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General Motors Will be Left With Junk Stock If It Closes Nikola Deal

Published September 24, 2020 9:49 PM
Mark Emem
Published September 24, 2020 9:49 PM
  • Nikola’s stock has tumbled following a series of allegations by a short-seller.
  • The company’s founder resigned from his executive chairman’s position just days ago.
  • The value of GM’s promised stake in the new energy automaker has now halved.

General Motors has until September 30th to change its mind regarding the partnership deal it announced with Nikola earlier this month.

Despite the renewable energy carmaker’s mounting problems, GM is intent on closing the deal  as its spokesperson Jim Cain told Reuters earlier this week:

We will work with Nikola to close the transaction we announced nearly two weeks ago.

This week, Nikola’s escalating troubles culminated in the company’s founder Trevor Milton resigning as the executive chairman.

What’s in It for GM?

Under the proposed GM-Nikola deal, the Detroit automaker will receive 47.7 million shares in Nikola at a fixed price of $41.93.

Investors initially greeted the announcement warmly, and this sent the renewable energy carmaker’s stock soaring to a two-month high. But a report by a short-seller Hindenburg Research alleging that the new energy vehicle firm misled investors sent the stock tumbling. The stock has now lost over 60% of its value  from the high it hit after the announcement.

Since hitting two-month highs, NKLA has lost over 60% of its value. | Source: Yahoo Finance 

GM’s promised stake in Nikola was worth slightly over $2 billion at the time of the deal being announced. About half of the stake’s value has now been wiped out.

Worse, the chances of Nikola’s stock falling even further are growing. GM will be left holding junk stock if the bleeding doesn’t stop. That is looking more likely than ever.

Here is why the prospects for Nikola stock are increasingly looking grim:

1. Partners Are Fleeing

Nikola’s business model involves joining hands with partners for the supply of vehicle components, manufacturing, and setting up a fueling/recharging network. The short-seller’s report has changed all that, causing some would-be partners to change their minds.

Earlier this week, oil major BP quit as a partner  in a deal where it would collaborate in building a network of hydrogen refueling stations.

Energy giant BP has pulled out of talks to set up a hydrogen fueling network with Nikola. | Source: @stocksharks/Twitter 

Such a partnership with a fuel major with a global footprint was an important selling point for Nikola’s trucks as customers would have been assured of a vast network of refueling stations.

As the fallout continues, expect more partners or potential partners to call it off. Besides GM, other partners that Nikola  has lined up include commercial vehicle manufacturer Iveco and auto supplier Bosch.

2. Nikola’s Reputational Damage Could Take Years to Repair

The reputational damage wrought on Nikola by the short seller is immense. Among the allegations included deceiving investors into thinking they had a ready self-propelling truck running on hydrogen  when, in reality, it was a truck rolling down an incline.

Damaging allegations have been brought against Nikola, some dating as far back as 2016. | Source: Twitter 

Before resigning, Trevor Milton somewhat confirmed the accusation. This and other allegations have greatly damaged Nikola’s credibility, perhaps irredeemably.

Some would-be customers will adopt a wait-and-see attitude, while others will be permanently turned off by the brand. The company’s timeline for starting to generate revenues will no doubt now be moved even further.

3. Nikola’s mounting legal problems

The Justice Department and the Securities and Exchange Commission are investigating Nikola. This will be a distraction for Nikola’s leadership at a critical point in the company’s history.

Additionally, shareholder lawsuits are being filed left , right, and center, further compounding Nikola’s legal problems.

General Motors
Nikola now faces numerous shareholder lawsuits filed after allegations that the company misled investors. | Source: Twitter 

With such uncertainty over the company’s future, investors are likely to vote with their feet. That is never good for a stock, leave alone one belonging to a zero-revenue company.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.