Nikola/Romeo Power: auto tech stars forced into distressed consolidation

Shares of Nikola Corp are down 90 per cent from their 2020 peak. Yet the electric truckmaker may still be among the winners of the auto tech start-ups that have gone public via blank cheque mergers. The company on Monday announced it would acquire Romeo Power, a maker of EV battery technology at an equity value of just $144mn.

When Romeo listed its shares last year via a so-called Spac merger, it was valued at $1bn. It is now troubled enough, however, to have disclosed a risk it could run out of money. Nikola’s all-stock deal values its shares at just 74 cents each.

Virtually every newly-listed clean energy car company has grappled with technology viability, manufacturing capability and liquidity. Consolidation may be the only route to survival for many of these companies. And Nikola, as Romeo’s largest customer, should be particularly interested in its fortunes.

Nikola may be best known for exaggerated claims about its electric truck that led to a $125mn penalty from the US Securities and Exchange Commission. Still, it expects to deliver as many as 500 battery-powered electric trucks in 2022 and says it can produce tens of thousands in a couple of years. Nikola says the vertical integration achieved by bringing Romeo in-house will eventually save it $350mn annually in manufacturing and operating costs.

Designing and assembling an EV is sufficiently difficult that most companies will choose to simply purchase components from a specialist. But with Romeo seemingly cheap and battery costs a crucial input of an EV, Nikola is making a measured bet on buying and operating a supplier. Nikola is providing a $35mn cash infusion into Romeo to keep it afloat but says that eventually its unit cost for battery packs will decline by as much as 40 per cent.

Nikola’s market value hovers around $3bn. Analysts still believe that by 2024 it will have cracked the $1bn barrier in annual revenue. It will be a big achievement to put together enough EVs to support that valuation as well as the cutting-edge batteries that power them.