Cash-strapped electric bus and van startup Arrival (NASDAQ:ARVL) received a financial lifeline last month. That’s when it locked down a financing deal with Antara Capital. The hedge fund has committed to buying $50 million worth of newly issued shares of ARVL stock.
Antara also agreed to exchange $121.9 million worth of Arrival convertible notes for additional newly issued common shares. This capital infusion/debt-for-equity swap stands to reduce the company’s outstanding debt significantly.
However, even as the transaction bolsters Arrival’s balance sheet, whether this is bullish for everyday shareholders is questionable. Per the terms of the transaction, Antara may have a reasonable chance of generating a strong return on its investment.
Barring a long-shot scenario playing out, it may prove difficult for retail investors in this stock to profit. With this, you may not want to follow the lead of the “smart money” here.
ARVL Stock: The Backstory Behind This Latest Capital Raise
Still at the pre-revenue stage, Arrival has had to depend on outside capital to both sustain its operations and fund growth/expansion. Previously, the company aimed to raise cash through at-the-market (or ATM) offerings of new shares.
Yet with the collapse in the price of ARVL stock, management conceded it could no longer depend on ATM offerings to raise the funds needed to turn its initial business plan into reality.
This resulted in Arrival scaling back its ambitious growth plans. As Louis Navellier discussed last month, the company pulled out of its home market (the U.K.), opting instead to concentrate on building out its U.S. microfactory, in Charlotte, North Carolina.
The company also has laid off a majority of its workforce, in a further effort to minimize cash burn, and extend the runway of its existing cash position ($205 million as of Dec. 31, 2022). However, given these downsizing efforts are not enough to fully fund its move to the production stage, Arrival is again raising money, like with this latest transaction.
Deal Terms are Highly Favorable to Antara
Arrival’s financing agreement may increase the chances this fledgling startup survives to the commercialization stage, but based on the deal terms, outside shareholders may get the short end of the stick. Here’s why.
In exchange for committing $50 million for new equity, Antara is receiving a generous discount. For the upfront portion of the equity transaction, Antara paid $25 million for 125 million new shares, or 20 cents per share. This represented a nearly 40% discount to ARVL’s closing price (33 cents per share) just before the announcement.
For the additional $25 million equity purchase, Antara will only have to pay the lesser of 20 cents per share, or 70% of the stock’s last reported sales price.
Although Antara is required to hold onto a portion of these newly issued shares under a twelve month lockup, if ARVL stock spikes again (say, because of renewed short-squeeze rumors), this fund may realize some quick profit.
As for the debt-for-equity portion, I’ll admit that, on the surface, the conversion terms do not appear as favorable. However, it’s still possible Antara is coming out well ahead on this portion of the deal.
Bottom Line
Swapping convertible notes with a principal value of $121.9 million for 219.42 million shares, the conversion price for the swap comes in at around 56 cents per share. That’s nearly three times ARVL’s current share price.
However, don’t assume Antara is taking an enormous loss. This fund likely purchased this debt at a sharp discount to principal. Antara may be sitting on big unrealized gains already. It may exit at a profit, even if ARVL shares move lower.
In contrast, profits for outside shareholders hinge mainly on one thing: Arrival successfully executing its business strategy. However, even if Arrival finds success, there’s limited potential upside to all shareholders.
As you cannot buy under the same terms offered to Antara Capital, consider it best to stay away from ARVL stock.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.