In this third – and last – part of the ESG-related investing theme, I’ll briefly look into two more recently announced spac-deals which I believe have quite a good chance of performing well as the deals close and the private companies start to trade publicly.
B. Riley Merger Corp. II (BMRG, BMRG/WS)
The first is B. Riley Merger Corp. II. BMRG is a bit of an odd one. BMRG recently merged with Eos Energy Storage, though while spacs generally tend to make a big (marketing) deal of their intended acquisition, BMRG kept very quiet – I can’t remember a spac m&a call lasting 11 minutes. In addition, as the acquisition was announced just a month after the spac listing, I believe this spac might have been set up just for the purpose of listing Eos.
Regarding Eos’ products, the company brands itself as “a leading manufacturer of safe, sustainable, low-cost, and long-duration zinc hybrid cathode (‘Znyth’) battery energy storage systems”. The target market of Eos is large scale energy storage solutions, a market which is expected to grow extremely fast as a consequence of the fast transition to renewables. According to Eos, their flagship product (Znyth battery system) is commercially available and already scalable. However, the main selling points are:
- Their core product requires only five core commodity materials that are derived from non-rare earth and non-conflict minerals (read: independency from China).
- The batteries are fully recyclable.
- The batteries are supposedly very safe, non-flammable and easy to maintain.
- Fully manufactured in the US.
In addition, the company is further developing its technology and is expecting to introduce new, more efficient batteries as of 2021. Management was changed completely over the last couple of years and now consists of mainly ex GE-employees.
Eos has some production agreements and the pipeline appears to be full. Since the business combination announcement (September), Eos disclosed more deals. Eos is (obviously) very positive about the future, mainly due to the strong expected demand from the shift to renewables.
I believe the bear/bull case here to be a bit more tricky compared to Danimer. The market demand for energy storage solutions is indeed growing very fast, and demand is expected to outpace supply for years. Also, the company claims visibility up to 2021 given the current pipeline. However, scaling the technology might prove difficult and we still have few signs of that potential given the little available capacity at the moment. Furthermore, there is much competition in this market, mainly from the ‘classic’ lithium-ion batteries. With respect to the technology, I understand that the potential is great, but total cost of ownership is not always better. Also, given Eos’ main product specs, the battery is efficient in specific environments, definitely not all (e.g. specific charge/discharge needs).
Again, assuming a $18 share target price, 68m shares (55m + 9.1m warrants + 3.8m earn-out shares) and ~$300m net cash (incl. ‘cash’ warrant conversion), Eos will trade at ~3.4x 2022e revenue of $270m* (2022e ebitda is break-even). Eos expects revenues to almost quadruple in the period thereafter, which is quite a lot, though I believe there to be more uncertainty with Eos compared to Danimer.
Nonetheless, I believe the story to be an easy sell to ESG investors and 3.4x 2022 revenue not a stretch to reach, keeping in mind the market back-drop where Eos will trade in and (again) the very sustainable character of the company. The marginal ESG investor today is willing to pay premium multiples to own growth stories in the ESG/sustainability space with much worse operating models. In addition, there aren’t many pure play sustainable battery storage solution companies in the market. In the end, it’s all about supply and demand. If you want to play the (industrial) battery theme, big chance you’ll have to own Eos.
Most importantly, as BMRG warrants are trading at $1.25 (and shares at ~$10) I’m not paying much to have exposure to what I believe is not a difficult story to sell. Remember, at $18 the warrants are worth $6.5 – plenty of upside from $1.25. The transaction is expected to close end of this month. I’m betting that as soon as this thing gets marketed, the warrants will start to get some traction.
(*I have to mention that I’m a bit confused regarding what the company claims about pro-forma EV and implied market cap; both are mentioned to be ~$550m, though they’ll have ~$200m cash for growth. So either they have 200m debt, which I very much doubt or there’s some confusion in the nomenclature.)
Click here for the BMRG’s deal presentation.
Pivotal Investment Corp. II (PIC, PIC/WS)
The last one is Pivotal, and I can be short on this one. Pivotal will merge with XL Fleet, a provider of EV powertrains. This is basically their sales pitch:
We know how the other companies have performed. Every one of them has seen their shares and warrants go up by multiples. To say the market anything related to EV is hyped is an understatement. Even Nikola, which admitted lying and massively inflating its (hydrogen) potential, is still trading at ~30x 2022e revenues. XL Fleet claims it will sell “existing products to existing customers through existing channels” and basically differentiating itself this way from peers. And of course, XL Fleet’s growth projections are similar to peers.
Of the three, this one has the lowest conviction. The EV powertrain market is crowded and becoming more crowded by the day. At $18 share price and 152m shares, XL Fleet will be trading at ~8x 2022e revenue; certainly a lot, though still cheap compared to listed peers. And we know the current market is willing to pay up; remember what we discussed in previous posts. With the warrants currently trading at ~$2.1, I believe there’s a good chance for these things to perform well.
Click here for the presentation.