Why does Harley-Davidson’s EV LiveWire motorcycle have a separate item?

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

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For corporations, 2021 is a year of big spinoffs and volatile SPAC offerings. As of this week, Wall Street and investors have one more iconic name to add to both financial technical columns: Harley-Davidson.

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

That’s not near the valuations of some EV automakers, including Rivian Automotive and Lucid’s group, has been witnessed after its recent market launch, but it points to a fundamental challenge facing legacy companies, long-time leaders in their markets, as the world emerges. The world is changing and major trends such as energy transition and electrification become more central to investment.

Across many sectors, climate change is leading to calls to rethink how iconic companies are structured. Royal Dutch Shell has recently come under pressure from active investors to consider spinning its renewable energy business. GM and Ford, while expressing no interest in their own, have faced questions from the market about Can new EV businesses be better off as independents?.

“If anything, this underlines what we’ve been talking about for a long time. Detroit, wake up! Trains have left the station! Trams are inevitable,” said Craig Irwin, analyst. by Roth Capital. said in a Reuters report on the Harley-Davidson deal. “Many traditional OEMs (Original Equipment Manufacturers) with emerging EV businesses can clearly do similar side deals.”

The special-purpose acquisition that LiveWire will merge is the ESG-focused SPAC, AEA-Bridges Impact Corporation.

Climate change isn’t the only major transformation theme leading to calls to break up the company, as major department store companies include Macy’s and Kohl’s facing investor pressure to withdraw from online retail operations as e-commerce continues to grow. And debates about the best way to realize shareholder value are raging across the globe a broader context 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 build a new business for a new era of transportation and consumption, and long-term questions about where Greater value will lie in the future Harley-Davidson brand – it will retain 74% controlling stake in the new company.

According to David S. MacGregor, an analyst at Longbow Research, growth assets in the electric vehicle sector are being valued differently from low-growth/mature assets such as the internal combustion engine business. “While the LiveWire software is not yet valued in the same way as other well-known EV stocks, the growth potential of the standalone business will be realized in the coming years and valuations will be in the future,” he said. follow.

From a product point of view, although the legacy business and the electric scooter business are both two-wheelers, they are different product categories and at different stages of development. According to MacGregor, that led to some considerations in favor of a spin-off. For LiveWire to recruit talent that will allow it to succeed, management will need the autonomy of an independent company, which in turn will allow them to create financial incentives for key managers. directly related to the achievement of performance milestones. Autonomy also means making capital decisions with the benefit of a clear market story.

Craig Kennison, analyst at Robert W. Baird & Co. “There is much more for us to learn, but LiveWire is unlikely to tap the capital inflows into electric vehicles as part of the legacy Harley-Davidson,” wrote in a note this week.

Research on divestment activities of enterprises conducted by Emilie Feldman, professor of management at the Wharton School, University of Pennsylvania, shows that similar thinking has benefited in the recent history of corporate interviews.

“My analysis is clear,” Feldman recently told CNBC. “We definitely see these big performance improvements both in divestments and then equally when we look at the performance of the decoupled companies, which tend to perform strongly after upon completion of the separation from the former parent company,” said Feldman, whose book was. “Divestitures: Creating Value Through Strategy, Structure, and Execution,” will be published next year.

There are reasons for Harley-Davidson to separate from the electric vehicle business as it continues with its own turnaround plan. Not only can small growing businesses get lost inside the larger company to their detriment, but it can also put additional capital pressure on a company facing a major shift in funding. demographics and markets. It could be 2025 or 2026 before LiveWire reaches break-even, and for Harley-Davidson it makes sense not to wear out its profit & loss statement while working on a broader turnaround plan under under the CEO and President of Harley-Davidson, Jochen Zeitz.

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


“Both new and legacy companies are telling stories for me right now, with investors less enthusiastic about HOG stock due to demographic issues still weighing heavily on the bike market.” Even if the new management team is getting it right, says MacGregor:

In some obvious ways, the two companies will remain tied together. Zeitz will serve as President and acting CEO of LiveWire, while Harley-Davidson CFO Gina Goetter will serve as chief financial officer.

Baird noted that LiveWire has the freedom to fund new product development and accelerate the model to market while benefiting from the scale of production and distribution capabilities of Harley and the scooter and bike company. KYMCO electric is based in Taiwan. .

Strategic and R&D priorities also overlap.

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

Zeitz, who formed Harley’s sustainability committee after he joined as CEO, told CNBC this week that he asked the company to “think long-term and think about electrification” and he is now betting that it will be the leading EV brand in the bicycle sector for a decade. “Through LiveWire we can really lead the way in the electrification of the sport and that’s why it makes sense to take the final last step to phase it out,” he said.

While LiveWire is focusing more on urban consumers, Zeitz says it could also bring the technology back to Harley, which he describes as a primary goal. “While we still have great potential for Harley-Davidson as a brand and as a company, it will be one of the key strategic elements in helping us achieve our ultimate goals,” he said. his own,” he said.

Harley’s timing hasn’t been great for a SPAC, as is market volatility increasing and investors becoming reveled in growth stories and some of the hottest tech trends. Rivian sold off after earnings this week, with lower-than-expected output forecasts and several recent SPACs that, while completing deals, sold heavily.

Shares of Harley made headlines earlier this week, but have traded lower since the stock got stuck in the mid-$30 range following a previous bounce under the new management strategy. of Zeitz, which has received high praise from Wall Street.

Zeitz told CNBC earlier this year, “Electrification is one.”

But LiveWire is not a 2022 story in terms of numbers. Today, the LiveWire business is a blip, with 387 LiveWire motorcycles and $33 million in revenue by 2021, according to Baird research. This isn’t how the street interprets the electric car story anyway – Rivian reported $1 million in sales in its earnings, but even after the decline, it’s still more than market cap. 80 billion dollars.

Harley forecasts sales of more than 100,000 e-bikes will generate $1.77 billion in sales by 2026, and by 2030, about 190,000 EVs will generate $3 billion in sales. Baird’s current forecast for traditional motorcycle shipments this year is 186,000 units.

“Of course it won’t be linear and depends a lot on when we bring new products to market,” says Zeitz. “There’s a lot of opportunity out there to grow the business and you know, if you look at the overall adoption rate, we see that number is going to grow dramatically over the next few years.”

The deal may not come close to the valuations some other “idea stocks” have received this year, but analysts say putting the deal out and giving the brand autonomy has may be more important, especially recruiting senior leadership for the new endeavor.

In the end, few would argue that in the future there won’t be more EVs on the road than internal combustion vehicles, whether it’s cars or bikes, and Harley has a leadership role in many areas of the bicycle business. dealer network to service and finance. That means it’s difficult to make a lasting worthwhile case for Harley becoming the leader in electric vehicles, even if the market – and many dealers by itself – remains unconvinced. .

Harley has been running out of money for a while, and many dealers today are still more focused on traditional bikes and growing sales of used bikes. From here, the futures of both Harley and LiveWire could go in different directions. LiveWire may have a more compelling long-term story for now, but that will take time to grow from thematic potential to truly catching the eye of more investors and leading to a high EV valuation. than.

However, there is one notable element that consumers do not see on the branding of the new LiveWire bike: the Harley-Davidson name.

“We wouldn’t be surprised to eventually see an EV company with a larger market cap than legacy,” said MacGregor. Why does Harley-Davidson’s EV LiveWire motorcycle have a separate item?

Emma James

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