Beleaguered battery supplier Romeo Power will soon be out of trouble as it is set to be bought by Arizona truckmaker Nikola.
The all-stock deal is worth $144 million, essentially $0.74 per share, which is 37% higher than Romeo’s closing price as of July 29th.
Seen as a ray of hope for the struggling battery company, the Nikola purchase also involves the provision of $35 million in stabilization funds for Romeo’s operations. $15 million of the said funds will be in senior secured notes, while the remaining $20 million will be delivered as a battery pack delivery bonus.
While the boards of both companies agreed to the deal, it is still pending stakeholder approval. A final decision is expected before the end of this year.
Following the deal’s announcement, Nikola’s share price rose by 7.9% on the Nasdaq, while Romeo Power’s went up by 27%, settling at around $0.70 at closing.
Necessary for Growth
Mark Russel, chief executive officer of Nikola, says that the impending purchase enables his company to gain stable access to lithium-ion packs, a necessary measure in light of company plans to increase the production of electric semi-trucks.
As Nikola is Romeo’s biggest customer, the purchase also ensures that there are no disruptions to either company’s operations. Indeed, Russel stated that Nikola is taking control of its battery supply by bringing production in-house.
The acquisition will augment the Nikola workforce by 400 employees. Likewise, Romeo’s headquarters in Cypress, CA will become Nikola’s Battery Center of Excellence.
Nikola is also poised to move forward with truck production at its plant in Coolidge, AZ where operations began in April of this year. Russel is also pushing shareholders to approve a pending stock issuance plan to raise funds for improved production and the construction of proprietary hydrogen fueling stations.
However, Russel added that his company gets a part of its battery supply from Silicon Valley battery producer Proterra and that this will not change even if the Romeo deal pushes through.
In a Better Place for Adjustment
According to Cowen equity analyst Jeffrey Osbourne, the Romeo deal puts Nikola in a more favorable position for adjustment even as battery technology continues to evolve.
Indeed, in terms of operational costs, the deal gives Nikola a great advantage by reducing battery pack costs by as much as 40%by the end of 2023. In this case, the truckmaker stands to save up to $350 million by 2026.