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S&P 500   3,811.15
DOW   30,932.37
QQQ   314.14
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S&P 500   3,811.15
DOW   30,932.37
QQQ   314.14
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S&P 500   3,811.15
DOW   30,932.37
QQQ   314.14
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GM (NYSE:GM) Reconsiders Nikola (NASDAQ:NKLA) Investment, Raises New Opportunity

Wednesday, September 30, 2020 | Steve Anderson
GM (NYSE:GM) Reconsiders Nikola (NASDAQ:NKLA) Investment, Raises New Opportunity

The recent avalanche of bad news to hit electric vehicle-maker Nikola (NASDAQ:NKLA) continues as new reports suggest that General Motors (NYSE:GM) has pulled back on its plans to close a deal with Nikola, meaning that 11% stake in the company GM was poised to take is now in jeopardy. There are really only two ways this can end at this point; only one ends well for Nikola. One, however, may end up especially well for GM.

A Growing Body of Evidence

A few weeks back, General Motors announced plans to buy an 11% stake in Nikola, a move which gave Nikola a nicely upward gain. At one point the stock had gained nearly 53%, but that was when the trouble kicked in. The report from Hindenburg Research that referred to Nikola, among other things, as an “intricate fraud” started an avalanche for Nikola, one that may not be, ultimately, survivable.

The report didn't come alone; within weeks, founder Trevor Milton resigned as Nikola's executive chairman, to be replaced by a former GM executive named Steve Girsky. Girsky had originally introduced Nikola to GM, and had a hand in setting up Nikola's IPO.

Girsky's move into the top slot came at an excellent time for Nikola, as within weeks of the Hindenburg report, two women came forward with allegations that Milton sexually abused them, though this was well before Milton founded Nikola. Such allegations are bad enough under normal circumstances, but given the current political climate, they could be potentially disastrous.

Now, GM is refraining from closing the deal established just weeks ago with Nikola, in which it was to not only take on that 11% stake—at the time worth around $2 billion—but also take over several aspects of supply and construction for the Nikola line. Under the agreement, not only would Nikola use GM's Ultium battery and Hydrotec fuel cells, but GM would “engineer, homologate, validate and manufacture” the Badger pickup, perhaps Nikola's flagship model right now.

It's Not Just Nikola GM Has to Worry About

There's another recent development that's hitting GM kind of hard right now; GM just landed a $40 million bill from Ohio, as the state required the company to pay back $28 million in tax credits extended to the company over the recent closure of GM's Lordstown plant. GM was required to keep the plant open and operational for 30 years to get the tax credits, but GM instead closed the plant after just 10. Additionally, Ohio required GM to pay a further $12 million in “community development” fees.

GM had pulled in over $60 million in tax credits back in 2008, as Ohio tried to keep 3,700 employees at the Lordstown plant in work through 2028. GM did keep the plant in place for quite some time, though not the agreed-upon length, so it was reasonable to expect Ohio to demand at least some of its money back. Had Ohio gone after the full $60 million, though, it would have represented one of the largest such clawback efforts in the US' history. Yet it's a safe bet Ohio realized that a pro-rated effort made more sense.

How It All Adds Up for GM

The Ohio bill is an issue for GM. There's no doubt about that; even a major multinational company like GM doesn't take an eight-figure bill quietly. It's the issues at Nikola that may be the biggest matter for GM to settle. While some might think this is a fine opportunity to declare the whole deal off, and cut bait while it still can, there may be another option in the making.

Nikola has already left behind Trevor Milton, and he may be able to take a lot of the company's troubles with him. The issues cited by the Hindenburg report all took place on his watch. The sexual abuse issues, ditto. But Milton is no longer part of the company. Now, former GM brass is minding the shop, and for GM to carry on with the deal could be a sign that the “adults” are now running things. GM might also be able to renegotiate pretty effectively here, as Nikola is now somewhat tainted by the new reports.

This could be GM's chance to bring forward its electric vehicle plans—it already has the fuel cells and batteries ready—and make itself a major player in a clearly growing space. With California looking to ban sales of gas-powered vehicles in the state by 2030, and players from Tesla (NASDAQ:TSLA) to Plug Power (NASDAQ:PLUG) to Nio (NYSE:NIO) stepping in, GM needs a way into the market. Nikola, warts and all, may be just the thing to get GM's foot in the door.

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
General Motors (GM)2.3$51.33+1.4%N/A23.02Buy$55.39
Tesla (TSLA)1.4$675.50-1.0%N/A1,356.43Hold$324.92
Plug Power (PLUG)1.4$48.38+11.6%N/A-146.61Buy$49.15
NIO (NIO)1.4$45.78-2.2%N/A-49.23Hold$46.48
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