General Motors Co. (GM) - Get Report shares soared after it said its self-driving unit, Cruise Holdings LLC, will receive a $2.25 billion investment from Softbank Vision Fund, helping the carmaker's autonomous vehicle business to start commercial operations by 2019.
SoftBank, part of Japanese conglomerate SoftBank Group, will be splitting the investment into two tranches. The first payment will be for $900 million once the deal closes in June, and once the "Cruise AVs are ready for commercial deployment, the Vision Fund will complete the second tranche of $1.35 billion, subject to regulatory approval."
SoftBank Vision Fund will own a 19.6% equity stake in GM Cruise.
GM will be investing an additional $1.1 billion into Cruise upon the closure of the deal.
"GM has made significant progress toward realizing the dream of completely automated driving to dramatically reduce fatalities, emissions and congestion," said Michael Ronen, managing partner, SoftBank Investment Advisers.
Shares of GM were up nearly 13% when the market closed on Thursday.
The investment in GM's Cruise assets raises the valuation of the autonomous unit to $11.5 billion, according to Evercore ISI analysts, including George Galliers. Prior to the announcement, the analysts were assigning no value to the Cruise unit.
As a result of the investment, the firm raised its price target to $50 and upgraded the stock rating to Outperform.
Piper Jaffray analyst Alexander Potter concurred with Evercore ISI with the $11.5 billion valuation and said the investment should fund GM's initial vehicle deployment. Potter expects deployment of about 33,000 vehicles, assuming the cost of $100,000 per robo-taxi.
"At 20 rides per day, 365 days per year, with a per-ride fare of $12, revenue potential is approximately $2.9 billion," Potter said.
This news is also significant in that it marks a legal separation of GM Cruise from the rest of the automaker, according to Deutsche Bank analyst Rod Lache.
"As an independent legal entity, [GM Cruise] will have access to private funding based on valuations that are more competitive with mobility/technology peers, will have a valuable currency that can be used to attract and compensate talent, can (and likely will) attract other strategic investors, and we believe that this move also signals a path towards an IPO," said Lache.
While GM executives remained relatively mum on whether they would spin GM Cruise, a filing with the U.S. Securities and exchange commission includes language that addresses the possibility of an IPO.
"If GM Cruise has not completed an IPO, spin-off, sale or dissolution within seven years of the closing, the investor will have the right, subject to certain limitations, to exchange all, but not less than all, of the equity securities of GM Cruise held by the investor for shares of common stock of the company," the filing stated.
While an IPO of GM Cruise remains unclear, the investment allows GM to compete with the other autonomous driving superpowers currently in the field, such as Tesla Inc. (TSLA) - Get Report and Alphabet Inc.'s (GOOGL) - Get Report Waymo.
"We have believed that GM has a meaningful seat at the table for shared autonomous vehicles ('robo-taxis') and we believe this deal affirms that view," said RBC Capital Markets analyst Joseph Spak.
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-- This story has been updated to include commentary from analysts.