Ares Acquisition Corporation (NYSE:AAC) has entered into a definitive agreement to combine with nuclear power company X-energy at an enterprise value of $2.2 billion.

Rockville, Maryland-based X-energy has developed small modular nuclear reactor technology designed to provide nuclear plants for projects ranging from individual industrial sites to regional utilities.

The combined company is expected to trade on the NYSE once the deal is completed in the second quarter of 2023.

Transaction Overview

Ares has about $1 billion in its current trust, which is supplemented by $120 million more in committed financing. This is made up of a $75 million C-2 round with $45 million from Ontario Power Generation and Segra Capital Management and $30 million from Ares sponsor Ares Management (NYSE:ARES).

Investors in the C-2 round are to receive notes on terms that are 10% more favorable than other potential investors and this discount is to be absorbed by existing X-energy equity. Ares Management is expected to invest a further $45 million to the transaction in a PIPE to close concurrently with the transaction.

The Ares PIPE would entail purchasing 45,000 shares of Series A preferred Stock for $1,000 per share, but the final amount of the investment is to be reduced on a dollar-for-dollar basis to the extent that total proceeds in the deal exceed $400 million. In no case shall the value of the PIPE drop below $20 million, however.

X-energy expects to add about $1.05 billion in proceeds to its balance sheet after $66 million in transaction fees. Ares must maintain at least $120 million in cash available in order for the deal to close and either party may terminate if the deal has not closed by the relatively near date of February 4, 2023 – Ares’ initial transaction deadline.

Assuming no redemptions, existing X-energy shareholders are expected to own 61% of the combined company with public Ares Acquisition shareholders taking a 31% stake. Through the combination of its C-2 financing and future PIPE investment, Ares Management is expected to own 6% of the combined entity at close.

The SPAC’s sponsor has nonetheless subjected all of its promote shares to earnout terms. Half of these are to vest if the company trades at or above $12.50 for 20 of 30 days and the remaining half at $15. X-energy shareholders stand to earn up to 25,000,000 new earnout shares, which are to vest under the same conditions as the SPAC’s promote, albeit time-limited to the first five years following close.

Both parties have agreed to a one-year lock-up.

Quick Takes: Ares’ deal follows in the footsteps of Spring Valley’s combination with NuScale (NYSE:SMR), which completed in May and continues to trade well, closing Monday at $11.14.

Both X-energy and NuScale have developed small, modular nuclear reactors (SMRs) of similar size with X-energy’s Xe-100 reactor design generating 80 MW each and NuScale’s VOYGR – 77 MW. Both are designed to be bundled in groups of four or more based on the specific needs of the sites.

The companies also both operate on a low-capex model whereby they largely license the technology necessary to build the plants and then derive continuing revenue from servicing the nuclear plants once built. NuScale continues to build its reactor modules in-house, however, and provides them as a part of the arrangement.

Rather than take that level of construction under its wing, X-energy has focused instead on its unique nuclear fuel as a proprietary edge. Its TRISO-X fuel is self-contained and designed to not melt. Because of this, X-energy facilities do not carry a risk of nuclear meltdown even in the case of emergency power loss.

Its pilot facility for producing TRISO-X has already been operating since 2017 and the company expects complete its final designs for a full-scale facility this month with its safety and environmental reports already submitted.

In fact, even in foreseeable adverse conditions, X-energy’s Xe-100 reactors require no operator actions in order to shut down or shift to safety measures. Xe-100 reactors are also designed to be able to ramp up from 40% to full power or from full back down to 40% in just about 12 minutes, while legacy designs tend to be much more unwieldy.

Over the long-term, X-energy’s plans to deploy by coordinating plant construction with third-parties, but will not hold any inventory associated with assembly and construction. Instead, it will reap a licensing fee, then ongoing revenue from services supporting the project planning, regulatory passage, procurement, and ongoing operations over the roughly 60-year life of the plant

X-energy will also reap revenue from the fueling of the plants through their lifecycle, but will not bear responsibility for managing spent fuel.

For a 320 MW four-reactor plant, the company would expect to receive the first 40% of its $75 million licensing fee when the plant is about five and four years out from operations. The remaining 60% is to be paid in the first year of the plant’s operations while roughly $50 million in initial fuel sales are to be paid on delivery as well as the $100 million in commission support fees.

These licensing and commissioning fees are to be the highest-margin of its revenue streams ranging from 60% to 100% gross profit, but it also expects to generate 15% to 20% gross margins in the roughly $150 million in annual support fees for the four years leading up to commissioning and up to 10% margins on its take from about $700 million in construction costs during those years.

From then on, X-energy expects to generate $10 million annually for fuel delivery and $4 million to $5 million annually in long-term support. That all stacks up to about $2.35 billion in total revenue over the 60-year life of each plant with $574 million in estimated gross profit.

The nearest of its projects to hand is a letter-of-intent with Dow (NYSE:DOW) to build an Xe-100 plant to one of tis Gulf Coast facilities by 2030. X-energy has also signed a framework agreement to have its designs promoted by state utility Ontario Power Generation for industrial site uses, and both of these partners are X-energy investors.

Like NuScale, X-energy also aims for its designs to be used in conversion of existing coal plants to nuclear reactor sites. The US Department of Energy has identified about 315 operating and retired sites as candidates for such conversions, which would save about 35% of construction costs and likely see some eased regulatory burdens.

If NuScale’s price performance – especially a month out from the expiration of its lock-ups – is any guide, then the market is likely to continue to be favorable towards new nuclear stocks. After all, X-energy predicts a potential market worth over $1 trillion by 2050 for SMRs and the recently passed Inflation Reduction Act promises tax credits of up to 50% of the initial capital costs for new nuclear.

Click here for the full investor presentation.

ADVISORS

• Guggenheim Securities, LLC is acting as financial advisor to X-energy.
• Latham & Watkins LLP is acting as legal advisor to X-energy.
• Moelis & Company LLC is acting as financial advisor to AAC.
• Kirkland & Ellis LLP is acting as legal advisor to AAC.
• Ocean Tomo, a part of J.S. Held, acted as financial advisor to the Special Committee of the Board of Directors of AAC.
• UBS Securities LLC and Citigroup Global Markets Inc. are serving as capital markets advisors to AAC
• Ropes & Gray LLP is acting as legal advisor to the capital markets advisors.