anheuser-Busch's 12 U.S. breweries and potential additional stations at certain distribution centers, initial hydrogen fueling station investment for this single customer could be well above $200 million as the company has stated capex requirements for a large-scale station at $16.6 million.
In the presentation, Nikola also lays out the business case for its planned all-inclusive fuel cell truck lease offering which is expected to generate a vehicle profit margin of 30%:
Source: Company Presentation
Please note that the projected cost of hydrogen is more than 50% below current estimates for renewable hydrogen generated from electrolysis but to be fair, Nikola still has a couple of years to make the equation work.
Nikola apparently took the backdoor listing path after its recent Series D funding round did not provide sufficient funds to execute on its ambitious plans. Nevertheless, founder Trevor Milton will receive a very generous $70 million cash payout.
Even after the proposed $525 million private placement, Nikola will likely have to raise a very substantial amount of additional capital in mid-2021 at the latest point to cover anticipated operating losses and capex requirements.
While the company currently expects EBITDA profitability by 2024, investors should take these projections with a huge grain of salt after the frequent delays experienced by Tesla over the past couple of years and given the fact that Nikola has already pushed back initial projections for starting fuel cell truck deliveries in mid-2020.
Despite these issues, Nikola might very well attract meaningful investor interest as market participants are eagerly looking for the next Tesla.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.