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SPAC strength and flexibility displayed in potential EV deal

SPAC strength and flexibility displayed in potential EV deal

The electric vehicle sector could be about to see its largest deal yet, as Lucid Motors has indicted that it could go public via veteran dealmaker, Michael Klein’s SPAC, Churchill Capital IV. Lucid is an American company based in California, specializing in electric cars. It was founded in 2007 but rebranded in 2016 with its proclaimed intention to develop an all-electric, high-performance luxury vehicle. In April 2019 Lucid received over $1bn of investment from the Public Investment Fund of Saudi Arabia towards the construction of its manufacturing plant in Arizona. The currently-discussed deal would make Lucid a public company with an approximate $12bn valuation.

Churchill Capital IV IPO-ed in July 2020, with the stated aim of raising $1.8bn in $10 shares towards a yet-unknown future merger. It joined a growing number of Special Purpose Acquisition Companies (SPACs) or “blank check” companies that become publicly-traded with no operations of their own, just a stated purpose to identify a target private company to merge with. The target company benefits from a simpler, smoother path to public status and the SPAC sponsor and shareholders benefit proportionately to their stake in the up-and-coming business.

SPACs have been around for decades, but their momentum has been building anew since 2019 when high-profile, credible sponsors began to lend their reputations and skills to the space, and companies like Tesla, Virgin Galactic and DraftKings made some great profits for their SPAC backers. 2020 saw SPACs raise $80bn from 237 deals, and a total of $38.3 billion has already been raised since the start of 2021. 1 That’s just under double the amount raised by the traditional IPO route so far this year, showing how seriously both the market and the sponsors are taking this development. Indeed more than 130 companies have gone public via a SPAC since the start of 2021, and the SPAC boom has even spun off into SPAC ETFs for investors looking to capture the growth in this space. 2

Churchill Capital formed its first SPAC in September 2018, which raised $690m before merging with Clarivate Analytics in May 2019. Clarivate has risen over 35% in the past year. 3 Its second SPAC, Churchill Capital Corp II raised another $690m when it IPO-ed in June 2019, and merged with Skillsoft and Global Knowledge in a $1.5 Billion Transaction in October 2020. In February 2020 Churchill Capital Corp III completed its $1.1 billion IPO and five months later announced its merger with healthcare cost-management company, MultiPlan.

The speed and regularity with which SPACs are forming and signing deals reflect the buoyancy in the market created by very low interest rates and the government’s Covid-response cash injection. However, the extent to which the SPAC model is taking over the traditional IPO one also indicates a deeper level of disruption. SPACs bring greater transparency to a venture-capital space that used to be closed to individual retail investors and characterized by private deals that could take a year to finalize. SPACs bring the whole process out into the open, with investors given the option to pull out if they don’t favor the target company. They also thereby democratize the process, meaning that a target company needs to find the approval of the mass of SPAC investors, not just the board of the sponsor company. The popularity of SPACS manifests a shift in emphasis from private to public markets. 4 It is proof of the confidence that public markets can do a better job of appreciating long-term, big idea opportunities than private ones.

The Churchill Capital IV / Lucid deal also seems to display the flexibility and accessibility inherent in a SPAC deal. For while it raised nearly $2bn via the SPAC formation, Churchill is now looking to raise a further $1bn to $1.5bn in PIPE (private investment in public equity) funding to secure the Lucid deal. Such a PIPE can act as an “anchor investor” and validate the valuation of the target business (Lucid Motors in this case). SPAC shareholders are given a boost in confidence in the potential success of the merger by the PIPE commitment (remember, they have the option to sell their shares if they reject the deal), and the target company gets increased certainty in the deal. The ability of SPAC sponsors to raise supplementary PIPE capital when needed (Chamath Palihapitiya’s SPACs are accompanied by PIPEs and he himself has invested in PIPEs attached to other SPACs) 5 is further evidence of the credibility and potential of the target company. It shows how private and public markets can work together to benefit both individual retail investors and institutional backers.

1 “The SPAC Boom, Visualized,” Elliot Bentley, February 10, 2021. https://www.wsj.com/articles/the-spac-boom-visualized-in-one-chart-11612962000

2 “Churchill Capital IV soars 33% after report says the SPAC is nearing a deal to take EV maker Lucid Motors public,”
Will Daniel, February 16, 2021. https://markets.businessinsider.com/news/stocks/churchill-capital-iv-stock-price-

3 https://money.cnn.com/quote/quote.html?symb=CLVT

4 “Public markets are the new private markets. Why SPACs are really a play on the long-term visions public markets
support better than private capital,” Myles Udland, Oct 5, 2020. https://mylesudland.substack.com/p/public-

5 “Chamath Palihapitiya's 12 SPAC, PIPE Deals: Tracking 2021 And Lifetime Performance,” Chris Katje, February 10,
2021. https://markets.businessinsider.com/news/stocks/chamath-palihapitiya-s-12-spac-pipe-deals-tracking-2021