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General Motors Should Demand a Better Deal From Nikola. Or Walk

Published September 30, 2020 2:35 PM
Mark Emem
Published September 30, 2020 2:35 PM
  • A wave of scandals has hit Nikola this month.
  • GM is the latest Nikola partner to delay closing a deal.
  • Nikola shares are down over 80% from their June record high.

In the good old days when the most controversial thing about Nikola was the lack of revenues, the energy vehicle startup touted the deals it had struck with major companies as a testament to its bright future. Now some of those companies are stalling on closing their agreements. Last week, it was supermajor BP. Now, it is General Motors’ turn.

GM was initially scheduled to close the deal with Nikola by September 30. Under the agreement, GM was to get a stake in Nikola and get paid for manufacturing and supplying its battery and fuel cell technology.

On Tuesday, GM revealed that the “discussions” were continuing, a sign of possible hesitancy. While the deal could still go ahead, it shows that GM might choose to wait till the dust settles on Nikola’s mounting scandals.

GM should not waste the opportunity; this is a golden chance for the world’s fifth-largest auto manufacturer  by revenues to demand a better deal.

Here is why GM should not close the deal until the offer has been sweetened.

1. GM Is Taking Added Reputational Risk

Before GM announced intentions to partner with Nikola, the energy mobility startup had few known controversies that were considered deal-breakers. But a report by short-seller Hindenburg Research  has changed the outlook. The report branded Nikola a “fraud” and accused the company of deceiving investors.

Already, investors who put their money into Nikola are lining up to sue.

The Justice Department and Securities and Exchange Commission are investigating Nikola, too.

Additionally, sexual harassment and abuse allegations against the company’s founder Trevor Milton have surfaced. While they have nothing to do with Nikola, it will mean that the negative press on the firm is not about to end.

Nikola founder Trevor Milton recently quit as the executive chairman after sexual allegations against him were leveled. | Source: @STONKSwave/Twitter 

All these scandals have demonstrated that GM is taking on a reputational risk  by partnering with Nikola. Without an enhanced deal, it’s not worth GM’s time anymore.

Morningstar’s David Whiston recently quipped:

The biggest risk right now is the risk of a huge PR black eye for Mary Barra (CEO of GM) and the firm.

2. Nikola Shares Are Now Worthless

GM was to get 47.7 million shares at a fixed price of $41.93 for a total value of just over $2 billion. Nikola’s shares have fallen below $18 , which means GM’s stake is worth less than $1 billion.

After the deal was announced earlier in September, the stock had risen to slightly above $50. Since hitting record highs of $93.99 after going public, Nikola’s shares have lost over 80% of their value.

NKLA has tumbled after a short-seller accused it of misleading investors. | Source: Yahoo Finance 

GM should renegotiate this to account for the Nikola’s depressed share price.

3. Doubts Over Nikola’s Ability to Raise Funds

In addition to an 11% stake, GM was to receive a $700 million payment to build the Nikola Badger truck. As of June 30, Nikola had $698 million in cash. The figure should be lower now as cash outflows far exceed the inflows.

In the quarter ending in June, for instance, Nikola posted a loss of $46.98 million. The company generated only $36,000 in revenues  from its solar business, a division that is set to be shut down.

Nikola is yet to generate any meaningful revenues, six years after it was founded. | Source: @BreakoutPoint/Twitter 

With the damaging allegations that have surfaced over the last few weeks, especially the claims of misleading investors, Nikola’s ability to raise funds is now in doubt.

For the deal to continue, GM should demand an upfront payment in full before it carries out any undertaking, if it hadn’t already done so.

Disclaimer: This article represents the author’s opinion 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.