Editor’s Note: Updates with closing stock price Monday and clarifies registration of PIPE shares
Shareholders in special purpose acquisition company (SPAC) Tortoise Acquisition Corp. (NYSE: SHLL) voted Monday to make startup electric drivetrain maker Hyliion Inc. a public company worth more than $7.2 billion.
The vote passed in a virtual special meeting called by Tortoise Acquisition Corp., the blank check company that selected Hyliion as its merger partner in June. Hyliion becomes Hyliion Holdings Corp. Its ticker symbol HYLN will replace Tortoise’s SHLL on the New York Stock Exchange on Thursday.
Hyliion receives $560 million raised by Tortoise in an initial public offering (IPO) and a sale of discounted shares through a private investment in public equity (PIPE).
That is enough money to fund Hyliion’s business plan to replace diesel engines in nearly any manufacturer’s heavy-duty trucks. Hyliion currently sells an electronic axle that improves the performance of diesel-powered trucks. Its next product, the Hypertruck ERX, will use a generator fueled by zero-emission renewable natural gas to make on-board electricity.
Tortoise Acquisition’s investment in Hyliion is one of 112 SPAC IPOs this year. They have generated more than $42 billion in proceeds, according to SPACInsider.The fast-to-market alternative to the longer and more arduous IPO process is popular among electric vehicle startups.
Lordstown Motors Corp., which is using Workhorse Group (NASDAQ: WKHS) technology for a commercially focused electric pickup and better-established electric infrastructure developer ChargePoint Inc. are both in the SPAC process.
A cautionary tale
Recent trouble at Nikola Corp. (NASDAQ: NKLA) is a cautionary tale of what can happen to a startup under the glare of public scrutiny. A Sept. 10 short seller report published by Hindenburg Research alleged years of lies and deception. Nikola founder and Executive Chairman Trevor Milton resigned last Monday.
Nikola shares closed Friday at $19.46, nearly 80% below their peak intraday selling price of $93.99 on June 9.
Milton constantly tweeted, parrying with critics and promising battery and hydrogen technology breakthroughs that were years away. Before his Twitter account was deactivated last Tuesday as part of his departure agreement, Milton drew unfavorable comparisons to Tesla Inc. (NASDAQ: TSLA) founder Elon Musk, whose tweets got him a $20 million fine from the U.S. Securities and Exchange Commission (SEC)in 2018.
The SEC and the U.S. attorney for the Southern District of New York are reportedly looking into Nikola. Neither agency confirms an investigation. Nikola said early last week it had not been contacted after initially reaching out to the SEC following the 67-page Hindenburg screed.
In contrast to Milton, Hyliion’s 28-year-old founder Thomas Healy exhibits a low-key demeanor. According to Forbes, he will become one of the nation’s youngest billionaires. Healy’s 34.97 million shares amounts to 22.9% of the company he founded in April 2015. At Friday’s closing price of $44.39, that stake is worth more than $1.5 billion.
Healy’s quiet confidence comes through in conversations with board members like former U.S. Department of Transportation Secretary Andy Card as well as Tortoise Acquisition Chairman and CEO Vince Cubbage.
“From our perspective, we want the performance and the milestones to speak for themselves,” Cubbage told FreightWaves on Sept. 1 before the withering criticism of Nikola began. “Our strategy is to build Class 8 electrified drivetrains, not to create buzz around the stock.”
In SEC filings, Hyliion said it expects to generate $8 million in revenue in 2021, rising to $344 million in 2022 and $1 billion in 2023. It has a preorder for 1,000 ERX drivetrains from Agility, one of the world’s largest integrated logistics providers.
The problem with hydrogen
Cubbage is a former investment banker who has broad experience in the energy sector. He founded private equity firm Lightfoot Capital Partners and was chairman and CEO of Arc Logistics Partners GP, purchased by Zenith Energy in December 2017.
Cubbage knows the hydrogen space where Nikola is trying to play. “I worked on the deal when Plug Power (NASDAQ: PLUG) went public,” he said.
