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GM Walks On Equity Stake In Nikola, May Supply Fuel Cells

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GM Walks On Equity Stake In Nikola, May Supply Fuel Cells

General Motors (NYSE: GM) is passing on taking an equity stake in startup Nikola Corp. (NASDAQ: NKLA), reducing a wide-ranging manufacturing partnership and supply deal announced in September to possibly providing fuel cells in the future.

GM CEO Mary Barra and former Nikola Executive Chairman Trevor Milton excitedly described the $2 billion tie-up on Sept. 8. GM would get an 11% ownership in Nikola in exchange for manufacturing the Nikola Badger electric pickup truck. Providing advanced battery and fuel cell technology for Nikola's heavy-duty trucks would be worth another $2 billion.

On Monday, the two companies indicated in separate press releases they signed a nonbinding memorandum of understanding for GM to supply Hydrotec fuel cells to Nikola. The two also will discuss Nikola using GM's Ultimum battery technology. 

"Without the equity swap, essentially what GM is really saying is ‘I'm not going to help you,'" said Michael Ramsey, a Gartner Inc. vice president who covers smart mobility and the evolution of the automotive industry.

The lack of a manufacturing agreement spells the end of the Badger. Nikola CEO Mark Russell said the Badger would only go forward if Nikola had a manufacturing partner. The company is refunding deposits taken for the truck, which had been seen only in photography.

"I thought the Badger was a distraction from what should be their core business," Sam Abuelsamid, principal analyst for Guidehouse, told FreightWaves. "The only reason the Badger existed was to generate more hype for Nikola and get them to be seen in the same realm as Tesla. Trevor Milton wanted to be seen as the next Elon Musk."

A price too high

GM would have received more than 47 million shares of Nikola stock priced at $41.93 a share. Nikola shares traded Monday at $21.23 at 1:48 p.m., down nearly 24%.

"GM clearly decided that the price that they were effectively paying for that stake in Nikola was too high," Abuelsamid said.

As talks toward the deal originally scheduled to close Sept. 30 dragged into overtime, GM officials spoke positively about a potential deal. Nikola was less upbeat, describing the GM technology as a secondary source for Nikola's trucks.

"As the Nikola shares tanked, GM wanted more shares," Abuelsamid said. "The value of (GM's)  engineering and manufacturing resources didn't change."

Cowen & Co. analyst Jeffrey Osborne described the stock deal as a giveaway.

"GM was never buying about $2 billion of stock," he said. "They were getting it for free under the prior proposed arrangement."

The unraveling

The deal began to unravel following short seller Hindenburg Research's scathing takedown of Nikola on Sept. 10. In a 67-page report, Hindenburg said Nikola was built on a web of lies and deceptions, overstating its technological prowess. 

Blowback from the allegations led Milton to resign as executive chairman and give up his board seat on Sept. 20. The U.S. Department of Justice and the U.S. Securities and Exchange Commission are investigating the Hindenburg claims. Both have subpoenaed Milton and current Nikola executives, according to Nikola's quarterly SEC filing.

"It is a face-saving move for GM to keep arm's length with a company that may be speculative," Ramsey said.

A renewed focus

Without the Badger, Nikola can focus on its battery-electric and hydrogen fuel cell-power Class 7 and 8 trucks. The first of those, the battery-electric cabover Tre, will be assembled in 2021 in a joint venture with CNH Industrial N.V. (NYSE: CNHI) subsidiary Iveco in Ulm, Germany. Robert Bosch will supply fuel cells for Nikola trucks in Europe.

Under the original GM deal, Nikola would have spent $700 million to cover the cost of manufacturing 50,000 Badgers a year.

Fuel cell truck production is scheduled in 2023 at a plant Nikola is building in Coolidge, Arizona.  A fuel cell sourcing decision is pending for Arizona-built trucks. Nikola is simultaneously planning a network of hydrogen fuel stations. The company said it is on track to name a partner for at least some aspect of the fueling stations before the end of the year.

"For this company, their primary target should be producing the heavy trucks that was the original idea for the company and the infrastructure that will go along with it," Ramsey said.

Bulls and bears

On Wall Street, two analysts who cover Nikola disagreed on what the scaled-down GM agreement means. J.P. Morgan analyst Paul Coster maintains an overweight rating on the stock.

"We think this is a positive outcome for Nikola over the medium to longer term, since the company can now focus on the core Class 8 truck initiative and avoid the distraction and [capital expenditures] associated with the Badger," Coster said in an investor note.

While Nikola would pay "cost-plus" for GM's fuel cell technology, GM would presumably cover the research and development of adapting its technology for large trucks instead of passenger cars and SUVs, Coster said.

Wedbush Securities analyst Dan Ives takes a negative outlook.

"This went from a game-changer deal for Nikola to a good supply partnership but nothing to write home about," he said. "And the Street will be disappointed accordingly along with lingering lockup worries."

The "lockup worries" involve 161 million shares — about 46% of all shares — that are free to be sold Tuesday by early investors. About 91.6 million of those shares are held by Milton. If he sells a significant portion or all of his shares, the resulting glut of available shares could send the stock price lower.

Click for more FreightWaves articles by Alan Adler

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