CIIG Merger Corp (NASDAQ:CIIC) announced on Nov. 18 that it had reached a merger agreement with a prominent electric vehicle (EV) company. That EV company, Arrival Group, is based in the U.K. and already has two factories, including one in South Carolina. My view is that CIIC stock is worth now overvalued, as it is not worth more than $20.66. That puts it at least 26% overvalued.
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CIIG is a SPAC (special purpose acquisition company) that is going to use its own cash and equity raised from a PIPE (private investment in public equity) round to complete the business combination. At the close of the transaction CIIC stock will change its name to Arrival and the new symbol on Nasdaq composite will be ARVL.
Arrival specializes in making electric buses and vans. It also has a unique, almost fully automated manufacturing process in what it calls “microfactories.”
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Arrival already has two microfactories, with one in the U.K. and the other in Rock Hill, South Carolina. The company is in the process of making electric buses there and will go into full production mode once the deal closes. The company shows pictures of its two microfactories in a very interesting slide presentation that accompanied the announcement.
Moreover, Arrival already has $1.2 billion in orders, including 10,000 EV vans for UPS (NYSE:UPS). Once the deal closes Arrival will receive $669 million in net cash and will have no debt. This is all that it needs to become profitable by 2023.
The Deal and Its Value
Once the merger closes, CIIC stock (ARVL stock) will have 606.179 million shares outstanding. This can be seen on page 42 of the slide presentation.
Therefore, since CIIC stock has risen to $25.91 since the announcement, it now has a pro forma market capitalization of $15.706 billion (i.e., $25.91 times 606.179 million pro forma shares outstanding). Now to get the pro forma enterprise value we subtract the $669 million in cash, for an EV of $15.037 billion.
This is 178% higher than the $5.392 billion enterprise value used in the public announcement or the slide presentation on page 41. However, I believe that CIIC stock is now overvalued by at least 26%.
Here is why. On page 41 of the presentation, the company estimates that it will make $14.1 billion in revenue by the end of 2024. That implies that Arrival’s EV-sales multiple will be more than 1x.
For example, $15.037 billion in EV (its present pro forma enterprise value) divided by $14.1 billion in pro forma sales by 2024, a ratio of 107%.
What CIIC Stock Is Worth Today
We can compare Arrival with its peers. For example, on page 44 of the deck, the average EV-sales multiple of its peers is 1.3x sales. The EV value for CIIC stock (ARVL stock) should be $18.99 billion (i.e., 1.3 x $14.1 billion).
In addition, we have to deduct the $669 million. Why? On the one hand, one can assume that the $669 million will be used up by 2024. On the other hand, it highly likely that the company will be profitable and/or it may have raised additional cash by then.
Therefore, the pro forma market value should be $18.33 billion ($18.99 billion minus $669 million). This puts its per-share value at $30.24 (i.e., $18.33 billion / 606.179 million shares.
That represents a potential gain of 16.7% above today’s price of $25.91. But is it really worth this on a present value basis?
Discounting To the Present
The year 2024 is a long time in the future to compare Arrival’s theoretical revenue and value with today’s CIIC stock price. We have to discount the 2024 forecast value to the present.
For example, using a 15% annual discount rate the present value factor compounds out to 57.175%. Therefore, the $18.33 billion market value is worth $10.48 billion today. That works out to $17.29 per share.
However, using a more typical 10% discount rate, the PV factor is 68.3% and its value is $12.52 billion. That works out to $20.66 per share.
Using a 10% discount rate is OK since Arrival’s enterprise value by 2024 will be likely higher than forecast, well above $19 billion. This is true especially since Arrival is likely to have taken on more debt by then.
The bottom line is that CIIC stock, at $25.91 is 26% higher than the company’s implied calculation of its own value.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
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