RMG Acquisition Corp. (NYSE: RMG) Continues To Generate Outsized Gains as Investors Anticipate Romeo Power’s Imminent Market Debut
RMG Acquisition Corp. (NYSE:RMG), is certainly resembling a unidirectional stock play these days, with the SPAC’s shares relentlessly pursuing an upward trajectory. As an illustration, RMG Acquisition has registered a gain of over 28 percent just this week, spurred by its approaching merger with Romeo Power, a company that designs and manufactures lithium-ion battery modules and packs for commercial electric vehicles. In today’s pre-market, the stock is up another 10 percent.
Readers should note that a Special Purpose Acquisition Company (SPAC) does not possess any intrinsic value. Rather, this is basically an investment vehicle that utilizes its IPO proceeds to acquire a private company. Oftentimes, institutional investors inject crucial liquidity in a SPAC – dubbed a PIPE investment – and, in return, receive shares of the combined company at a discount. This is a cost-efficient method for a private company to float its shares on the stock exchange and has been gaining popularity due to the opportunity for investors to earn a riskless arbitrage.
With the primer out of the way, let’s discuss why investors keep bidding on RMG Acquisition. The answer is fairly simple: Romeo Power. To wit, Romeo already has contracted revenue of around $310 million, with a further $2.4 billion in revenue currently under negotiation. The company offers three main variants of its battery pack:
(Source: Investor Presentation)
Romeo is an attractive bet for electric vehicle OEMs as it offers flexibility, production scalability, enhanced safety features, and an established recycling program. The company expects to earn annual revenue of $412 million in 2022. However, by 2025, its top-line metric is expected to swell to $1.65 billion, constituting growth of around 300 percent! Given this solid growth profile of Romeo Power, it is hardly surprising that investors continue to soak up RMG Acquisition’s shares in the pre-merger phase.
This brings us to the crux of the matter. On Wednesday, the 25th of November, RMG Acquisition filed a Form 425 with the SEC, intimating the 1st of December 2020 as the date of record for the determination of stockholders eligible to receive the proxy and vote at the upcoming special meeting. Bear in mind that the special meeting is one of the most crucial steps in a SPAC’s attempt to acquire its target company as the shareholders accord their formal approval of the proposed merger at that time. Wednesday’s announcement supercharged RMG Acquisition’s gains as it indicated that the special meeting of the SPAC’s shareholders is imminent.
While it is too early to label this ongoing rally in RMG Acquisition’s shares the result of an overexuberance, investors should remain cautious as most SPAC mergers experience a cooling-off period after the closing of the deal. Consequently, investors with a high cost base – those that bought the shares far above the SPAC’s NAV price – should consider buying some downside protection in the form of puts.