EV (electric vehicle) startup Arrival (NYSE: ARVL) has announced a merger with Kensington Capital Acquisition Corp. V amid dwindling cash. Here are the key takeaways.
Notably, usually SPACs hunt for unlisted companies which then go public through a reverse merger with these blank cheque companies.
Arrival also listed in March 2021 after it merged with CIIG Merger Corp. The stock plummeted in 2022 and the slide continued in 2023 as well.
Arrival flagged going concern risk
Arrival has flagged “going concern” risks amid its perennial cash burn and last month announced a $300 million financing from Westwood Capital.
Now, the company has opted for a second SPAC reverse merger which is perhaps the first case of a company doing so.
It might serve as a template though as many de-SPACs are trading at their all-time low prices. Instead of funding unlisted companies, SPACs might see opportunities in the listed space as well.
Arrival announces second SPAC reverse merger
Kensington Capital Acquisition Corp. V has $283 million in the SPAC trust account. Arrival would receive this money subject to the redemptions. On average, 89% of SPAC investors redeemed their units in 2022.
The merger between Kensington Capital Acquisition Corp. V and Arrival does not involve PIPE (private investment in public equity).
The deal values Arrival at an enterprise value of $524 million subject to redemptions and the two parties expect the transaction to conclude in the second half of 2023.
According to the terms of the transaction, “Kensington shareholders will receive, for every one Kensington ordinary share, an amount of newly issued shares equal to $17.00 divided by Arrival shares’ 10-day volume-weighted average price (“VWAP”) for the 10 days preceding the fourth day prior to Kensington’s shareholder meeting.”
ARVL has reduced its footprint
Amid a dwindling cash pile, ARVL reduced its footprint to focus on the US market. It also laid off many of its employees in a bid to lower costs. It is looking to commercialize its XL Van by the end of 2024.
Like fellow EV SPACs, Arrival is running way behind on execution. While going public it forecast revenues and adjusted EBITDA of $14.1 billion and $3.2 billion respectively for 2024. It is still a pre-revenue company and has missed all the major operational and financial projections.
Meanwhile, commenting on the merger, ARVL CEO Igor Torgov said, “This transaction offers a potentially significant capital infusion and additional support in bringing our XL Van to market.”
Kensington CEO Justin Mirro said, “We believe Arrival is at the forefront of the single greatest mega-trend in transportation: electric mobility. While there are many companies making electric vehicles today, Arrival has built a next-generation Class 4 van, taking advantage of 200 patents and over $1B in invested capital, that meets the needs of today’s drivers, fleet operators and delivery customers.”
Startup EV companies face a litmus test
Startup EV companies are facing a litmus test as almost all of them are running way behind on execution. Lucid Motors, which was the most hyped SPAC merger of 2021, expects to produce between 10,000-14,000 cars in 2023 – less than a third of what it forecasted while going public.
Things are no different for other EV companies. Another similarity among startup EV companies is the perennial cash burn which means that they have to look at additional funding often.
Nikola recently announced its second stock sale in less than a year while Rivian raised $1.3 billion through a convertible bond offering. Lucid also raised $1.5 billion through a stock sale last year.
Arrival has also been looking for funds and found an ally in Kensington.
SPAC bubble has burst
In 2020, SPAC IPOs hit a new record and the total money collected by these blank cheque companies was more than what they did in the previous 10 years. The SPAC mania continued in 2021and it was another record year but cracks began to appear in the back half of the year.
For little-known startup companies, SPAC was a good tool to go public in a red-hot IPO market. 2020 and 2021 were good years for new listings, and through SPAC reverse merger companies managed to go public much sooner than traditional IPOs.
The regulatory arbitrage between traditional IPOs and SPACs also helped fuel the industry’s growth. While companies are barred from projecting future earnings in a traditional IPO, they could generously do so in SPAC reverse merger.
EV companies are struggling to meet projections
Companies provided forward projections stretching as far as 10 years which helped markets value them based on future earnings. Incidentally, almost all of the companies that went public through SPAC mergers were loss-making growth companies that were difficult to value based on traditional valuation metrics.
As has been the case with companies like Arrival, these financial forecasts proved a lot too rosy. The supply chain issues and macroeconomic slowdown did not make things any better for startup EV companies.
Arrival has lowered its cash burn rate
Arrival has taken several measures to lower its cash burn and last month it said it would limit its cash spending below $35 million every quarter. The merger would help strengthen its balance sheet and the company expects $468 million of pro forma cash after the merger is completed.
This is however subject to the approval of Kensington stockholders. SPAC stockholders have of late been quite wary of backing the mergers with private companies as is visible in the mass redemptions.
It remains to be seen as to how many Kensington stockholders back the deal to merge with Arrival.
That said if the deal sails through with a reasonable amount of redemptions, several other struggling de-SPACs might fancy their chances of a second life through another merger.