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Nikola Deal Brings Credibility to GM's Alternative Tech

We are raising our fair value estimate to $50 after the automaker announced it is receiving $2 billion of stock in Nikola, a hydrogen and electric vehicle maker.

General Motors' GM stock surged as much as 10% on Sept. 8 after the automaker announced it is receiving $2 billion of stock in Nikola, a publicly traded hydrogen and electric vehicle maker, for no up-front cash spending. The 11% stake consists of nearly 47.7 million shares at $41.93 each. GM will also appoint one member of Nikola’s board. GM expects to realize over $4 billion in benefits via manufacturing contracts, the value of the Nikola stake, and the sale of electric vehicle credits. We are raising our fair value estimate by $2 per share to $50. The change is from the time value of money plus the present value of $4 billion over six years. The firms expect to close the deal before Sept. 30 and GM can sell up to 33% of its stake a year after close, another 33% two years after close, and the final 34% on June 30, 2025. We like the deal as Nikola needs GM’s battery and hydrogen technology, manufacturing abilities, and supply chain expertise, while GM gets an investment in a firm, for zero cash up front, with a long growth runway and a new battery and fuel cell customer.

Nikola is primarily a heavy-truck maker but also has an all-electric pickup truck in development, the Badger, due out by the end of 2022. GM has a Michigan fuel cell facility with its partner Honda and will be Nikola’s exclusive fuel cell provider outside Europe for Class 7 and 8 trucks and for the Badger in North America. GM will make the Badger for Nikola in a GM facility using its Ultium batteries and Hydrotec fuel cells, which makes Nikola GM’s second Ultium customer after Honda. The agreement states that Nikola will reimburse GM up to $700 million for capital expenditures GM incurs to add manufacturing capacity for 50,000 units per year for two light-duty trucks GM will make for Nikola on GM’s platform. Nikola will then market and sell the vehicles under its brand. The agreement is for electric or fuel cell vehicles, and each vehicle’s agreement has a default term of six years.

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