German auto giant Volkswagen will invest $5 billion in U.S. electric vehicle maker Rivian and create a joint venture expected to produce technology used by both automakers, the companies announced on Tuesday.
The partnership includes a $3 billion direct investment from the German company in Rivian as well as $2 billion to create an equally controlled and owned joint venture “to create next-generation electrical architecture and best-in-class software technology,” the companies said in a press release.
Rivian shares rose 8.6 percent on Tuesday and nearly 50 percent in after-hours trading after the deal was announced shortly after the session ended.
Although praised for its technology, Rivian has reported losses and bleeding cash.
As part of the transaction, VW will make an initial investment of $1 billion in the US company in 2024, which will be converted into Rivian common shares, followed by further rounds in 2025 and 2026 of $1 billion each.
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The additional $2 billion from VW is expected to be split between a payment at the start of the joint venture and a loan in 2026, the companies said.
In addition to bolstering Rivian’s balance sheet, the deal represents a vote of confidence by VW in the California company’s platform that will improve the EV maker’s ability to win concessions from key suppliers, company officials said on a conference call with analysts.
“The transaction as a whole provides a strong platform for future growth for Rivian,” said Chief Financial Officer Claire McDonough “And it’s not just the $2 billion of capital associated with the JV. It’s the full $5 billion of capital and opportunity we have to accelerate our mission.”
VW’s investment will allow Rivian to finance investments to increase production at its Illinois plant and promote a new plant in the state of Georgia, the company said.
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Those two projects allow for “a path to positive free cash flow and meaningful scale,” Rivian said.
The venture will allow VW to use Rivian’s existing electrical architecture and software design, accelerating the German company’s software-defined vehicle efforts.
“Through our cooperation, we will bring the best solutions to our vehicles faster and at a lower cost,” said VW CEO Oliver Blume.
“We’re strengthening our technology profile and our competitiveness,” Blume said.
The two companies expect the transaction to close in the fourth quarter of 2024, pending regulatory approvals.
CFRA Research increased its price target on Rivian stock, but maintained a โsellโ recommendation on the company.
“While the announcement is a vote of confidence in Rivian, we believe it does little to change the company’s operational issues and troubling cash burn rates, which have been about a billion dollars per quarter,” said CFRA’s Garrett Nelson.
“The key question is why VW would make such an investment in a struggling EV manufacturer that could face the risk of going concern in the future, but clearly VW sees value in gaining access to RIVN’s vehicle architecture and software,” Nelson said.
Source: AFP