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Romeo Power Technology’s production plant outside of Los Angeles.
Courtesy of Romeo Power Technology
Another day, another electric-vehicle-related stock for investors to consider.
On Monday, a special purpose acquisition company, or SPAC, RMG Acquisition (ticker: RMG ) announced plans to merge with Romeo Power Systems. The deal values Romeo at about $1.3 billion based on the 133.4 million shares that will be outstanding when it closes in the fourth quarter.
RMG stock surged 8% on Friday, when the deal was rumored in a Bloomberg report. It gave back those gains and more on Monday, falling 9.9% to $10.36. Call it selling the news.
Romeo is a player in EV batteries, focusing on commercial vehicles similar to Workhorse (WKHS), Nikola (NKLA), and newly public Hyliion (HYLN). But Romeo isn’t planning to make, sell, or lease electric big rigs that will cart goods along the world’s highways. Romeo also isn’t making battery cells the way LG Chem (051910.Korea) or Tesla (TSLA) partner Panasonic (6752.Japan) do.
Instead, Romeo will sit right in the middle. Romeo’s focus is on battery pack construction and battery management systems, or BMS—the software and hardware that determine critical factors such as EV range, battery life, and battery reliability. Romeo is going to be a powertrain supplier in the evolving, rapidly expanding EV universe.
“We package the most energy density, most safety, and most innovation into the [battery] modules, pack, and BMS,” Romeo CEO Lionel Selwood said in an interview. Romeo’s technology attempts to optimize factors including thermal management, battery life, and degradation, as well as power-pack density, which impacts vehicle range. “We enable the tough stuff…commercial [vehicles] are hard.”
It is a little like the place BorgWarner (BWA) occupies in the traditional automotive landscape. That company makes traditional (and electric) automotive powertrain technologies, including turbochargers and clutches. Borg is also a strategic investor—and customer—of Romeo and its battery solutions. The two have a 60/40 joint venture to combine Romeo’s technology with BorgWarner’s manufacturing and supply chain capabilities and its established relationships with car and truck makers around the globe.
Romeo estimates the joint venture could produce revenue of $708 million in 2025. It also forecasts $1.65 billion in sales of its own that year, which would be up from $11 million forecast for 2020. Romeo says it has $310 million in contracted revenue and an additional $2.4 billion under discussion with potential customers.
Another Romeo customer is also an investor. Republic Services (RSG) is participating in the private investment in public equity, or PIPE, portion of the SPAC deal. Republic is one of the largest waste haulers in the U.S. The company also announced a deal in August with Nikola for 2,500 electric waste and recycling trucks. Republic operates about 16,000 vehicles.
The merger with RMG, which went public in February 2019, includes the $230 million in its trust and a $150 million PIPE. After expenses, all of that cash goes to Romeo’s balance sheet. The company will have roughly $340 million to put toward investing in its research and development, manufacturing capacity and optimization, and expanding its sales team.
RMG CEO Robert Mancini and COO Philip Kassin will join Romeo’s board of directors once the transaction closes. Both have backgrounds in energy and power-related investing and banking.
The deal is another sign the EV industry is maturing. In addition to producing powertrain components for heavy-duty trucks, Romeo has a partnership with recycling company Heritage to process and reuse lithium-ion batteries at the end of their life. Heritage is also an early investor in Romeo. And Selwood sees big future opportunities for battery-powered vehicles and machinery in end markets including aviation, mining, agriculture, and marine.
Year to date, RMG shares are up about 4%, not too different from returns of the S&P 500 and Dow Jones Industrial Average over the same span.
Most EV stocks are on fire this year. Tesla shares, for instance, are up more than 400% year to date. Workhorse stock has risen about 685%.
Kensington Capital Acquisition (KCAC), another SPAC merging with an EV battery-technology company, is up about 50% from its August $10 offering price. Kensington is merging with solid-state battery company QuantumScape.
QuantumScape might sound like a James Bond movie. Romeo sounds Shakespearean. But the name comes from a dinnertime brainstorming session between its founder and his wife at a restaurant in Europe, Café Romeo, Selwood said.
Write to Al Root at allen.root@dowjones.com and Nicholas Jasinski at nicholas.jasinski@barrons.com