Overall, 2021 was a bad year for SPACs and most of them fell below the SPAC IPO price, including some of the high-profile mergers like Clover Health, Paysafe, and Grab. After a brief lull, we have many merger votes this week. On Jan. 12, Decarbonization Plus Acquisition II (DCRN) stockholders will vote on the business combination with Tritium. What’s the forecast for the stock and will the merger vote sail through?
An affiliate of Riverstone Holdings LLC is the sponsor of DCRN. The company has a 15-year track record of investing in the clean energy ecosystem and has invested over $5 billion as equity in different renewable companies. Before we look at the outlook for DCRN stock, let’s take a brief look at some of the other SPAC from the sponsors.
Decarbonization Plus Acquisition SPACs have been weak.
In December 2021, DCRC merged with Solid Power and the stock now trades well below the SPAC IPO price. Hyzon Motors, which went public with DCRB, also trades below the IPO price. While the price action should be read in the context of the sell-off in de-SPACs and the derating of green energy stocks, it still doesn't reflect well on the sponsor.
Watch out for redemptions in the DCRN merger voting.
As DCRN stockholders vote on the merger with Tritium, it will be worthwhile to keep an eye on the redemptions. With DCRN stock trading well below the IPO price of $10 and the continued sell-off in growth names, investors might be wary of staying with DCRN. In case of redemption, investors would get $10 plus any accrued interest on the SPAC trust cash.
Tritium is a play on the EV transition.
Tritium makes fast chargers for electric cars and is a play on the EV transition. The Biden administration is committed to the green energy cause and plans to invest billions over the next decade to increase the EV charging infrastructure in the U.S.
Meanwhile, the euphoria towards green energy stocks that we saw in 2020 and the first few months of 2021 has fizzled away. Markets have been wary of startup EV companies unlike previously when all green energy stocks just kept on climbing.
What's Tritium's stock forecast?
All of the companies should be looked at in isolation and the fall in de-SPACs and green energy stocks doesn't mean that DCRN will meet a similar fate. The dismal price action of other SPACs from the sponsor isn't an indication of how Tritium, which would trade under the ticker “DCFC” after the merger, could perform after the merger.
Tritium posted revenues of $59 million in 2020 and the company’s sales rose at a CAGR of 56 percent between 2016 and 2020. The company is forecasting its sales to rise to $982 million by 2025.
Tritium expects to become free cash flow and EBITDA positive in 2023. In 2025, it expects to post an EBITDA of $221 million and free cash flows of $196 million. The projected free cash flow-to-EBITDA conversion ratio is around 90 percent.
Wait on the sidelines if you want to buy Tritium.
While the projected cash flows look healthy, there's a catch—it will need to deliver on them. There have been many instances when companies have had to tone down their projections.
From a valuation perspective, the deal valued Tritium at an equity value of $1.2 billion. At the current stock price, the pro forma market cap is just around $1 billion. The stock’s valuations look attractive based on long-term projections. However, such long-term growth stories have been out of favor amid the rise in bond yields. While Tritium looks like a good investment opportunity, it might be worthwhile to wait for the stock to come down after the merger.