A charger is plugged into a LiveWire electrical motorbike at a Harley-Davidson showroom and restore store in Lindon, Utah, U.S., on Monday, April 19, 2021.
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For firms, 2021 has been a 12 months of massive spinoff plans and unstable SPAC choices. As of this week, Wall Street and traders had yet another iconic identify so as to add into each monetary engineering columns: Harley-Davidson.
The motorbike maker introduced plans to spin off its electrical bike division, LiveWire, as a new firm via a SPAC deal that values Harley’s EV enterprise at roughly $1.8 billion.
That’s not close to the valuations a number of the EV automotive makers, together with Rivian Automotive and Lucid Group, have seen after current market debuts, nevertheless it factors to a basic problem legacy corporations, lengthy leaders in their market, face because the world modifications and mega developments akin to vitality transition and electrification turn into extra central as investing themes.
Across a number of sectors, local weather change is resulting in requires a rethinking of how iconic corporations are structured. Royal Dutch Shell not too long ago got here below activist investor stress to think about spinning off its renewable vitality enterprise. GM and Ford, whereas expressing no curiosity on their very own, have been topic to questions from the market as as to if new EV companies may be higher as stand-alone corporations.
“If anything this underlines what we’ve been saying for a long time. Detroit, wake up! The train has left the station! EVs are inevitable,” Roth Capital analyst Craig Irwin stated in the Reuters report on the Harley-Davidson deal. “Many traditional OEMs (Original equipment manufacturers) with emerging EV businesses can obviously do similar spinoff transactions.”
The particular objective acquisition firm that LiveWire will merge with is an ESG-focused SPAC, AEA-Bridges Impact Corporation.
Climate change is not the one main transition theme that’s resulting in requires company breakups, as main division retailer corporations together with Macy’s and Kohl’s face investor stress to spin off on-line retail operations as e-commerce continues to develop as a shopper habits. And these debates about how finest to appreciate shareholder worth are going down on a broader panorama of company spinoffs involving iconic corporations from GE to Johnson & Johnson.
For Harley-Davidson, the spinoff plan raises short-term questions on how finest to fund and construct a new enterprise for a new transportation and shopper period, and longer-term questions on the place the higher worth will reside in the Harley-Davidson model in the future — it should retain 74% management of the brand new firm’s shares.
Growth belongings in the EV house are being valued in another way than mature low/no progress belongings like an inside combustion engine manufacturing enterprise, in line with David S. MacGregor, Longbow Research analyst. “While the LiveWire spinoff isn’t yet being valued similar to other well-known EV stocks, the growth potential of the stand-alone business will be recognized in the years ahead and the valuation will follow,” he stated.
From a product standpoint, despite the fact that the legacy enterprise and EV enterprise are each two-wheel bikes, they’re totally different product classes and at totally different levels of evolution. That results in a number of issues which favor a spinoff, in line with MacGregor. For LiveWire to recruit the expertise that may enable it to succeed, administration will want the autonomy of a stand-alone firm, which in flip will enable them to create monetary incentives for key managers that tie on to the achievement of efficiency milestones. Autonomy additionally means making choices on capital with the advantages of a clear market story.
“There is more for us to learn, but LiveWire was not likely to tap the flow of capital into electric vehicles as part of legacy Harley-Davidson,” wrote Craig Kennison, Robert W. Baird & Co. analyst in a word this week.
Research on company divestitures performed by Emilie Feldman, professor of administration at The Wharton School, University of Pennsylvania, signifies that comparable considering has benefitted in the current historical past of company spinoffs.
“My analysis is unequivocal,” Feldman not too long ago advised CNBC. “We definitely see these big performance improvements both in divesting companies and then equally when we look at the performance of the companies spun off, they tend to strongly perform after the completion of the separation from the former parent company,” stated Feldman, whose e book “Divestitures: Creating Value Through Strategies, Structure and Implementation,” will be revealed subsequent 12 months.
