Yes, Churchill Capital Corp. IV (CCIV) Is Dramatically Boosting Its Authorized Share Capital, and No, This Is Not Definitively Bearish for Lucid Motors
Lucid Motors, to be officially named Lucid Group (LCID) after its public flotation, is just days away from merging with the SPAC Churchill Capital Corp. IV (NYSE:CCIV). However, a recent filing by CCIV is causing a lot of consternation among investors ahead of the crucial merger approval vote, currently slated for the 22nd of July.
To wit, Churchill Capital IV filed Form 424B3 with the SEC a few days back. The filing details the proposals that CCIV shareholders would be required to vote on during a special meeting in the latter part of July, including the crucial proposal to approve the business combination agreement with Lucid Motors. However, it is the proposed increase in CCIV’s authorized share capital that is raising quite a lot of hackles.
Proposal number 2, dubbed the Charter Proposal, calls for an increase in Churchill Capital IV’s authorized number of shares from 501 million to 15.01 billion. Interestingly, this same action is also a part of proposal number 3A, with the caveat that proposal number 3 – dubbed the Governance Proposal – is advisory in nature and not mandatory for the consummation of the business combination agreement with Lucid Motors. So, what does this mean? Well, even if investors were to reject proposal number 3, the increase in CCIV’s authorized share capital is embedded within the Charter Proposal. Hence, this increase has to be certified by investors if the merger with Lucid Motors is to go ahead.
This brings us to the crux of the matter. As is evident from the snippet above, Churchill Capital IV has to issue new shares to existing Lucid Motors investors. Moreover, the PIPE investors, who are bringing in $2.5 billion in crucial liquidity, also need to be issued new shares, to the tune of 166.66 million. Assuming no redemptions, 1.595 billion Lucid Group common shares will have to be issued in total upon the close of the merger agreement. However, the authorized share capital is nearly 10x this immediate issuance requirement, thereby giving rise to fears of rampant dilution.
Investors should note that authorized share capital is simply an enabling measure and need not be fully utilized. Instead of repeatedly going to investors for the issuance of new shares, Churchill Capital IV seems to be catering to all of its foreseeable equity financing needs in one go. Consequently, while the size of this authorization relative to the current need is indeed an outlier, this facility is unlikely to be fully utilized. To sum it up, the increase in authorized share capital is not a bearish factor on its own. It is only the manner in which this facility would be used by Lucid Group that would dictate its bearish or bullish tilt.
In another caveat, Lucid Motors is currently in an aggressive expansion phase and would need to continue to raise new capital for the next few years. This is especially true given that the Lucid Group is not expected to become profitable until 2025:
Therefore, any capital raised will go toward enhancing Lucid Motors’ production capacity, for instance, by financing the AMP-2. This, in turn, would benefit investors in the long-run.
I’ve repeatedly stated that Lucid Motors, soon to become Lucid Group, is a long-term play. Investors trying to wring out short-term gains are missing the bigger picture. Of course, the incoming wave of dilution will be a point of consternation for these speculators. However, for those adopting a longer time horizon for their investment, this dilution would simply mark a bump in the long road ahead.
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