GM and Nikola Partnership: What Went Wrong and Where Does it Stand?

Mergers, Acquisitions, & Divestitures Special Topics Valuation Issues

Even with Halloween, we doubt your weekend was as scary as the past few months have been for Nikola…

As we have discussed previously, electric vehicles (EVs) are all the rage with new start-ups trying to capture a slice of the pie that Tesla has been helping grow for years. In response, traditional manufacturers have begun to create EV options of their own.

However, the entry path into the EV space has its drawbacks. For start-ups entering the industry, they may have the technology or innovative idea but lack the scale and access to capital necessary to gain market share and keep up with established competitors. Legacy manufacturers face the opposite problem: while they have the scale and capital, diverting resources into R&D for electric in a rapidly progressing space can lead to minimal tangible gain while it’s established products languish.

To solve this mismatch, a new trend has emerged as manufacturers seek start-ups for their technology in a mutually beneficial relationship, perhaps best exemplified by GM and Nikola’s plan for a partnership. In this post, we look at the original deal, ensuing issues, and current plans. We will also look at what this trend could mean for dealerships going forward, and the importance of the valuation date.

The Initial Deal

In early September, Nikola stock got a massive boost after announcing a partnership with General Motors. Under the agreement, GM would engineer and build Nikola’s pickup truck named the Badger.  In return, GM would take an 11% stake in Nikola and have rights to nominate one person on the board of the startup.  This $2 billion equity stake won’t be in the form of cash however, but instead will be in “in-kind” contributions. These contributions include access to General Motors’ global safety-tested and validated parts and components.  In regards to the deal, Nikola Founder and Executive Chairman Trevor Milton had this to say:

Nikola is one of the most innovative companies in the world. General Motors is one of the top engineering and manufacturing companies in the world. You couldn’t dream of a better partnership than this […]. By joining together, we get access to their validated parts for all of our programs, General Motors’ Ultium battery technology and a multi-billion dollar fuel cell program ready for production. Nikola immediately gets decades of supplier and manufacturing knowledge, validated and tested production-ready EV propulsion, world-class engineering and investor confidence. Most importantly, General Motors has a vested interest to see Nikola succeed. We made three promises to our stakeholders and have now fulfilled two out of three promises ahead of schedule. What an exciting announcement.

General Motors Chairman and CEO Mary Barra shared similar sentiments about the deal:

This strategic partnership with Nikola, an industry leading disrupter, continues the broader deployment of General Motors’ all-new Ultium battery and Hydrotec fuel cell systems […]. We are growing our presence in multiple high-volume EV segments while building scale to lower battery and fuel cell costs and increase profitability. In addition, applying General Motors’ electrified technology solutions to the heavy-duty class of commercial vehicles is another important step in fulfilling our vision of a zero-emissions future.

While Nikola would utilize GM’s fuel cell technology for the Badger, they would still be responsible for the sales and marketing, and the Badger would remain under the Nikola brand name. Though the Badger was first announced on February 10, 2020, production was not expected to occur until late 2022.

What Went Wrong?

Although the deal was initially anticipated to close on September 30, 2020, Nikola experienced troubles over the weeks prior that led to delays as their value has dropped sharply. Behind this decline in value and trouble sorting out the deal is a litany of allegations.  Things began to fall apart just two days after the announcement when short-seller Hindenburg Research released a study claiming Nikola was based on “intricate fraud built on dozens of lies.”  Included in these fraudulent claims is an allegation of Nikola staging a 2018 video of its hydrogen fuel-cell truck driving. Hindenburg alleges that the semi-truck was not actually driving, but instead, rolling down a long gentle slope. In response, Nikola stated it never claimed that the car was propelling itself. They also noted the careful wording employed at the time of the vehicle “being in motion” did not necessarily indicate that it was moving on its own accord. This technicality didn’t do much to assuage investors.

