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Courtesy Nikola
It is decision time for
General Motors
regarding its agreement with
Nikola,
the alternative-fuel heavy-duty trucking company.
The pair announced a significant deal on Sept. 8. General Motors (ticker: GM) is set to receive an 11% stake in Nikola (NKLA) for providing manufacturing and engineering support, and will help the startup with manufacturing and engineering, as well as sourcing parts, in exchange.
The surprising news sent Nikola stock soaring 41%.
The deal, according to the original news release, is to be finalized by Sept. 30. That’s Wednesday. Normally, deal closing isn’t newsworthy, but Nikola has experienced a period of significant drama over the past couple of weeks—leaving investors wondering what’s next.
“Our transaction with Nikola has not closed,” GM told Barron’s. “We are continuing our discussions with Nikola and will provide further updates when appropriate or required.” Nikola said the same.
On Sept. 10, two days after the GM agreement was disclosed, the short-seller Hindenburg Research published a negative report on Nikola, alleging, among other things, that Executive Chairman Trevor Milton had misled investors about the technology the truck maker has developed. Nikola denies those claims. Milton left the firm on Sept. 21, saying he hoped to allow investors to focus on the company he founded and its technology, rather than on him.
For Nikola investors, the outcome looks like a binary event. It would be a positive if the deal closes, while a breakdown would be highly negative. Options markets imply that Nikola stock will move more than 35%, up or down, by mid-October. Options on
Tesla
(TSLA), another volatile stock, imply a move of about 15% over the same span.
Since the Hindenburg report hit, Nikola stock has been trading between 50% and 60% below its previous level. The biggest declines came after Milton decided to leave the company.
On Sept. 14, before the news of Milton’s departure, General Motors CEO Mary Barra assured investors her company has done due diligence on the agreement, meaning GM understands Nikola’s technology.
Wall Street appears to believe the deal will be completed. J.P. Morgan analyst Paul Coster wrote after the Hindenburg report, but before Milton’s exit, that he expected the deal to close. Cowen analyst Jeffrey Osborne pointed out after Milton had left that the new board chairman, Stephen Girsky, is a former GM executive. (He also has worked as an auto analyst, at Morgan Stanley.)
Both Coster and Osborne rate Nikola shares the equivalent of Buy. Coster has a target of $41 for the stock price, more than double the Wednesday morning level of $17.75. Osborne believes the shares are worth $79.
It is possible the deal terms could be recut. The original agreement gave GM an 11% stake in Nikola in return for GM’s expertise. It was a coup for GM that helped to alter investors’ views about the century-old auto maker’s battery and fuel-cell technology.
But the value Nikola is offering, measured by the price of its stock, is down significantly. Still, companies generally don’t renegotiate long-term deals according to every tick of the market.
Nikola stock remains up about 68% since early March, when the company announced plans to become publicly traded by merging with a special-purpose acquisition company, or SPAC. That’s far better than comparable gains of the
Dow Jones Industrial Average
and
S&P 500.
GM stock is down 2.2% from levels just prior to the Nikola deal. It has fallen about 20% year to date.
