Lotus SPAC calls for scrutiny under the bonnet

Lotus Technology

03/02/2023 14:34

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Katrina Hamlin
       HONG KONG, Feb 3 (Reuters Breakingviews) - A deal to
drive sportscar specialist Lotus Technology into a New York
listing via a merger with a special-purpose acquisition company
deserves a close look under the bonnet. Buyer L Catterton Asia
Acquisition  LCAA.O  has engineered a transaction valuing the
enterprise at $5.4 billion. But plans to electrify a brand known
for speedy gas guzzlers are bold. Outsourcing manufacturing
could be costly too. 
    The valuation works out at about 12 times projected EBITDA
for 2025. That’s less rich than the 20 times and 15 times
ascribed to Ferrari  RACE.MI  and Tesla  TSLA.O , according to
Refinitiv. However, it assumes the group, which has sold around
100,000 cars since it was founded in 1948, can deliver more than
150,00 vehicles between 2023 and 2025. At the same time
management will manoeuvre Lotus along a new road, producing only
electric cars and branching into sport utility vehicles. 
    The idea has wheels. Lotus helped Tesla to build its early
Roadster model, after all. Meanwhile, demand for battery-powered
brands is growing fast, and Lotus argues the luxury segment -
especially the lower range of around $100,000 a car that it’s
targeting - will accelerate faster than the mass market.
Reassuringly, Lotus is outsourcing manufacturing of its new SUVs
to the Wuhan factory of its current owner, China’s Geely, which
boasts a vast portfolio of battery-powered models under badges
including Volvo Car  VOLCARb.ST  and Polestar. 
    But the relationship raises questions too. Geely needs to be
compensated. How that will work is not clear. Another Chinese EV
maker, Nio  NIO.N , has a similar setup with a state-backed
partner: Nio pays regular fees for this service, as well as
contributing to investments into the plant. In 2022, when it
delivered around 120,000 vehicles for the full year, filings
show Nio’s gross margin hovered in the low teens in the first
three quarters. That suggests Lotus’ projected gross margin of
at least 21% by 2025 could be punchy.
    More uncertainty comes in the form of a put option. This
requires the soon-to-be-listed Lotus to buy affiliated unit
Lotus UK from Geely and Malaysia’s Etika at a pre-agreed price.
The terms are also unclear.
    Previous spivvy SPACs touting huge electric-car success have
since suffered – Lucid  LCID.O  stock has fallen some 80% from
its 2021 high. On the face of it, Lotus’ sleek exterior and
assistance from an experienced manufacturer are reassuring. But
would-be buyers will nonetheless do well to give the tires a
good, hard kick.
    Follow @KatrinaHamlin on Twitter
    CONTEXT NEWS
    Blank-cheque company L Catterton Asia Acquisition on Jan. 31
agreed to buy electric-vehicle maker Lotus Technology in a deal
valuing the target’s enterprise at $5.4 billion. 
    Current owners, led by Geely, are expected to retain their
stakes and own just under 90% of the combined company once the
transaction closes. 
    Lotus Technology was founded in 2021 as part of the Lotus
Group, in which Geely bought a 51% stake in 2017. Lotus UK, the
other main subsidiary of Lotus Group, is not included in the
merger. As part of the transaction, Lotus Tech will be
responsible for sales and marketing for both companies and has
agreed to a put option requiring it to buy Lotus UK from the
current owners at a pre-agreed price if certain conditions are
met.
 (Editing by Antony Currie and Thomas Shum)
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