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Stem and Star Peak Energy Transition Corp — A SPAC That Did It Right

I'm feeling a bit like the parent who's been harping on a stocking full of coal regarding SPACs. But now it's Christmas morning, and lo, your stocking is loaded with renewables instead. In this final article on SPACs, I'm sharing the story of three cleantech startups that merged with a SPAC, with Stem and Star Peak Energy Transition Corp taking center stage. So far, the returns are a mixed bag. 
mountain climber reaching the peak

Stem and Star Peak Energy Transition Corp

There are sexier SPAC deals out there than the Stem and Star Peak Energy Transition Corp arrangement. But this one has the fundamentals and the projections to be what the SPAC said — the peak is stratospheric. This isn't me saying this; this is from an in-depth analysis of the SPAC and its place in the market. Here are the numbers. With commentary, of course. 

The transaction was announced in November 2020, with the deal projected to close in Q1 2021. Star Peak shares rocketed up 69% at the announcement, and another 102% by the end of January, to $34.43. The deal was finalized on April 27. Then the new company listed on the NYSE as Stem (go ahead and check today's price. I'll wait) and opened at $21.10 on April 29. 

Sure, it dropped a fair amount since the announcement, but remember that this is common in the SPAC space. Also, remember that SPACs in general took a nosedive in the first quarter.

The Stem and Star Peak Energy Transition Corp Money Breakdown

  • Transaction structure — equity value of $1.4b, executed at post-money EV $829 mm. Cash proceeds of $512m included transaction expenses and PIPE investment. The company retains $525m in cash. 
  • Considerations — assuming (and you know what that means) no redemptions by the SPAC, Star Peak, Stem has $383m held in trust in cash and additional PIPE equity of $225m. Stem shareholders received rollover equity of $650m.
  • Proceeds — debt repayment and additional funds to pursue joint ventures, geographic expansion, selected acquisitions, and targeted growth opportunities
  • Ownership — 100% existing shareholder (48%) rollover, remaining shares split into 35% SPAC, 17% PIPE equity

Now, what does this all mean if you're an investor or an entrepreneur? The numbers only tell you that Star Peak raised a ton of money in all the right ways and merged with a startup that was ready for prime time. The question is, how did the stars align to make this happen?

Stem

Stem has created an AI-powered analytics platform, Athena. It enables its partners and customers to toggle between battery power, grid power, and onsite generation based on usage patterns. There are lots of benefits for enterprise clients who are using Athena. Not only do enterprise clients see lower energy costs through adaptive, smart, and clean energy, but they foster sustainability, innovation, and corporate responsibility. 

Stem has also given their solar partners opportunities to add storage to standalone, commercial, or community projects on either side of the meter. If you're like me and thinking too good to be true, — about the week before they went public — Stem announced that they hit their six-month anniversary of operating a 345MWh storage portfolio for Electrodes Holdings LLC. 

Electrodes oversees 86 sites and 25 municipal and commercial customers in the greater Los Angeles area, from Target and Wal-Mart to food processing plants, university campuses, office buildings, and water treatment plants. These customers are seeing an average of 30% reduction in energy costs from their previous power provider. Stem also delivers controllable capacity energy for another local investor-owned utility in Southern California. Say what you will about the Sunshine State; they're leading edge in clean energy and climate solutions — pay attention. 

The Downside of Stem and Star Peak Energy Transition Corp (Because There Has to Be One)

Okay, so Stem has a game-changing technology that they have deployed successfully at scale. Yay. Can they keep it up? Stem's SEC paperwork, filed in March, outlines the risk that even the strongest clean energy company faces. 

First, they're not going to be buying any black ink until 2022. That's okay; Uber hasn't yet. Second, scaling up isn't cheap, and they anticipate lighting a lot of cash on fire — for marketing, R&D, sales, staffing, and infrastructure — in the process of hitting enterprise scale. The risks they face include the dependency on favorable contracts with battery storage OEMs. 

The Big Upside of Stem and Star Peak Energy Transition Corp

On the upside, Stem's projections through 2025 forecast sales growing from $147m this year to $1.167b in 2021 — a whopping 67.9% average annual compounded increase over the next four years.  

