Satellite veterans warn of space SPAC downside
TAMPA, Fla. — The frenzy of activity swirling around SPACs is pushing space into a new era of risk-taking, according to two satellite industry veterans.
The past decade’s flow of private capital into megaconstellations and launch startups was a sedate “tea party” in comparison to what’s happening now, Iridium Communications CEO Matt Desch told SpaceNews in an interview.
Space ventures have been rushing in the last six months to take advantage of increasing investor appetite for SPACs, or special-purpose acquisition companies. Often referred to as “blank check” companies, SPACs offer space ventures a significant — and relatively quick — cash injection as they are fast-tracked to the public markets.
“It looks like an all-out, mind-bending party going on right now,” said Desch, who took Iridium public in 2009 via a SPAC merger with GHL Acquisition Corp.
Four years later, inflight connectivity provider Row 44 went public through a SPAC merger with Global Eagle Acquisition. Italian rocket builder Avio SpA followed a similar route to public markets, completing its listing in 2017.
Suborbital spaceflight venture Virgin Galactic sparked the current space SPAC wave with its 2019 merger with Social Capital Hedosophia. In late 2020, space logistics startup Momentus and satellite-to-device specialist AST & Science announced SPAC deals.
Space-based data ventures Spire and BlackSky and launch providers Astra and Rocket Lab all announced SPAC mergers between Feb. 2 and March 1.
Virgin Orbit, the spinoff of Virgin Galactic that is developing the LauncherOne small launch vehicle, is reportedly getting ready to join the party. Canadian space technology company MDA, meanwhile, is poised to file for an initial public offering (IPO) of stock, the more conventional path to public markets.
While the SPAC spree is good news for early investors positioned to profit as these companies go public with multibillion-dollar valuations, Desch is not the only industry veteran questioning whether the trend is as good a deal for the businesses themselves and the wider industry.
In a separate interview, Viasat executive chairman Mark Dankberg compared the rush of companies going public with sky-high valuations despite little or no revenue to the dot-com bubble at the turn of the century.
“I think it’s very dangerous,” Dankberg told SpaceNews.
SPACs allow companies to make far bolder five-year revenue forecasts than those going through the more traditional route to becoming a public company.
Desch said relatively relaxed disclosure rules compared to conventional IPOs are helping fuel the excitement around these companies, which might make double-digits today but believe they can surpass a billion dollars by 2026.
The trend is also riding a wave of optimism in the space sector amid technology breakthroughs and stellar forecasts from established banks such as Morgan Stanley, which predicts the global space industry could be generating more than $1 trillion in revenues in 2040, up from about $350 billion in 2020.
Other analysts have poured cold water on these projections.
Mark Boggett, CEO of venture capital firm Seraphim Capital that is poised to benefit from the SPAC spending spree due to early investments in Spire and AST & Science, supports Morgan Stanley’s forecast.
Boggett said the $1 trillion figure holds without too much stretching of credibility when space is viewed as a “digital platform in the sky,” rather than simply as satellites and rockets.
“This ‘space’ digital infrastructure, consisting of thousands of satellites will deliver capabilities that will define societal change over the forthcoming decades,” Boggett told SpaceNews via email, pointing to applications ranging from drone delivery services to tracking livestock for ensuring food security.
“Taking the big picture of how space is underpinning a whole range of megatrends I can get very comfortable talking of a market measured in $trillions,” he added.
The SPAC trend also comes as equity markets are abuzz from social media-driven activity around stocks such as GameStop, which could spill over into space as the industry increasingly opens up to new types of investors.
Stimulus checks that were part of the $1.9 trillion relief bill signed into law March 11 by U.S. President Joe Biden could further fuel a rally in long shot stocks and speculative behavior.
“I wouldn’t be surprised if these $1,400 stimulus checks get invested into a lot of SPAC stocks,” Desch quipped.
Surging retail investor activity, such as the Reddit-orchestrated GameStop short squeeze that temporarily drove shares of the struggling video game retailer to stratospheric heights, creates new issues for the market. Desch pointed to rampant investor exuberance he has seen sweeping across online message boards that discuss stocks.
“You’ve got all these small-time investors just making up stuff — there are no fundamentals, no discussions of those sort of things,” he warned.
“It’s raw speculation.”
Desch also sees similarities to the dot-com bubble, when investors — many buying stocks for the first time — flocked to recently formed wireless and internet-based businesses of the 1990s, confident that stock prices would only go up.
Revenues took a back seat as these early internet ventures focused on building a big base of users. For a while, investors were willing to tolerate huge losses, confident that these companies would eventually find their way to profitability.
“Investors would drive up the price of stocks because [the businesses] were spending money, not because they were making money,” Dankberg said.
Telecom companies that would take on more debt to build more infrastructure saw their stock prices rise. Meanwhile, businesses that were not participating in the frenzy saw their stock prices languish, increasing the likelihood of being bought by another company with a more relaxed attitude to debt.
It put companies in a position of either being sold or joining in the fray, according to Dankberg.
“I think you’re seeing a fair amount of that now,” he added.
When good times come to an end
The dot-com bubble ultimately burst, crashing stock markets as many early internet businesses collapsed. Between 1995 and its March 2000 peak, the Nasdaq rose 400%. But by October 2002, the bull market had given back all its gain.
Desch said: “All of a sudden it got so overheated, so much money spent on so many nonrevenue companies, and those nonrevenue companies couldn’t survive.”
Iridium was a product of the 1990s, joining in the rush and excitement before its first iteration via Motorola collapsed — along with similar LEO satellite ventures Globalstar, ICO Global and Teledesic that contributed to a 10-year investment drought for the sector.
Post-bankruptcy Iridium later went public for the second time via a SPAC merger in 2009.
NSR analyst Claude Rouseau outlined how Iridium’s recurring revenue, and corresponding valuation, put it in a very different position from today’s SPACs in a forthcoming SpaceNews commentary.
“The recent spree of space SPACs are marked by unrealistic projections,” Rouseau wrote.
“Not counting Iridium, the average space SPAC has a $1.8 billion enterprise valuation built on assumptions it can grow [an average of] $29 million in revenue to $3.85 billion within five years.
“Virgin Galactic’s market capitalization as of early March was $8.7 billion. Compared to the Iridium situation, the average enterprise value of current space SPACs is three times higher, the market cap is 1.6 times higher, and revenues are 10 times lower.”
Complicating the picture, it is also worth noting that the failures that space has already endured have yet to create the kind of domino effect that could lead to a crash.
“OneWeb should have been a big note of caution,” Desch said of the LEO broadband operator’s March 2020 bankruptcy filing, but its story became complicated when the British government and Bharti Global, the Indian telecom company, brought it out of Chapter 11 just eight months later.
However, space SPAC advocates say the significant capital the deals bring will propel the industry into a new growth stage, enabling businesses to focus on scaling operations without being distracted by incremental funding needs.
Mike Collett, managing partner at venture capital firm Promus Ventures, which invested in Spire and Rocket Lab, said: “With a public stock and lots of cash, these new public companies can use their paper to acquire other companies, use the public markets to access more cash through secondaries, and pump more gas into their model to attract more talent and grow faster.
“All of this is a huge competitive advantage. The public equity market will ultimately decide the fate of these public enterprise values, but those that execute will be rewarded handsomely.”