Arrival Stock Crashes on Warrant Redemption

Electric vehicle (EV) startup Arrival (NASDAQ: ARVL) announced on Friday that it is redeeming all outstanding warrants. Warrants are derivatives that have become a mainstay of merger deals with special purpose acquisition companies (SPACs), allowing investors to buy more stock in the new company.

As of 12:10 p.m. EDT, Arrival shares have crashed by 12%. Here’s why.

The dilutive nature of warrants

Unlike call options that also give investors the ability to buy more stock from other market participants, exercising warrants results in the company issuing new shares to warrant holders. That means that exercising warrants is dilutive to existing shareholders while exercising call options is not. It’s common for any stock to decline from dilutive events.

Companies can voluntarily choose to redeem outstanding warrants for $0.01 per warrant once certain conditions are met. Once that decision has been made, warrant holders typically have 30 days to exercise the instrument to buy shares at a strike price of $11.50, otherwise the value of the warrants is effectively wiped out. 

In Arrival’s case, the deadline for warrant investors to exercise the warrants will be 5 p.m. on July 19, 2021. Any warrants that remain unexercised after that deadline will become void. Investors are encouraged to contact their brokers to exercise their warrants and avoid redemption.

Entering the auto industry is wildly expensive

Arrival had closed its de-SPAC transaction back in March, completing its merger with CIIG Merger Corp and raising $660 million in gross proceeds that it plans to use to fund the development of various EVs. The company is working on an Arrival Bus, Arrival Van, and Arrival Car.

However, the automotive industry is notoriously among the most capital intensive industries on the planet. Arrival hopes to mitigate the capital intensity by constructing “Microfactories,” which are smaller and less expensive to construct than traditional automotive manufacturing plants. For example, Arrival’s first Microfactory is expected to cost just $44 million in capital expenditures, far less than the $1 billion it usually takes to build a car factory. Still, Arrival is going to need all the money it can get. 

The company had €516 million in cash on its balance sheet at the end of the first quarter, or about $613 million based on current exchange rates. There are currently 12.9 million public warrants outstanding, which will raise an additional $148.8 million in cash for Arrival if they are all exercised.

Driving forward

Arrival is still a pre-revenue startup, which entails substantial execution risks for investors. The United Kingdom-based company plans to begin public road trials this summer for its Van, with Bus trials expected to commence in the fourth quarter. Production for the Bus is also scheduled to start in the fourth quarter, with Van entering production in the second half of 2022.

The company says that delivery giant UPS (NYSE: UPS) has committed to purchasing up to 10,000 vehicles with an option to order an additional 10,000.

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