Why GM may escape from Nikola’s wreckage unharmed

What a difference two weeks makes.

On Sept. 8, General Motors’ stock bounced nearly 10% after the legacy carmaker announced it would take an 11% stake in Nikola Motor and provide technology to the buzzy hydrogen-electric truck startup.

It’s all been, to put it mildly, downhill from there.

Allegations of fraud by Nikola have since dismembered its stock, with GM’s promised stake losing nearly $1 billion in value since the deal’s announcement. GM’s own shares also cratered Monday after the announcement that Nikola’s founder and former CEO Trevor Milton would step down as executive chairman and leave the company. GM’s stock has now given back all the gains that followed the partnership announcement.

But despite those paper losses, and the potential for more if Nikola’s situation worsens, the terms of the deal mean GM’s real downside is likely to be minimal. In fact, while some investors took the GM deal as validation of Nikola, others saw the arrangement as so one-sided that it fueled suspicions about Nikola’s business model.

Most important, GM didn’t put up any cash in the deal. Instead, its big stake in Nikola was based on sharing its battery and fuel-cell technology with the startup. Moreover, GM was also to be paid by Nikola for its engineering and manufacturing work, and for building factories for Nikola. Finally, GM’s deal would give it a claim on 80% of the valuable regulatory credits generated from the sale of Nikola vehicles. All told, GM estimated it would earn $2 billion from the deal in addition to the value of the Nikola stock.

The deal’s terms were a red flag for some analysts, and not just because of its generosity to GM. Above all, Nikola had long touted its own advances in battery and fuel-cell technology, drawing questions about why it would look to GM for those core components, and more broadly, what exactly Nikola itself was bringing to the table.

Nikola had earned a dramatic stock run-up partly by promising investors the moon: not only innovative batteries and a national network of hydrogen fuel facilities, but a list of potential vehicles that grew to a half-dozen before any of them actually went on sale.

Batteries in particular turned out to be a key issue in the fraud allegations published by short-seller Hindenburg Research two days after the GM deal was announced. Nikola, the Hindenburg report claimed, had been misrepresenting its progress in developing batteries, as well as faking a 2018 video of one of its trucks, which seemed to show it moving under its own hydrogen fuel-cell power. In fact, it was rolling down a hill, powered by an old-school technology called gravity.

Despite signaling that it would rebut the accusations, Nikola never did so convincingly, and even publicly admitted to the truck deception (while insisting that it wasn’t a deception at all). On Sept. 14, it was reported that the Securities and Exchange Commission and U.S. Justice Department were investigating the claims.

Through it all, GM stood by Nikola. On Sept. 14, for instance, GM CEO Mary Barra assured markets that GM had conducted “appropriate diligence” on the deal. After Milton stepped down, GM again stood firm, reiterating that it would close the deal as scheduled at the end of September.

That’s not as surprising as it seems. Even if Nikola collapses entirely, GM will likely come out ahead. GM can’t sell its Nikola stock for at least a year, and it’s anyone’s guess whether there will be any value left by then. But in the meantime, GM may get to test-drive an EV business on somebody else’s dime. In late July, Nikola executives said the company had about $900 million in capital, enough to start funding GM’s work on Nikola’s planned Badger electric pickup truck. Assuming that work proceeds, it will at the very least be a test bed for GM’s Ultium batteries, which GM has also licensed to Honda, and will be part of GM’s own planned slate of as many as 20 new EV models by 2023.

That’s why Morningstar’s David Whiston told the Detroit Free Press last week that, however bad things get for Nikola, the main risk for GM was “a huge PR black eye…It still looks really bad optics-wise should Nikola be charged with criminal fraud or go bankrupt.”

And to top it off, Nikola announced today that Milton’s spot as chairman will be filled by former GM vice chairman Stephen Girsky. Girsky founded VectoIQ, the so-called special purpose acquisition company, or SPAC, that allowed Nikola to become a publicly traded company. He was also reportedly the architect of the Nikola-GM deal.

So even if it suffers a reputational hit, GM could still come out ahead if Nikola continues to crumble. In the short term, cash from Nikola investors will go to fund GM engineers’ work on the Badger and other vehicles. Then, if the scandal-plagued startup can’t attract more investment, GM will be in the pole position to buy whatever’s left of Nikola—maybe even, if Nikola’s stock slides far enough, for less than GM was to be paid for its work.

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