Ex-Russian Minister Nets $11 Billion With a SPAC

(Bloomberg Opinion) -- By the time a start-up has gone public, a founder can count themselves lucky if they still own 20% of the shares.

It's striking then that the boss of Britain's Arrival Ltd., Russian tycoon and ex-politician Denis Sverdlov, will control 76% of its stock after the maker of electric vans and buses completes a merger with a special purpose acquisition company (SPAC) in the coming weeks. The stake, owned by Sverdlov's Luxembourg investment company Kinetik Sarl, is valued at about $11 billion even though Arrival hasn't begun manufacturing vehicles yet.

Sverdlov's jackpot stems partly from the giddy valuations of electric-vehicle companies going public via SPACs. A high value helps them raise capital without cutting the founders' holdings by much. It also avoids dilutive venture-capital funding rounds done at more conservative prices. These trends are cementing the wealth and voting power of founders and early financial backers. Saudi Arabia's Public Investment Fund will own 62% of Lucid Motors Inc. after its SPAC listing closes.

And yet, Arrival is still pretty unusual. It was funded entirely by Kinetik until a 250-million euro ($300 million) private funding round last year that brought in Hyundai Motor, BlackRock Inc. and Vladimir Potanin, Russia's richest man.  Most founders can't afford to go solo at the start. Sverdlov, 42, made his first fortune in Russian telecoms, later serving briefly as Russia's deputy minister for communications and mass media.

His ability to maintain such a large stake in Arrival will depend on the company funding its expansion from retained earnings, rather than raising capital by selling shares. In the past that's been difficult in capital-intensive manufacturing, but Arrival says its innovative “microfactory” approach will cost far less than that of big commercial-vehicle manufacturers such as Daimler AG. That claim has yet to be tested on a large scale.

The feverish investor excitement around pre-revenue electric-vehicle companies has dimmed somewhat in recent weeks because of rising bond yields (a higher discount rate means future earnings are worth less in today's money). Some early-stage companies have lost a third or more of their market value.

Arrival is no exception, but it's pro forma value is still almost $14 billion — based on the current price of the SPAC with which it's merging, CIIG Merger Corp. That's more than twice the deal value it negotiated in November. It's also higher than the market capitalization of about half the members of the FTSE 100 index, including British engineering giant Rolls-Royce Holdings Plc.

Ploughing about 370 million euros of his fortune into electric buses and vans was a risky move for Sverdlov, but it looks inspired now. Other commercial-vehicle start-ups such as Nikola Corp. and Rivian Automotive Inc. are achieving similar nosebleed valuations. His financial commitment is peanuts by the automotive industry's standards, where building or retooling a factory can consume $1 billion. 

Arrival plans to start manufacturing at the end of this year. Beyond the $660 million it's getting from the SPAC and concurrent PIPE financing, it says no additional capital is required to achieve profitability. It expects to be cash-flow positive by 2023 and to generate more than $14 billion in yearly revenue by 2024. I've written plenty about how the forecasts of SPAC-backed companies are unreliable. A $1.2 billion order from UPS is Arrival's only firm purchase commitment.

The company is betting that an unusual approach to manufacturing will give it a competitive edge and make it profitable even with limited sales. Rather than construct one large and very expensive plant, it aims to build a network of microfactories close to cities where the vehicles are purchased. It estimates each plant will cost just $50 million and that they'll each churn out 10,000 vans or 1,000 buses yearly. Cities will no doubt offer incentives for Arrival to set up such factories.

Sverdlov hopes this approach will let Arrival scale up more quickly in response to demand. By using lightweight composite materials for the vehicle panels, it won't have to invest in metal stamping, welding facilities or paint shops. So far it's built two microfactories, in South Carolina and the U.K.; it aims to have 31 by 2024. 

This all sounds compelling, but executing a microfactory strategy on a large scale is unproven and it may lead to increased costs and delays, the merger prospectus acknowledges. Manufacturing snafus are to be expected. Nikola warned last week that it will produce fewer than 20% of the electric trucks it expected this year because of the pandemic and supply chain issues.

By developing components in-house, Arrival says it won't have to spend as much on purchasing kit from outside suppliers. Around 85% of its 1,600 employees are engineers — including software engineers — which is admirable. However, most of the group's more than 200 patent applications are pending, making it difficult to judge its success.

If Sverdlov's strategy is vindicated, other entrepreneurs will copy it. Who wouldn't favor a capital-light approach that limits their dilution? But there's a lot of hope value here. 

Lucid is another special case because the PIF invested at a comparatively late stage and yet still emerged with a large majority stake.

Potanin is an indirect shareholder of Whiteleave Holdings ltd, which is an anchor investor of Winter Capital Partners Fund II, which bought preferred shares in Arrival

Arrival has though signed non-binding letters of intent with various potential customers

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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