As has been the case lately, investors are continuing to bail on Mullen Automotive (NASDAQ:MULN) stock. Just in the past month, shares in the fledgling electric vehicle (EV) maker are down around 50%.
While you can blame market volatility for some of these price declines, the bulk of them are due to decreased confidence in Mullen’s future. Like I discussed earlier in September, the market is now well-aware that the stock’s many risks far exceed the possible rewards.
Mullen’s current risk/return proposition could become even more unfavorable if the company’s bid to buy a struggling peer out of bankruptcy goes through.
Put simply, this deal stands to worsen what is already a bad situation. MULN may look cheap with its current sub-$1 share price, but if the company is able to close on this transaction, the stock could remain in free-fall mode. Here’s why.
MULN Stock and the Latest M&A News
As InvestorPlace Financial News Writer Samuel O’Brient reported on Sept. 20, Mullen Automotive continues to be in deal-making mode. Just coming off its deal to buy a majority stake in Bollinger Motors, Mullen now has its eyes on another acquisition target: the assets of bankrupt EV maker Electric Last Mile Solutions (OTCMKTS:ELMSQ).
The company has put in a $55 million bid for Electric Last Mile’s inventory, intellectual property rights, as well as its manufacturing plant located in Mishawaka, Indiana. While it’s not guaranteed that Mullen will win the bankruptcy auction, so far the company has placed the highest bid.
Much like other recent news, this development has done little to improve sentiment for MULN stock. Instead, it’s having the opposite reaction. In my view, this makes perfect sense.
Sure, in theory this deal may be a great opportunity for Mullen to obtain manufacturing capacity on the cheap. However, along with the above-mentioned grab bag of assets, the Electric Last Mile deal also comes with $37 million in assumed liabilities, bringing the total price up to around $92 million. Already stretched thin, the need to raise more capital could arise sooner, and to a far greater extent, than previously anticipated.
Why Mullen Is Dropping on This News
Investors appear to be pricing in an inevitable capital raise. As of Aug. 8, the company only had $99 million in cash on hand, barely enough to cover cash burn in the coming quarters, as well as the above-mentioned Bollinger deal.
Now, Mullen is taking on another relatively large financial commitment. This means a Mullen capital raise may happen sooner. If the company wins the Electric Last Mile bankruptcy auction, it will likely need to quickly raise the funds, most likely through the sale of new convertible debt. This will dilute existing shareholders.
That’s not all. Mullen could follow up this deal with a series of similar transactions, all of which entail shareholder dilution and questionable long-term benefit. It’s very uncertain whether this company will be able to turn this burgeoning collection of EV assets into an enterprise that can take on established EV makers like Tesla (NASDAQ:TSLA).
Put simply, the market is responding appropriately to this news by selling MULN stock. This deal increases downside risk, adding little upside potential.
The Takeaway
Mullen shares have dropped nearly 30% on news of the Electric Last Mile bid. The stock could keep dropping, as the market continues to price in the prospect of more dilution, all in the pursuit of a deal with an uncertain chance of paying off. That’s why it’s wise to stay away and avoid this stock completely. Don’t be fooled by Mullen’s super-low stock price.
If it continues to finance its expansion via dilutive methods, the stock could remain in its current death spiral. If it loses its ability to raise money through convertible debt financing, it may even one day find itself facing the same fate as its latest acquisition target.
Far from overreacting, investors are making the right call in selling low-quality MULN stock. Follow their lead, and stay away.
MULN stock earns a D rating in my Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.