Sent straight to the stock market junkyard at the end of last year, Lucid Group (NASDAQ:LCID) made a remarkable comeback last month. Although the broad market rally set shares in motion, the emergence of takeover speculation is what really put LCID stock back into the fast lane.
On Jan. 27, shares in this early-stage electric vehicle (EV) maker zoomed 43% higher. The move came on rumors that the company’s majority owner — Saudi Arabia’s Public Investment Fund (PIF) — was preparing to buy out public shareholders. That said, little in terms of detail has come out about this possibility since then.
LCID stock has pulled back slightly since then as well, although it has held onto some of these buyout rumor gains. The question now is whether Lucid can hold steady at current prices — and in the near future, move higher if a bona fide offer emerges.
My view? Don’t count on an offer happening. Here’s why.
LCID Stock: Why a Takeover May Not Happen
Admittedly, I can understand the appeal of buying Lucid, merely on its potential as a takeover target. It’s not uncommon for deep-pocketed buyers to pay big premiums to acquire businesses. With $620 billion under management, the Public Investment Fund certainly has deep pockets.
Not only that, as the sovereign wealth fund of Saudi Arabia, the PIF has objectives beyond just maximizing investment returns. Its other objective is to invest in ways that help diversify Saudi Arabia’s economy.
As a Seeking Alpha commentator recently argued, the PIF may view Lucid as a “strategic asset” that can help turn Saudi Arabia into an EV hub in the Middle East. With that theory in mind, it makes sense why the PIF would potentially pay to own 100% of the company.
However, buying out public shareholders of LCID stock may not be necessary for Saudi Arabia to achieve these goals. When it comes to using Lucid as a vehicle to jumpstart the country’s EV industry, it could simply form partnerships with Lucid rather than buy the company outright. Even if it merely wants to increase its stake, the PIF has another way of doing so.
PIF Could Increase Its Stake Via Future Capital Raises
The PIF has been a Lucid investor since 2018, when it pumped more than $1 billion into the then-private EV startup. However, more recently, the fund made another big investment.
Back in December 2022, the PIF invested nearly another $1 billion into the company through the purchase of newly issued shares of LCID stock. While this investment provided Lucid with additional cash and helped to increase the fund’s ownership, the capital raise was also dilutive to existing shareholders.
What does that have to do with recent buyout talk?
Put simply, it may make more sense for the PIF to increase its position via this method rather than buy out minority shareholders at a premium. As I argued recently, given factors like declining reservation figures and rising competition, Lucid’s cash burn in the coming years could be greater than currently expected.
In order to continue advancing to the mass production stage, Lucid may need to raise more cash. As the PIF would likely need to infuse this growth capital into the company anyway if it owned Lucid completely, participating in future funding rounds may be a far cheaper way for the fund to increase its stake.
Bottom Line? Sell the Rumor.
Given that buying out minority shareholders isn’t the fund’s only option when it comes to increasing ownership, there’s a strong chance a buyout offer fails to materialize. If it becomes clear a deal isn’t happening, shares of LCID will likely dive back to pre-rumor prices as well.
If Lucid continues to struggle and conducts additional capital raises (which its majority shareholder may be interested in participating in), the resultant dilution could also place more pressure on shares.
As Louis Navellier recently put it, the story with Lucid right now seems like a “buy the rumor, sell the news” type of situation. That said, instead of waiting for the official news to arrive or not — whether you bought LCID stock before, during, or after this questionable catalyst emerged — your best bet may be to “sell the rumor.”
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.