SPACs: Game Changer or Passing Fad?

by Elisabeth Tweedie

Los Angeles, Calif., March 5, 2022--The satellite industry is no stranger to mergers and acquisitions, nor to new entrants. The last few years in particular have seen numerous startups enter the industry, indeed that is how the term “new space” originated. Suddenly the industry was no longer the sole domain of large well-established companies, advances in technology meant that the barriers to entry were rapidly being eroded.

For example, ten years ago, very few people would have envisaged that rockets could be “manufactured” using 3D printing, and yet that is exactly what Relatively Space is doing. Founded in 2016; following a Series E round last year, led by Fidelity, the company has now raised more than US$1.2 Billion and is valued at US$4.2 Billion, making it the second largest privately held aerospace company after SpaceX. Relativity Space has contracts with Iridium, NASA, (through Lockheed) and US Space Force. 

Not all of the new entrants have done so well. Several have relied on SPACs or Special Purpose Acquisition Companies to raise money, and whilst popular, many of these across all industry sectors have suffered significant falls in value.

A SPAC is formed with the sole purpose of effecting a merger with a privately held business, although at the time the SPAC is formed, the target business may not have been identified. It raises capital through an initial public offering (IPO). The private business will merge with, or be acquired by the SPAC. This provides an alternative to a traditional IPO for a start-up, and is generally a shorter route to become a listed company, with less stringent regulatory requirements. A SPAC has a maximum lifetime of two years. The merger or acquisition process is known as a de-SPAC. 

SPACs have experienced a surge in popularity. According to White and Case, in 2021 there were 221 de-SPAC transactions with a total deal value of over US$403 Million. This represents more than a doubling of transactions and volume from 2020 (92 transactions, total value US$139 Million). 

However, in spite of this, shares of many companies that used SPACs as a vehicle to go public have not fared well. In the middle of January this year, over half of the companies were trading at prices 40% of more below their opening price.

As already mentioned, several aerospace companies have chosen to take the SPAC route to go public. Unfortunately in the last few months, these companies have suffered the same fall in value that has affected SPACs in general. In October 2019 Virgin Galactic was one of the first aerospace companies to embrace a SPAC. Currently trading at just under US$10, it is slightly up from its all-time low of US$7.58, but still down from the US$11.75 close on its first trading day, and way down from its high of US$57.51.

Rocket Lab is following a similar trajectory. It closed at US$10.43 when it debuted in August last year and is currently trading at US$9.06 significantly below its high of $21.34.

It’s easy to generalize, other factors will also come into play. For example, Astra, another company that make its market entry via a SPAC, has suffered several launch failures. Doubtless these also contributed to the fact that it is currently trading at US$3.15, down from its opening price of US$12.90 and far below its high of US$21.25.

The other issue with SPACs that recently has confronted many companies, including Virgin Orbit, is high redemption rates by the original investors in the SPAC. SPACs are often formed without a particular target company in mind, so investors have the right to exit before the acquisition closes. Virgin Orbit was expecting to raise US$383 Million from its SPAC, but with over 82% of the SPAC shares redeemed, it only raised US$68 Million. Additional funds were provided by the Private Investors in Public Equity (PIPE) partners, who put in US$160 Million instead of the anticipated US$100 Million. Boeing was the lead investor on the PIPE. Nevertheless, initial funding only totaled US$228 Million as opposed to the anticipated US$483 Million. Spire, the cubesat manufacturer and data analytics company, faced a similar fate, when its SPAC had a 90% redemption rate. Obviously, had these companies chosen the traditional IPO route, they may still have failed to raise as much as expected, so one can’t be sure that choosing the SPAC route was a mistake.

Tim Ellis, chief executive of Relativity, said in a June interview that he’s never considered doing a SPAC deal to raise funding. “We didn’t need to because there was so much private capital available.”

“Honestly, I think it’s a bit of a funding path of last resort,” he added. “I certainly wish the companies that are doing that best of luck, but I think it’s going to be a tough road to go down.” So far, that certainly seems to be wise decision.

One of the most ambitious recent new entrants came from serial entrepreneur Greg Wyler, founder of O3b and OneWeb. Last month his company E-Space raised US$50 Million in the largest ever seed capital investment for the space industry. In terms of number of satellites, this is by far Wyler’s most ambitious project. The full constellation will be over 100,000, (one report says that the filing, which was done through Rwanda is for 300,000 satellites). The first beta satellites are planned for launch in March, with a second launch later this year. It is planned to launch them all by the end of the decade. 

E-Space will be a mesh network to carry secure communications for businesses and governments. According to the website, it will be: “a bespoke multi-application cloud server in space, powered by a rapidly scalable optical 5G mesh network.” The website also states that the system is resilient enough to withstand a cascading collision, otherwise known as the Kessler effect, whilst at the same time being “sustainable enough to avoid one.” 

Ultimately, it is planned that the satellites will be capable, not only of safely deorbiting themselves, but will also be able to collect and deorbit space debris.

There were several acquisitions last year as well as unsuccessful attempts at acquiring other companies. It is generally expected that these will continue through this year. Falling stock prices of companies that raised money through SPACs make many of them prime targets, but you don’t have to be a new entrant to be a target, as Eutelsat found out when it found itself the subject of an unsolicited US$3.2 Billion bid from Patrick Drahi. Inmarsat on the other hand welcomed the bid from Viasat.

Although traditionally a manufacturer of ground equipment, ViaSat, with two high throughput satellites (HTS) in orbit and three more to be launched this year, is now regarded as an established operator. Nevertheless, many were surprised when at the end of last year, it moved to acquire London based Inmarsat for US$7.3 Billion. If successful, this deal puts Viasat, firmly in the mobility sector. From that point of view, the move isn’t very surprising. In recent years, Mark Dankberg (Executive Chairman, Viasat), has taken every opportunity to talk about the importance and growth potential of in-flight communications (IFC). But, if the deal goes ahead, it brings other advantages to Viasat. Currently, 80% of its revenue comes from North America, Inmarsat is a global player. In addition, and very importantly, given the way the industry is evolving, Inmarsat’s Orchestra will create a hybrid multi-orbit, multi-band, multi-technology system, so the acquisition firmly moves Viasat into the ranks of the other big global players: SES, Eutelsat and Intelsat. 

However, the deal is now undergoing investigation by the UK Government. The National Security and Investment Act was introduced in January, in order to make it harder for UK firms of national importance to fall into foreign hands and the Viasat-Inmarsat deal, is one of several that are undergoing investigation. In this instance, the main concern seems to be the possibility of a foreign power being in possession of sensitive government information. This is a reference to the fact that Inmarsat already carries sensitive information, relating to the location of troops and vessels and is currently a contender for a contract worth £6 Billion (US$8.2 Billion) to upgrade the UK military’s secure defense communications network. Rick Baldridge, CEO Viasat, has been quoted as saying that the takeover is not contingent on Inmarsat winning that contract. 

As always, the industry is changing. Consolidating in some areas and expanding rapidly in others and doubtless will continue to do so.

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Elisabeth Tweedie has over 20 years experience at the cutting edge of new communications entertainment technologies. She is the founder and President of Definitive Direction (www.definitivedirection.com), a consultancy that focuses on researching and evaluating the long-term potential for new ventures, initiating their development, and identifying and developing appropriate alliances. During her 10 years at Hughes Electronics, she worked on every acquisition and new business that the company considered during her time there. She can be reached at etweedie@definitivedirection.com