There are causes for Harley-Davidson to separate the EV enterprise because it continues with its personal turnaround plan. It shouldn’t be solely the small growing enterprise that may get misplaced contained in the bigger firm to its detriment, but in addition be an added capital pressure on a firm going through main demographic and market shifts. It may be 2025 or 2026 earlier than LiveWire reaches breakeven, and for Harley-Davidson it is smart to not have that drain on its revenue & loss assertion whereas present process a broader turnaround plan below Harley-Davidson CEO and Chairman Jochen Zeitz.
“Right now, both the new company and the legacy company are show-me stories, with investors not excited about HOG shares given the demographic issues that still weigh on the traditional heavyweight bike market. Even as the new management team is executing on the right strategies, it is still faced with the challenges created by the previous management team’s mistakes, and we expect that will take a couple more years to resolve,” MacGregor stated.
In some apparent methods, the 2 corporations will stay connected on the hip. Zeitz will be Chairman and performing CEO of LiveWire, whereas Harley-Davidson CFO Gina Goetter will function performing CFO.
Baird famous LiveWire will get the liberty to fund new product growth and speed up its go-to-market mannequin whereas additionally benefitting from the manufacturing scale and distribution capabilities of Harley and Taiwan-based scooter and e-bike firm KYMCO, which can be on the deal.
Strategic priorities and R&D additionally overlap.
As the biggest producer of heavyweight gasoline-powered motorbikes, Harley-Davidson is “uniquely positioned to shape the future of the motorcycle industry,” Baird wrote in its ESG abstract of Harley.
Zeitz, who arrange Harley’s sustainability committee after he joined as CEO, advised CNBC this week he requested the corporate “to think long term and think electrification” and he’s now betting it should be the main EV model in bikes in a decade. “Through LiveWire, we can really spearhead the electrification of the sport and that’s why taking the final ultimate step to spin it off is just a logical thing to do now,” he stated.
While LiveWire is focusing extra on the city shopper, Zeitz says it might probably additionally deliver the expertise again into Harley, which he described as a key goal. “While we have huge potential still for Harley-Davidson as a brand and as a company, this will be one of the key strategic elements that will help us to achieve our ultimate goals,” he stated.
Harley’s timing wasn’t nice for a SPAC, simply as market volatility intensifies and traders turn into skittish on progress tales and a number of the hottest tech developments. Rivian offered off after its earnings this week and a few current SPACs, whereas getting offers carried out, have seen heavy promoting.
Harley shares popped up on the information early this week, however have traded again down since to the place shares have been caught in the mid-$30s vary after rallying earlier below Zeitz’s new administration.
LiveWire is not a 2022 story in phrases of the numbers. Today, the LiveWire enterprise is a blip, a base of 387 LiveWire bikes and $33 million in income in 2021, in line with Baird analysis. Harley forecasts gross sales of over 100,000 bikes producing $1.77 billion in income in 2026, and by 2030, roughly 190,000 EVs producing $3 billion in income. Baird’s present forecast for conventional motorbike shipments this 12 months is 186,000 bikes.
“It’s not going to be linear of course and a lot will depend on when we launch new product into the market,” Zeitz stated. “There’s lots of opportunity there to grow the business and, you know, if you look at the overall adoption rate, we see that increasing dramatically over the next few years.”
The deal may not obtain the valuation another “concept stocks” acquired this 12 months, however analysts say getting the deal out the door and creating the autonomy for the model may be extra essential, particularly to recruit high administration to the brand new effort.
Ultimately, few folks will argue that in the future there will not be extra EVs on the highway than inside combustion automobiles, and Harley has a lead in many features of the bike enterprise to lean into, from its vendor community to servicing and finance. That means it’s laborious to make a long-term bear case in opposition to Harley being a chief in EVs, even when the market stays unconvinced on the legacy firm and the brand new EV firm as buys in the rapid future.
Harley has been lifeless cash for a whereas, and plenty of sellers as we speak stay extra targeted on conventional bikes and rising used bike gross sales. The future of each Harley and LiveWire may go many various methods. Right now, LiveWire may have the extra compelling long-term story, however that may take time to develop from potential to really hitting the radar of extra traders and ensuing in a greater EV valuation.
There is one notable ingredient consumerd do not see on the brand new LiveWire bike’s branding: the Harley-Davidson identify.
“We wouldn’t be surprised to eventually see the EV company with a larger market cap than legacy,” stated MacGregor.