Why Churchill Capital IV’s stock fell after it finally confirmed its merger with Lucid Motors

For several weeks rumors swirled Churchill Capital IV (NYSE: CCIV) was preparing to merge with Lucid Motors. Lucid, one of the hottest electric vehicle (EV) start-ups, is set to start delivering its luxury sedan, the Lucid Air, within a few months. Finally, the companies confirmed the deal last night, announcing that Churchill Capital IV and Lucid Motors have reached a definitive merger agreement. The shares quickly surged in extended trading.

Last week I suggested that I wouldn’t be surprised if this ended up being a “buy the rumor, sell the news” situation. This adage refers to a common phenomenon in the market when an event does not meet expectations. Here’s why investors may be disappointed with the deal.

How the agreement is structured

Over the weekend, Bloomberg signaled that a deal could be imminent, suggesting the announcement could come as early as Tuesday. Lucid’s valuation was rumored to be around $ 15 billion. The structure of the deal was always going to be a major risk for anyone investing in Churchill Capital IV on the basis of speculation.

The transaction will include $ 2.1 billion in cash from Churchill Capital IV, plus a $ 2.5 billion PIPE (private investment in public stocks) anchored by the Saudi Public Investment Fund (PIF) – which is currently l majority shareholder of Lucid – and other familiar institutional heavyweights like Black rock and loyalty. PIPE trades are often done at the same $ 10 net asset value of the Special Purpose Acquisition Company (SPAC), but in this case, PIPE investors buy at $ 15 per share due to the stock’s skyrocketing rise. over the past month.

Once it’s all said and done, the deal involves a pro forma value of $ 24 billion for Lucid. This is significantly higher than the $ 15 billion expected by investors. Churchill Capital IV shareholders will eventually own around 16% of the combined company, according to the investor presentation.

Evaluation matters

Typically, when a PSPC negotiates a merger agreement with a target, it has different incentives in place for the assessment. PSPC prefers a lower valuation because this allows it to acquire a larger stake in the target company with the money at its disposal. Target would prefer a higher valuation, which benefits existing shareholders while requiring a smaller sale of PSPC stake.

Once rumors erupted and Churchill Capital IV stock skyrocketed, Lucid gained the upper hand in the negotiations. Investors demanded to buy shares, which drove the price up to nearly $ 65 on pure speculation. Lucid could then argue that he justifies a higher valuation, indicating market activity. In other words, the negotiated valuation of $ 24 billion would look excellent for Lucid at the expense of Churchill Capital IV investors, at least when it comes to the structure of the deal.

However, there may be some confusion around the valuation numbers due to the unique circumstances. The valuation of $ 24 billion is based on PIPE’s offering price of $ 15 per share. At the standard net asset value of $ 10, that would imply a valuation of $ 16 billion – not too far from the Bloomberg report, which sets out the expectations.

There are still evaluation issues. At yesterday’s closing price of around $ 57 (before the announcement), Lucid’s implied market cap would be an incredible $ 91 billion before delivering a single car.

The deal is expected to close in the second quarter. Investors should then turn their attention away from the structure of the merger to determine whether Lucid’s electric vehicles become viable contenders in the auto industry.