More Upside of Stem and Star Peak Energy Transition Corp

Star Peak had the advantage of a platinum-standard management team, PIPE money, and investment banks. Michael Morgan led a group with deep and diverse energy experience. He put together a PIPE consortium from Black Rock, Van Eck Associates, Adage Capital Management, Electron Capital Partners, and Senator Investment Group to give the deal some serious gravity and hired Goldman Sachs to advise on the deal. Stem countered with Credit Suisse to advise them, which pretty much guaranteed the stamp of Good Buy on the merger. 

By the way, Star Peak II has announced a merger with Benson Hill, a sustainable food technology company. 

Eos

Lithium-ion batteries aren't the only battery game. Eos Energy Enterprises manufactures scalable and sustainable zinc-based batteries merged with SPAC B. Riley Principal Merger Corp. II in November 2020. Their first-quarter highlights for 2021 look pretty good — YTD orders as of May 11 at $33m, resulting in a backlog of $50.5m. They finalized their acquisition of Hi-Power LLC, a manufacturing joint venture with Holtec International, another cleantech company. They also got their UL certification for 9450A and are on track for full certification by mid-year. Adding to the good news, Eos's next-gen design, the Z3 (not to be confused with a BMW roadster) is doing well in prototype testing. 

Eos is building an order for an ESS for Hecate Energy, a US developer, for an ERCOT project in Texas. Another project for a Greek oil refinery is also well underway, with the first of four containers already shipped. 

More Eos High Points

  • The first Gen 2.3 container was shipped to Nigeria for the Shell microgrid storage solution.
  • R&D costs were offset by accrual reversal in cost of sales; costs were targeted to the development of Z3 technology.
  • The administrative fees of almost $17m included $7.8m for finalizing the Hi-Power purchase; other new costs were fees necessary to operate as a public company, including $1m in non-recurring expenses and $2.5m in higher stock compensation costs.

Eos had over $100m cash on hand at the end of the quarter. They're projecting a revenue of $50m for 2021, with booked orders of $300m to meet 2022 commitments. 

What's apparent here is that Eos was ready to operate at scale — again, ready for prime time — and had solid marketing and sales strategies in place. 

Nikola

Nikola race in cleantech
Nikola fell behind in the race to become the next big thing in cleantech.

Nikola's sad story is an example of What Not To Do on every level. The company makes hydrogen-fuel cell trucks, filling a gap in the EV market since most EVs are small sedans or, at best, a mid-sized SUV like the Rivian. They started off with a $3.3b market cap, a solid SPAC/PIPE partnership, and a deal with GM to invest another $2b to integrate GM's hydrogen fuel cell technology with Nikola trucks.

They also contracted with Nikola to build the GM Badger, the first hydrogen-powered pickup. Last summer, Nikola stock soared like Icarus, hitting $80 after the GM announcement.

Then the Fall

Much like Icarus, the stock plummeted when Hindenburg Research accused founder Trevor Milton of what basically amounted to securities fraud in hyping Nikola to investors. The SEC took an interest in the claims, Milton resigned, and GM backed out. BP Plc followed close behind, shutting the door on partnering with Nikola to build hydrogen filling stations, which would undoubtedly have been followed by mini-marts full of healthy snacks and vitamin water. 

Nikola had a great idea, a borderline carnival barker selling the idea, and a SPAC that fell far short from the crowd at Star Peak. VectoIQ has a team that's got a lot of cleantech experience, but it somehow bought into whatever Milton was selling.

Maybe their timeline for finding a target was uncomfortably short; maybe they saw their competitors snapping up zinc and Li-ion battery technologies and thought they'd jump in the hydrogen market. When the deal was announced, it took many analysts by surprise, primarily because Nikola's fundraising had stalled out in the Series D round. They were trying to raise $1b in that round, but no takers. Maybe it was just a perfect storm. Nikola faced a huge liquidity crunch, and VectoIQ needed a deal. 

Nikola is not dead yet; they're solvent enough to pay the disgraced Milton $159m in stock. Current CEO Mark Russell is getting the same booty — although if I were either of them, I would take the money and run as soon as possible. 

The Takeaways on Stem and Star Peak Energy Transition Corp

So here are some examples of cleantech companies and the SPACs that lured them into the public sphere — the great, the good, and the really bad. It's hard to find the magic formulae that made Stem such a success and Nikola such a train wreck; you could look at Stem and see, as I said earlier, platinum-level participation at every level.

The most non-traditional thing you can say about Stem and Eos is that they came to the public via a SPAC rather than an IPO. But the businesses are running fairly normally, which in itself is a bit of a pleasant surprise. If you want to continue the conversation about SPACs and cleantech, contact me here.