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Harley is betting on a future where EV could be bigger than HOG


A charger is plugged into a LiveWire electric motorcycle at a Harley-Davidson showroom and repair shop in Lindon, Utah, United States on Monday, April 19, 2021.

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For businesses, 2021 has been a year of big spinoff projects and volatile PSPC offers. As of this week, Wall Street and investors had another iconic name to add to the two financial engineering columns: Harley-Davidson.

The motorcycle maker has announced plans to split its e-bike division, LiveWire, as a new company through a SPAC deal that values ​​Harley’s EV business at around $ 1.8 billion.

This isn’t close to the valuations that some electric vehicle automakers, including Rivian Automotive and Lucid Group, have seen after their recent market debuts, but it does point to a fundamental challenge facing legacy companies, long-time leaders on the market. their market, are facing as the world changes and megatrends. like the energy transition and electrification are becoming more central investment themes.

Across multiple sectors, climate change is leading to calls to rethink the way iconic companies are structured. Royal Dutch Shell has recently come under pressure from activist investors to consider parting with its renewable energy business. GM and Ford, while showing no interest from their side, have been subjected to market questions as to whether new electric vehicle companies could be better as stand-alone businesses.

“If anything, that underscores what we’ve been saying for a long time. Detroit, wake up! The train has left the station! Electric vehicles are inevitable,” said Craig Irwin, analyst at Roth Capital, in the report. Reuters on the Harley-Davidson deal. “Many traditional OEMs (original equipment manufacturers) with emerging EV companies can obviously do similar spinoff transactions.”

The special purpose acquisition company that LiveWire will merge with is an ESG-focused PSPC, AEA-Bridges Impact Corporation.

Climate change is not the only major transitional theme that is leading to calls for business disbandments, as large department store companies, including Macy’s and Kohl’s, are under pressure from investors to get into the business. online retail operations as e-commerce continues to grow as consumer behavior. And these debates about how best to achieve shareholder value unfold across a broader landscape of corporate spinoffs involving iconic companies from GE to Johnson & Johnson.

For Harley-Davidson, the spinoff plan raises short-term questions about how best to finance and start a new business for a new era of transportation and consumption, and longer-term questions about where the More value will lie in the Harley-Davidson brand in the future – he will retain control of 74% of the shares of the new company.

Longbow Research analyst David S. MacGregor said growth assets in the electric vehicle space are valued differently from mature assets with little or no growth, such as an internal combustion engine manufacturing company. “Although the LiveWire spin-off is yet to be evaluated in the same way as other well-known electric vehicle stocks, the growth potential of the autonomous business will be recognized in the coming years and the evaluation will follow. “, did he declare.

From a product perspective, although both the traditional business and the EV business are two-wheeled bicycles, they are different product categories and at different stages of development. This leads to several considerations that favor a spin-off, according to MacGregor. In order for LiveWire to recruit the talent that will enable it to be successful, management will need the autonomy of a stand-alone business, which in turn will allow them to create financial incentives for key managers that are directly linked to achieving milestones. performance. Autonomy also means making decisions about capital with the benefits of a clear market history.

“We still have more to learn, but LiveWire was not likely to harness the flow of capital in electric vehicles as part of the Harley-Davidson legacy,” wrote Craig Kennison, Robert W. Baird & analyst. Co. in a note this week.

Business divestiture research conducted by Emilie Feldman, professor of management at the Wharton School at the University of Pennsylvania, indicates that a similar thinking has benefited recent history of corporate spinoffs.

“My analysis is unequivocal,” Feldman recently told CNBC. “We certainly see these big improvements in performance both in business divestitures and similarly when we look at the performance of spin-off companies, they tend to perform very well after the separation from the old company ends. mother, “said Feldman, whose book” Divestitures: Creating Value Through Strategies, Structure and Implementation “will be released next year.

There are reasons for Harley-Davidson to separate the EV business as it pursues its own turnaround plan. It is not only the growing small business that can get lost within the larger business to its detriment, but it can also put additional pressure on the capital of a business facing major demographic and market changes. . It may be 2025 or 2026 before LiveWire hits breakeven, and for Harley-Davidson, it makes sense not to deplete its income statement while undergoing a broader turnaround plan under the leadership of the CEO and President. of Harley-Davidson, Jochen Zeitz.

