When SPACs are attacked
by Jeff Foust
|Stallmer said he used “fun money” to buy stock in space companies that recently went public. “Well, that money is not fun any more.”|
On Thursday, a real LauncherOne was released over the Pacific Ocean from its Boeing 747 carrier aircraft, firing its first-stage engine seconds later. Within the hour, the company announced the rocket had successfully placed into orbit seven cubesats from the DOD’s Space Test Program, Polish satellite developer SatRevolution, and Spire. It was the third successful launch in just under a year for Virgin Orbit, and the first of as many as six the company plans for 2022, including the first launches from England’s Spaceport Cornwall. Certainly, something to feel good about.
The launch took place after the Nasdaq closed for the day Thursday, so industry observers waited until Friday to see how the market would react. The company’s stock… closed down 9%, as investors were apparently unimpressed with the launch. Fake rockets are more lucrative than real ones, perhaps.
Virgin Orbit is not alone in experiencing market turbulence. Since the start of last year, nine space companies went public through SPAC mergers, part of a much larger wave of companies that decided to raise money and go public by merging with such “blank-check” entities that offered a faster path to public markets than a traditional initial public offering. As of the closing of trading Friday, all nine were trading below the price when their SPAC deals closed, in some cases by large margins. Spire was down by more than 70%, as was imaging company BlackSky. Momentus, an in-space transportation company, was down by more than 60%. Even Rocket Lab, the small launch vehicle and spacecraft developer that had seen strong performance of its stock in the last few months of 2021, was down by about 10%.
At the SpaceCom commercial space conference in Orlando last week, Eric Stallmer, executive vice president for government affairs and space policy at Voyager Space, a company that owns several space technology firms, said he had put some of his own money into several of those companies, ones “that I believe in and have represented and think have a great product.” He described that investment as using “fun money,” or money he was willing to lose.
“Well, that money is not fun any more,” he said. “I think I’m down about 50% from a lot of those investments.”
“As we move forward, we need to look at a lot of the reasons why these companies are down from their IPO raise,” he said. “What are the concerns that investors have?”
Common themes for those companies’ stock market performance are not immediately obvious. Shares in Redwire, which acquired several space technology companies before going public to fuel further expansion, have been gradually declining since November, when the company announced “potential accounting issues at a business subunit” that caused it to delay earnings reports. Shares in Planet, which went public early December, slid after it revealed a lost government contract and a problem with thrusters on one of its SkySat imaging satellites. Astra, the small launch vehicle company, has seen its shares decline since it reached orbit for the first time nearly two months ago, a skid fueled in part by a sharply critical report in late December from investment firm Kerrisdale Capital that concluded Astra “faces massive obstacles in its quest to develop a viable business model.”
Another issue is that investors are still learning about the space industry: before this wave of SPAC deals there were few “pure-play” publicly traded space companies, and space was just a small part of larger aerospace companies on the stock market, like Boeing and Lockheed Martin. “We know its ins and outs, but the general public does not, especially on the public markets,” said Janice Starzyk, vice president of government operations at Virgin Orbit, at SpaceCom. “This is a very volatile business, so it’s not something that is used to being seen on public markets. We have a tough job telling the story about it.”
|“This is a tough business, and the people who are typically investing in SPACs, the large retail investor community that’s putting money in, doesn’t quite understand the toughness of it,” Patz said.|
SPACs in general, though, have been lagging in recent months. Benjamin Patz, managing partner at Deepwork Capital, noted on the SpaceCom panel that only about one in four companies that have gone public through SPAC deals recently were trading above their opening price, so space “is just a little bit worse than SPACs in general.”
He agreed that conventional investors don’t understand the space industry. “This is a tough business, and the people who are typically investing in SPACs, the large retail investor community that’s putting money in, doesn’t quite understand the toughness of it,” he said. He added he was “grossly optimistic” about the industry’s long-term potential, particularly if reduced costs of access to space enable exponential growth of the industry.
There had been red flags for months about SPACs, which in the first part of the year were a popular and lucrative tool for going public. “There are certain warning signs in terms of what’s happening in the SPAC market,” said Phil Ingle, a managing director at Morgan Stanley, at AIAA’s ASCEND conference in Las Vegas in November. “There are real signs of fatigue in the SPAC market right now.”