Another misrepresentation that was alleged is Nikola’s efforts to develop a new kind of battery for use in electric vehicles. In November 2019, Milton claimed that Nikola would unveil “the biggest advancement we have seen in the battery world,” with these claims based on the planned acquisition of ZapGo. However, the acquisition never went through after Nikola stated that ZapGo had nothing more than interesting research with no ability to commercialize it. Despite pulling out of the deal, Nikola’s message about the new advancement in battery technology remained the same, putting into question if there is actually this battery technology in the works at all. This was not the only problem for Nikola in the past month, however, as the Department of Justice and SEC are reportedly probing Hindenburg’s allegations and two women in Utah filed sexual abuse charges against Milton. Ultimately, all of this culminated into a mountain of insurmountable issues for Trevor Milton, who resigned from his position as Executive Chairman of Nikola on September 20th. Post resignation, Nikola stock dropped 17% to $28.35 after already being down almost 27%. As of November 2nd, Nikola’s stock price stood at $18.84. This is a 76.4% decline from the stock’s peak as of June 9th and down 62.3% since the GM announcement spike.

What Now?

With all of this being said, it’s clear why GM and Nikola haven’t been able to close their $2 billion deal. The question now seems to be under what terms a “new deal” may come, or if there should even be a deal at all. According to several sources, GM is considering revisions to the deal and may seek a higher stake in the startup after its valuation fell due to the allegations.  Though there are some new considerations that need to come into play for the deal to occur, some analysts see it still as a viable possibility. J.P Morgan analyst Paul Coster thinks that a new deal could be signed by early December, as he notes, “Nikola needs access to GM’s supply-chain, engineering resource, the Ultium battery, and Hydrotec fuel cells to de-risk the Class 8 truck initiative.” The analyst wrote in a Monday research report, “GM needs to realize a return on billions of dollars of investment in hydrogen fuel cells, and Nikola might be the best available option.” He believes that the price target for Nikola is still around that $41 September value and that the stock is currently undervalued. However, with the December 3rd deadline of renegotiations looming, November is going to be critical to getting something put together.

Takeaways

Though the GM and Nikola deal is in limbo, we believe more partnerships like this may materialize in the future. With increased emphasis on energy-efficient vehicles going forward, traditional manufacturers are going to need to find ways to meet consumer demand and fuel efficiency regulations. Furthermore, the looming election and the potential for a leadership transition might pave the way for EVs to carve out a more significant spot in the market (if you haven’t already, read our blog post on Trump and Biden’s potential policy impacts on the auto industry). Manufacturers may seek partnerships and acquisitions in lieu of creating their own electric vehicle technology. Ultimately, only time will tell, but the struggles of GM and Nikola to close this deal might not be a reflection that these deals are doomed, and instead, a hiccup before other auto manufacturers try to create their own deals with EV start-ups.

This GM and Nikola deal sheds light not only on the current EV industry, but also on how important the valuation date is in determining value for deals such as this. In the initial deal, Nikola was going to give 47,698,545 shares of its common stock to GM Holdings in exchange for in-kind contributions. These shares were valued at $2 billion based on the average price per share of $41.93 as of the September 8th Nikola filing with the SEC. When considering this, does it make sense for GM to assume $41 per share, established at the September valuation date, when allegations have led to scrutiny of this number? Especially when the public market has reacted and the stock price has plummeted to under $20 per share? Your answer is most likely no. They should try to get a new valuation closer to the deal close date in order to more accurately determine Nikola’s current value.

The same considerations should be made if you are considering buying and selling an auto dealership. Though it can be more difficult to determine value without the assistance of the public market as in the case of Nikola, there are still certain signs that a previous valuation may no longer be applicable. The most common this year has been due to the economic volatility of the COVID-19 pandemic and the ensuing recession. Because of these factors, the fair value of a dealership has most likely fluctuated depending on how they were able to navigate the past year. Proceeding with a deal considering a February valuation could lead to one party paying unfairly. With this being said, due diligence in regard to having a proper and timely valuation is critical to making sure that a buyer and seller both agree to a fair price.

If you are interested in how the past year may have affected the value of your dealership, feel free to reach out to us.