The LiveWire Motorcycle, which Harley-Davidson has announced plans to become a separate EV company through a deal with an ESG-focused SPAC.

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“Right now the new company and the old company are stories to show, investors are not excited about HOG shares given the demographic issues that still plague the traditional heavy bike market. Although the new management team is running on the right track. strategies, he still faces the challenges created by the mistakes of the previous management team, and we anticipate it will take a few more years to resolve, ”said MacGregor.

In some ways, the two companies will remain tied at the hip. Zeitz will serve as LiveWire’s Interim President and CEO, while Harley-Davidson CFO Gina Goetter will be Interim CFO.

Baird noted that LiveWire has the freedom to fund new product development and accelerate its time-to-market model while also benefiting from the manufacturing scale and distribution capabilities of the electric scooter and bike company. Harley-based and Taiwanese KYMCO, which is also on the case.

Strategic priorities and R&D also overlap.

As the largest producer of heavy gasoline motorcycles, Harley-Davidson is “uniquely positioned to shape the future of the motorcycle industry,” Baird wrote in his Harley ESG summary.

Zeitz, who set up Harley’s sustainability committee after taking over as CEO, told CNBC this week he asked the company to “think long term and think about electrification. “and he’s betting now that it’ll be the leading brand of e-bikes in a decade. “Thanks to LiveWire, we can truly be the spearhead of the electrification of the sport and that’s why taking the ultimate last step to make it run is just a logical thing to do now,” he said.

As LiveWire focuses more on the urban consumer, Zeitz says he can also bring the technology back into Harley, which he described as a key goal. “While we still have enormous potential for Harley-Davidson as a brand and as a company, this will be one of the key strategic elements that will help us achieve our ultimate goals,” he said.

Harley’s timing was not ideal for a SPAC, as market volatility escalates and investors become fearful of growth stories and some of the hottest tech trends. Rivian sold after profit this week, with a lower than expected production forecast, and some recent PSPCs, while making deals, have seen strong sales.

Harley shares first appeared on the news earlier this week, but retreated from where shares remained stuck in the $ 30 range after rallying earlier under Zeitz’s new management strategy. which received high marks from Wall Street.

LiveWire is not a 2022 story in terms of numbers. Today, the LiveWire business is a blip, a base of 387 LiveWire motorcycles and $ 33 million in revenue in 2021, according to Baird research. Now that’s how the street values ​​EV history, anyway – Rivian grossed $ 1 million in revenue from his profits.

Harley projects sales of more than 100,000 electric bikes generating $ 1.77 billion in revenue in 2026 and by 2030, around 190,000 electric vehicles generating $ 3 billion in revenue. Baird’s current forecast for traditional motorcycle shipments this year is 186,000 bikes.

“Of course, it won’t be linear and a lot will depend on when we bring a new product to market,” Zeitz said. “There are a lot of opportunities to grow the business and, you know, if you look at the overall adoption rate, we see that it will increase dramatically over the next few years. “

The deal may not reach the valuation other “concept actions” have received this year, but analysts say it may be more important to close the deal and build brand autonomy , especially to recruit senior management in the new effort.

Ultimately, not many people will say that in the future there will be no more EVs on the road than internal combustion vehicles, be they cars or bikes, and Harley has a lead in many aspects of the bicycle industry to rely on, from its dealer network to maintenance and finance. This means that it is difficult to make a long-term argument against Harley as the leader in electric vehicles, even if the market is still not convinced by the old company and the new electric vehicle company that the investor is buying. in the immediate future.

Harley has been dead money for a while, and many dealers today remain more focused on traditional bikes and growing used bike sales. From there, the future of Harley and LiveWire could take different forms. LiveWire may have the most compelling long-term story right now, but it will take time to grow from the potential to hit the radar of more investors and result in a higher valuation of the EV.

There is one notable element, however, that consumers don’t see about the brand of the new LiveWire bike: the name Harley-Davidson.

“We wouldn’t be surprised to finally see the EV company with a bigger market cap than Legacy,” MacGregor said.