“I fell in love with the prospects of hydrogen 15 years ago. I understand it. I understand the economics around it. I understand the infrastructure requirements to it. I think the world is excited about it. This time they may be right.”
Despite expanding efforts by South Korea’s Hyundai Motor, engine maker Cummins Inc. (NYSE: CMI) and dozens of startups globally, “there is currently no opportunity to capture hydrogen and use it for energy,” Cubbage said.
That’s why Tortoise chose Hyliion from 200 companies it considered, Renewable natural gas plentiful. It is not a fossil fuel. It comes from biogas, the decomposition of organic matter like wastewater, food and farm waste. And there are 700 existing stations where it can be purchased.
“The key to Hyliion’s business plan is execution,” he said. “It doesn’t require something new to happen that falls in its direction. When we saw this business plan and its path to mass production, we dropped everything and tried to get a deal with Healy.”
Trucking companies, Cubbage said, want to be on the right side of reducing carbon and greenhouse gas emissions. But they don’t want to pay more for it. California will begin requiring 9% zero-emission trucks in four years under the Advanced Clean Truck rule passed in June.
“If you believe the total cost of ownership analysis, and you believe that investors should invest in what’s known today, not on what’s hoped to be created tomorrow, this is a better path to market and it’s a lower cost of operation,” he said.
Shares on the rise
Tortoise shares have risen more than 300% since coming on the market at $9.50. Anticipation of the merger drove shares as high as $58.66. They closed Monday at $48.00 and rose to $51.50 in after-hours trading.
“I think if we do a good job executing the business plan, the stock will take care of itself,” said Cubbage, whose private equity fund owns 8.7% of Hyliion, or 12 million shares, worth about $533 million as of Friday.
The Tortoise-Hyliion merger mostly sailed through its SEC review. The agency sent follow-up questions, which delayed the merger vote from mid-September until Monday.
One shareholder sued Tortoise and another sent a letter claiming lack of transparency in its proxy statement. Tortoise filed a revised 8-K with the SEC last Thursday. The two stockholders declared their claims moot, the company said in the filing.
Locking up investors
Tortoise has four groups of investors:
- Original investors in Hyliion, which raised about $50 million through the likes of Dana Inc. (NYSE: DAN). Dana makes the drivetrain Hyliion uses and invested $15 million.
- Founders of Tortoise Acquisition Corp. that created the SPAC and raised $235 million through an IPO.
- PIPE investors who bought $325 million in discounted Tortoise shares, and received warrants to buy additional shares.
- Public holders who bought Tortoise shares on the open market.
All stand to profit at Tortoise’s current price. However, all but the public shareholders must wait to sell their shares.
Shares held by the PIPE investors technically do not exist until they are registered. Hyliion will register those shares within 30 days of the merger closing followed by an SEC review. Registering the shares does not mean they will be sold, only that they can be.
The original Hyliion investors have a six-month lockup. Healy has a full lockup for six months. Then he can sell up to 10% of the shares he owned at closing over the following 18 months. The Tortoise SPAC founders agreed to hold their shares for a year. They could sell in as soon as six months if Hyliion shares trade above a certain price for a certain time period, Cubbage said.
What about SPAC volatility?
Share price volatility in a SPAC like Nikola has more to do with the underlying business than with the SPAC structure, said Cubbage, who recently started a second SPAC at Tortoise. A merger target is pending.
“We’ve studied SPACs across the entire market,” Cubbage said. “Some have high levels of volatility. Some have low. A lot of shareholders trade in and out of the stocks with greater velocity. They’re betting on things that are longer term in nature.”
In other words, some are out to make a fast buck.
“What’s exciting for me is a business plan that I can underwrite and view as achievable,” Cubbage said. “It’s why we’re excited about the team. It’s why we raised enough money to put the company in a position where it doesn’t need any external additional financing to get to mass production.
“As an investor, what excites me is a quick profitability of the investment case being achieved.”