One sign of fatigue involved what are known as redemptions. Shareholders of a SPAC have the right, when that SPAC announces a merger deal, to ask for its money back rather than hold shares in the merged company. Those refunds, or redemptions, cut into the pool of capital that the merged company would have.
Early last year, redemption rates were low as investors decided to stick with the merged company. In the latter half of the year, though, redemption rates rose significantly as investors decided to get their money back. Ingle said that redemption rates market-wide went from about 10% early in the year to 70% in November.
Virgin Orbit is an victim of those high redemption rates. When the company announced its merger with a SPAC called NextGen Acquisition Corp. II in August, it expected to raise up to $483 million. All but $100 million of that would come from the proceeds that SPAC raised when it went public. But, when the deal was completed in late December, the capital raised fell to $228 million, of which just $68 million came from SPAC proceeds, implying a high rate of redemptions.
|“If you’re a space company and you’re looking for capital in the SPAC market, number one, you’ve got a dry PIPE market and, number two, you’re facing the prospect of big redemptions,” Ingle said. “Capital becomes very uncertain.”|
Another warning sign Ingle noted was a lack of additional capital available from concurrent funding rounds called private investment in public equity, or PIPEs. PIPE rounds, announced in conjunction with a SPAC deal, allow companies to raise additional funding. In the Virgin Orbit example, the merger included a $100 million PIPE from investors that included Boeing and AE Industrial Partners; the final deal increased that to $160 million thanks to an infusion from the Virgin Group.
Early in the year, companies were raising several hundred million in PIPE rounds tied to SPAC mergers. But, by the time satellite manufacturer Terran Orbital announced a SPAC merger in October, that agreement included a PIPE of just $50 million. (Terran Orbital executives say the PIPE includes three tranches that could provide it with up to $200 million, although that approach differs from how PIPEs announced earlier in the year were structured.)
“That means that, if you’re a space company and you’re looking for capital in the SPAC market, number one, you’ve got a dry PIPE market and, number two, you’re facing the prospect of big redemptions,” Ingle said. “Capital becomes very uncertain.”
Those issues may be a factor why one such deal hasn’t closed. Satellogic, a company developing a constellation of high-resolution imaging satellites, announced a SPAC merger in July with CF Acquisition Corp. V. That deal was expected to close in December, raising up to $271 million to fund development of that constellation.
However, three times last month CF Acquisition Corp. V delayed a shareholder vote on the merger, which is usually the last step before the deal closes. After the third delay December 30, the SPAC said it postponed the vote until January 24 to give the companies “and a potential third-party investor additional time to finalize the terms on which such potential investor may complete a significant additional PIPE financing for the benefit of the post-combination company.”
What this means for companies that went public via SPAC mergers in the last year, or companies considering such deals, is unclear. Ingle said rising inflation, and likely increases in interest rates to counter it, could diminish capital available to companies. “That is an absolute, no-question macro risk, not just for space but also for some of these other capital-intensive industries generally,” he said.
Others, though, shrugged off issues like high redemption rates. “Any landing you can walk away from is a good landing,” said James Murray of PJT Partners during a panel at Euroconsult’s World Satellite Business Week last month. “There’s an enormous amount of focus placed on redemptions, and I’m just not sure it matters that much.”
The reason he thought it didn’t matter much is that companies were able to raise money at high valuations. “These high-redemption scenarios are still, in a lot of cases, raising $150-plus million,” he said. “I believe that bigger deals are still to come,” such as for megaconstellation companies.
|“Any landing you can walk away from is a good landing,” said Murray. “There’s an enormous amount of focus placed on redemptions, and I’m just not sure it matters that much.”|
At the very least, Ingle said, having companies go public has gotten Wall Street interested in the space sector. “Now there are pure-play space opportunities, and you are seeing Wall Street focus on this sector.”
“There’s a lot to be excited for, but I think you’ve got to be very prudent as we move forward with a lot of these investments,” Stallmer said. “There’s a historic amount of money out there. I would like to see that money stay in the commercial space market.”
“Be careful what you wish for in the public market,” advised Patz. “It’s not necessarily a rational representation of what the underlying fundamentals are.” Otherwise, every space company would be putting replica rockets on display in Times Square.
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