POLESTAR AUTOMOTIVE: MacroDoζer Summer Special 2/5
The Games Continue: Polestar As Second Contender In "MacroDoζer Summer Special"
The most successful SPACs gravitate to ten.
Leonardo Di Caprio is co-investing with The Party.
Can significant shareholders nudge the share price?
Twenty million warrants will keep the share price in check.
Christoph Waltz could join The Party if he gets the chance to watch.
1. Why Do I Care Right Now?
It is Summer Special Time at the Doζe. So we better care before it’s too late. We were trying to prove that money could be made during the summer months of July and August. It is hot and steamy wherever you go. Let’s roll.
I like this market. Everybody is confused and complaining. It makes me feel like being part of something special. So now, with little pull to the upside, we continue to look for range-bound situations with high absolute and high relative volatility and preferably limited sudden risk to the downside.
Generally, knowing where to find the minimum value of assets is helpful. For a company that generates real tangible products, that minimum value is usually at or right below book value. For companies who live off stories, dreams, and bits in the sky, it usually is zero. For the very few successful and most liquid SPAC (Special Purpose Acquisition Company) business combinations, the price seems to gravitate towards ten. At least for now. And that is all we need to know for sunny summer celebrations.
We successfully sold premium on Gores Guggenheim / Polestar before, and why not bet on a few more calm weeks to come.
2. Useful Background Information
The ownership, lock-up, and free float affairs with the Gore Guggenheim SPAC crowd and our Chinese-Scandi troopers from Polarstar can be slightly confusing. I will try and simplify as much as possible. Details are not a matter of life and death for our strategy, but it is intellectually rewarding to understand at least the basics.
If you need a crash course on SPACs, check out my friend Ramin Nakisa’s fantastic video on How SPACs Work. Put the speed on 1.25x in case your feet start tingling.
Now, a quick and dirty overview of the situation.
The publicly traded Gore Guggenheim SPAC merged with the private company Polestar Performance AB on Jun 23, 2022. Together they formed the publicly listed Polestar Automotive Holding UK PLC, now trading on NASDAQ.
Volvo Car Group1 owns just above 49%, affiliates of Geely Chairman Eric Li (whoever they are) own 39%, and some Chinese state-owned asset managers together with Leonardo Di Caprio hold slightly north of 5%. Good things must follow when Leonardo D.C. starts co-investing with the Communist Party.
The above adds up to roughly 94%. These shares are not part of the publicly traded free float (yet); it is considered restricted stock. The SPAC Sponsor and the SPAC PIPE investors (Private Investment in Public Equity)2 make up close to 2%. This 2% is currently in lock-up and will become part of the free float 180 days after the business combination, mid-December. The residual 4% consists of the former SPAC shareholders and the general public, the only shares currently trading freely.
I am highlighting that small percentage of 4% tradable free float because it would not take much effort for bigger interested parties to nudge the share price just a little to avoid a mediocre price development, such as south of eight. A healthy share price development right from the start is part of a company’s reputation, and it is in the best interest of all bigger locked-up shareholders. Especially the ones who want to exit the investment after 6-12 months.
Here you have our thesis on a potential invisible price floor to the downside. Next, let’s look at a potential invisible price ceiling to the upside.
We believe a potential price ceiling could range between 12 and 14. There are roughly 20 million dilutive warrants floating around with a strike price of 11.50. More than half came for free together with the USD 10.- SPAC units offering, the other half were sold simultaneously for USD 2.- as part of the private placement arrangement.
After redemption, Polestar raised USD 640 million via the SPAC shareholders, meaning ca. 64 million shares are floating freely at that moment. The addition of 20 million extra shares to be issued by Polestar when warrant holders want to exercise somewhere north of the 11.50 strike would mean an ongoing dilution plus immediate price pressure in the range of 12-14.
This is all pure BrainDoζing in combination with gut feelings and knowing what to expect from certain lots.
Back to the business.
Polestar considers itself a competitor to Tesla, a global pure-play electric car company. Asset light, assembly primarily in China. Check out how the current CEO introduces the latest model, Polestar 2. A rather long video; I suggest using the progress bar to jump parts. You won’t miss out on much. Keep the speed at 1.0x, so you better understand mood and spirit.
Rant Around Egocentrism
It is not clear why the CEO has to do the marketing videos himself. He is not doing the brand or anyone else a favor. Christoph Walz meets Steve Jobs. I see what they are trying to do. It is not working. Maybe the Chinese like it.
It seems to help keep the share price in check, balancing two strong forces: EV hype and a sobering marketing effort. In combination with our expected price floor and price ceiling, perfect conditions to sell pricey premiums as long as the fun lasts.
3. Trade Execution
We are selling our classic, slightly bullish risk-defined straddle at 10, with wings at 6 and 14. We could have chosen the 9s, but we anticipate better liquidity in the 10s and, therefore, less transaction slippage and costs. The underlying is currently not the most liquid—better stick to round numbers.
Regarding the wings, 5 and 15 are also possible, but liquidity seems better in the 6 and 14 at the moment, which is odd but a bonus for us; we are using less capital relative to potential maximum profit with tighter wings.
Break-evens are at 7.5 and 12.5.
Trade Entry - Jul 19, 2022
1) Short Call 10, Sep 16, 2022: 0.73 Credit.
2) Short Put 10, Sep 16, 2022: 2.03 Credit.
3) Long Call 14, Sep 16, 2022: 0.20 Debit.
4) Long Put 6, Sep 16, 2022: 0.53 Debit.
Total: 2.54 Credit.3
4. Final Comments
Expect updates on BrainDoζers within 4-6 weeks. We use the exact heading, ending with (+/- xy%), and label the cover cartoon with a red Doζed stamp. That way, the performance will be easy to follow.
We are not sending BrainDoζer updates via email unless you specifically ask for it here. We want to keep the information flow light and to the point. You can still freely access all updates on MacroDozer the moment they are released.
My name is Juri von Randow. You can find me on the top banner to the right. MacroDoζing, as if there was no tomorrow. (Email version only.)
Feel free to share. Sincerely.
As of Apr 28, 2022, Zhejiang Geely Holding Group owns 82% of Volvo. Nordic and international institutions, as well as retail investors, own the remaining 18%.
Private investment in public equity (PIPE) is when an institutional or an accredited investor buys stock directly from a public company, usually below market price.
Total credit equals the sum of the mid-prices of each bid/ ask spread. Brokers usually get filled mid-price for liquid options.