10X Capital Venture Acquisition Corp. (NASDAQ:VCVC) has entered a definitive agreement to combine with electric vehicle-maker (EV) REE Automotive for an enterprise value of $3.14 billion.

REE Automotive makes a range of electric vehicles with “skateboard” designs capable of supporting models from buses and medium trucks down to sedans and even smaller last-mile delivery vehicles.

The combined entity is expected to trade on the Nasdaq under the symbol “REE” upon close.

Transaction Overview

10X brings about $201 million in cash from its current trust into the deal alongside a $300 million PIPE, which included investments by strategic investors Koch Strategic Platforms, Mahindra & Mahindra and Magna International. These join existing strategic REE shareholders Mitsubishi Corporation, American Axle, and Musashi Seimitsu Industry who will maintain equity in the company.

REE expects to add $436 million to its balance sheet through the deal and 10X must maintain at least $225 million in cash available in order for the deal to close.

Overall, existing REE shareholders are expected to own 83% of the combined entity with 10X shareholders taking 5.6%, PIPE investors 8.4% and 10X’s sponsor 2.2%.

This assumes however, that 10X’s sponsor maintains its full promote, which is not guaranteed in this structure. 10X’s stake is subject to a unique earnout structure, where it stands to forfeit up to 1,500,000 shares depending on how the combined entity performs on its first trading day.

The sponsor loses this full amount if the VWAP is below $13 on day one, or 1,000,000 shares if the VWAP is below $16 and 500,000 if this is less than $20. The most unusual feature of these terms is how soon they hit – right after close. Most earnout stipulations give the parties three to five years to hit price targets, which is a fairly low hurdle.

In this case, the sponsor is out about 30% of its promote if the market doesn’t love the deal off the bat. Luckily for 10X, that has rarely been the case for electric vehicle deals and the SPAC already opened above $12 on the news.

All of the sponsor’s ordinary shares are to be subject to a lock-up following close, with 25% released 90 days after close. The remaining 75% are to be locked for one year following close or until shares trade at or above $13 for 20 of 30 trading days at least 180 days after close. 10X’s sponsor has also agreed not to transfer any of its 5,500,000 warrants for 30 days after close.

REE’s two co-founders are also to hold Class B shares in the post-transaction company granting each 39% voting power.

Quick Takes: Now that enough SPACs have inked deals with EV targets, this growing ecosystem is starting to solidify its logic in terms of valuation. REE, like many EV ventures combining with SPACs, is still about three years out from full commercialization.

Looking at its value once that rollout is complete, the deal values REE at 1.2x its projected 2024E revenue. This is squarely in the middle of range for peer automotive SPAC targets Hyliion (NYSE:NYLN) at 1.3x, Lion Electric (NYSE:NGA) at 1.3x, Arrival (NASDAQ:CIIG) at 1.2x, Fisker (NYSE:FSR) at 0.9x, and Lordstown (NASDAQ:RIDE) at 0.7x.

Above this range are the exceptions in the peer cohort. Workhorse (NASDAQ:WKHS) at 4.7x went public via a traditional IPO in 2018, Canoo (NASDAQ:GOEV) at 2.2x has a unique lease-like subscription model and XL Fleet (NYSE:XL) at 1.9x is further ahead in commercialization with electrified fleets already on the road.

While REE is nestled in this group nicely on an enterprise value-to-revenue comparison, it is the second priciest company in the cohort by enterprise value-to-2024E EBITDA. Valued at 11.4x by this metric, only Canoo and its recurring revenue model was valued higher at 17x. This is also higher than Workhorse at 10.1x, which is further down the road in commercialization with 400 vehicles in circulation and 6,320 more ordered last month.

REE drivers will have to wait a bit longer for their first cars as it expects to make its first sales beyond samples and pilots in 2023. Its platform features a “skateboard” design like Canoo scaled in five sizes from medium truck or bus models down to shorter last-mile delivery models.

REE is also planning on a decentralized manufacturing approach with “integration centers” for component assembly in the US, Germany and Japan with a total of 15 globally by 2026.

This ability to efficiently go global may ultimately be the company’s highest selling point, but it will take some time and capex to build. REE expects to turn just $1 million in gross profits in 2022E and $70 million in 2023E before jumping to $710 million in 2024E. This is the year it expects to generate its first positive EBITDA as well, with $275 million. It expects its first free cash flow the following year with $307 million in 2025E.

One thing that other EV targets have had at the announcement stage that REE lacks, however, is a business model already de-risked by concrete vehicle orders by strategic partners. REE has signed MOUs wroth $5.1 billion in cumulative revenue by 2026, but in the emerging technology space, these do not always convert directly to purchase orders so neatly.

Click here for the full investor presentation.

ADVISORS

• Morgan Stanley & Co. LLC is serving as lead placement agent on the PIPE offering.
• Cowen is serving as financial advisor to REE and as a placement agent on the PIPE offering.
• White and Case LLP, Zemah Schneider & Partners, and Goldfarb Seligman & Co. are serving as legal advisor to REE
• Wells Fargo Securities is serving as financial advisor to 10X SPAC.
• JVB Financial is serving as capital markets advisor to 10X SPAC.
• Morgan, Lewis & Bockius LLP and Gornitzky & Co. are serving as legal advisor to 10X SPAC.
• Latham & Watkins LLP is serving as legal advisor to the placement agents.