Lucid deal may be 'a gut check' in the SPAC craze and a broader market warning

Published Wed, Feb 24 20217:08 AM ESTUpdated Wed, Feb 24 20213:31 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

The speculative fervor around Lucid's merger with special purpose acquisition company Churchill Capital Corp IV has been a hard lesson for some SPAC investors. Shares of Churchill Capital Corp IV plunged 38% Tuesday, following its announcement that it would merge with luxury electric car company Lucid and take it public. The California-based car company has caught the fancy of investors who have high expectations for its electric vehicles that are not yet in production. The deal is the largest in a series of mergers between electric vehicle firms and SPACs. A SPAC is a blank-check company, formed as an alternative to an IPO. They are companies with essentially no assets, other than cash, and they trade on a stock exchange before merging with private companies. "The market cap going into the deal was $65 billion and instead of being valued at that, the deal was done at $24 billion ," said Peter Boockvar, chief investment officer of Bleakley Global Advisors, referring to the Churchill-Lucid pairing. "That just shows you, there's money chasers in some of these SPACs instead of people doing their homework," he said. Churchill is run by former Citigroup investment banker Michael Klein and has been extremely popular with investors, including retail investors on Reddit. Speculation about the Lucid deal started in January, and the stock had moved up sharply since then. Lucid is led by ex-Tesla engineering executive and automotive veteran Peter Rawlinson. Deliveries of its first car, the all-electric Air , are now set for the second half of the year, a delay from its earlier forecast. The cars will be built in a plant in Casa Grande, Arizona. The Air starts at $77,400 , not including the federal EV tax credit . Weaker SPACs As Churchill shares fell Tuesday, other SPACs were also weaker. Switchback Energy Acquisition Corp fell 8.5%, and Star Peak Energy Transition was down 8.8%. Climate Change Crisis Real Impact I Acquisition Corp was down nearly 13%. GS Acquisition Holdings fell 9.15%, and Atlas Crest Investment Corp was off 9.8%. "The SPACs that are down the most are also the ones that really went up a lot, and a lot of those are technology and ESG-related," said Eric Pestrue, portfolio manager for SPAC strategy at RiverNorth, referring to the term for environmental, social, and governance investing criteria. "I think it's connected to the broader market." Stocks were mixed Tuesday with the S & P 500 up slightly, but the Nasdaq was down 0.5% and the Russell 2000 slid 0.88% as growth stocks were hit hard. The market has been rewarding cyclicals and value names. In the market for SPACs, which have become intensely popular this year, Churchill led the losses, and investors have already been looking at the SPAC boom as a warning sign. "It could easily be a canary," Boockvar said. "I don't know if this necessarily slows down the pace of SPACs, but it certainly is a gut check on the valuation of some of these SPACs," he said. "There's no question the economics are skewed to the promoters. ... The regular shareholder is always at risk of dilution and a much lower valuation." Pestrue is a portfolio manager for a private RiverNorth SPAC fund. "I think there is a lot of speculation in these types of names," he said. "For the most part, most of these have earnings and revenues years away," Pestrue said. "None of them are value buys right now, so it's hard to say if this is just a one-day sell-off and they continue to go back up or if this is a bigger change." Cheaper and faster than an IPO For the companies going public, it can be cheaper and faster than an IPO. Pestrue's strategy is to exit the SPAC before the acquisition closes. "We buy the unit typically at the IPO," he said. "Then we let the market tell us what the stock is worth, and we will get out by the time the acquisition closes." Jack Ablin, chief investment officer at Cresset Wealth Management, also warns investors it's best to be early. "Our bottom line is that SPACs are great investments for investors who partner with quality sponsors," he wrote in a note. "The experience and gravitas of the individual operating the SPAC is undoubtedly the biggest factor in determining SPAC success." "The second most important factor is timing," Ablin said. "Get in on the ground floor. Early investors reap substantially higher benefits than those who pile into the SPAC once the target company is announced." But he also warned that returns for investors who hold onto these investments could be at risk. Professors from Stanford University and New York University found SPAC returns were worse than traditional initial public offerings, Ablin wrote. For the most part, most of these have earnings and revenues years away. portfolio manager for SPAC strategy, RiverNorth Eric Pestrue "Companies that went public through SPACs fell in value by an average of three percent after three months, 12 percent after six months and by more than one-third a year later," Ablin wrote. Hedge fund manager Ray Dalio, founder of Bridgewater Associates, wrote about SPACs as part of a note Tuesday on market bubbles. He said the SPAC boom has added some bubbly sentiment to the market, though it is not at the extreme of 2000. "The current IPO pace has been brought about by the sentiment previously mentioned, as well as the SPAC boom, as these blank-check acquisition companies have lower regulatory hurdles and greater flexibility to bring more speculative companies into the public market," he wrote. Boockvar said the SPAC sell-off is another reminder about valuations. "You have to consider at $65 billion, it was almost the size of GM and bigger than Ford," he said. "I think that rise in rates is making valuations matter." "When people look back at this period, and they talk about Tesla and bitcoin, they're going to talk about SPACs," Boockvar said. "It's not the SPACs themselves, it's the flood of them – the hype and the valuation."

A worker assembles the Lucid Air prototype electric vehicle, manufactured by Lucid Motors Inc., at the company's headquarters in Newark, California, on Monday, Aug. 3, 2020.

David Paul Morris | Bloomberg | Getty Images

The speculative fervor around Lucid's merger with special purpose acquisition company Churchill Capital Corp IV has been a hard lesson for some SPAC investors.

Shares of Churchill Capital Corp IV plunged 38% Tuesday, following its announcement that it would merge with luxury electric car company Lucid and take it public. The California-based car company has caught the fancy of investors who have high expectations for its electric vehicles that are not yet in production.

The deal is the largest in a series of mergers between electric vehicle firms and SPACs.

A SPAC is a blank-check company, formed as an alternative to an IPO. They are companies with essentially no assets, other than cash, and they trade on a stock exchange before merging with private companies.

"The market cap going into the deal was $65 billion and instead of being valued at that, the deal was done at $24 billion," said Peter Boockvar, chief investment officer of Bleakley Global Advisors, referring to the Churchill-Lucid pairing.

"That just shows you, there's money chasers in some of these SPACs instead of people doing their homework," he said.