After two years of hectic activity marked by mergers between special-purpose acquisition corporations, or SPACs, and space companies, the tide seems to be ebbing.
August 12, 2022: Italian space logistics company D-Orbit announced the cancellation of its plans to go public by merging with Breeze Holdings Acquisition Corp., a special purpose acquisition company (SPAC). Earlier, in January this year, the two companies had entered into an agreement that would result in D-Orbit becoming a publicly traded company with an enterprise value of about USD 1.28 billion. However, D-Orbit’s decision to now scrap the plans comes since “financial markets have changed substantially”.
March 7, 2022: US-based weather satellite company Tomorrow.io terminated its merger plan with SPAC vehicle Pine Technology Acquisition Corp “due to market conditions.” According to filings with the Securities and Exchange Commission (SEC), Tomorrow.io would pay the Pine Technology USD 1.5 million as part of the termination agreement.
If you want to hit the market, you must SPAC it — that was the prevailing sentiment in 2020 and 2021. Year 2021 saw a whopping 638 SPAC filings, garnering a combined value of USD 143 billion, far surpassing 2020’s 246 filings and USD 73 billion raised, according to a report from CB Insights.
But, come 2022, as CNN recently put it very aptly, Wall Street’s blank check boom went bust. In a cratering stock market, many high-profile SPACs are now either left stranded, struggling to find target companies to acquire, or have themselves pulled the plug on agreed deals in the face of forthcoming tougher regulations. Further, according to data from PitchBook, shares of companies that went public through SPACs in the past two years are down 45% so far in 2022.
The space and satellite industry has not been spared either. A trend that started with Virgin Galactic taking the SPAC route by merging with Social Capital Hedosophia in October 2019, continued through 2020 and 2021, with 2021 seeing a total of 10 space companies completing their IPO via SPAC for a total value of USD 3.6 billion. This included small satellite pioneer Planet and a bunch of others.
But now, the peak phase of SPAC mergers in space seems to be over. To date, only two SPACs were successfully closed in 2022 (Terran Orbital and Satellogic).
“This is due to the combined effect of stricter SEC regulations, disappointing results of early SPACs and degrading economic and environment conditions,” says Pacôme Révillon, CEO of Euroconsult, the leading global consulting firm specializing in satellite application markets.
What is SPAC?
“SPACs are shell companies with no operations that raise capital through an initial public offering and then use the proceeds to fund one or more mergers that form the basis of the ongoing public entity,” according to Bain & Company.
Simply put, SPACs offer private companies — often startups and innovation companies — the opportunity to go public without a direct IPO. This starts with the formation of a SPAC company, which is then floated on the stock market with the sole purpose of buying another company. Since this is an empty listed company — which is why it is sometimes also known as a blank-check company — the regulatory work is much less. Once the SPAC is floated, it enters into a merger deal with a company.
Why SPAC?
“SPACs were seen as an easier and faster way to raise large amounts of cash compared to another round of venture capital or regular IPO (and higher scrutiny from stock exchange regulators),” Révillon explains.
“It’s just simpler for small companies. IPO is a pretty overwhelming process,” adds Shawana Johnson, satellite imagery and GEOINT expert, and President of Global Marketing Insights, a US-based consulting firm offering expertise in geospatial business intelligence.
Space is a highly regulated sector, and naturally, space companies have a lot of compliance issues that have to be dealt with. Therefore, for a smaller company, it is often easier to go with a SPAC and let the entity take on the qualification and necessary documentation, as opposed to trying to deal with all of it on its own.
One of the most attractive features of a SPAC is the timeline. A regular IPO process needs extensive preparation, lasting at least a year or more. In comparison, the entire SPAC cycle can happen in a matter of months. Because the original SPAC company generates no revenue, the process needs less arduous regulatory review.
Usually, the SPAC process takes a fixed time period — between 18 and 24 months — to identify and acquire a target firm or return funds to its investors. Once the target firm is merged with the SPAC, the SPAC is dissolved and the resulting company is public.
As a spokesperson for Spire, the US-based satellite company which hit the bourses last year, explained, the SPAC process also allowed it to become a public company in a timely manner, which quickly opened up new business opportunities.
“As we evaluated the best method to go public, we decided on moving forward with the SPAC process for two reasons: experience and speed. Our SPAC sponsors have decades of experience working with technology companies. We have been able to benefit from their experience, as well as their network of relationships, as we worked toward and since becoming a public company last summer,” the spokesperson added.
Overall, the SPAC vehicle was so attractive to the companies because it was a way for them to raise money and, at the same time, become part of a larger offering, which then could be presented more holistically to the big government clients and the commercial world.
Explaining the rationale behind going public, Spire said that as the company continued to grow, it became apparent that being a public company would further its growth by expanding its customer set. “Many of our customers are public companies themselves, international organizations, and government agencies. As a public company, Spire is subject to rigorous audits by outside parties and needs to make important disclosures about our business. The additional transparency and additional checks on our business provide a level of comfort to customers signing large contracts with us,” the spokesperson said.
Additionally, the company claims it was also able to use some of the proceeds from the transaction to acquire exactEarth late last year, further strengthening its leadership in the maritime space.
Efforts to reach out to several other satellite companies, which successfully took the SPAC route, were not successful.
The SPAC frenzy
According to Thomson Reuters, total capital raised via SPACs was well over USD 150 billion in 2020. This is more than four times the previous annual record set in 2019. Data from 2021 showed companies in the software, automobiles, and aerospace sectors being primarily targeted by SPACs.
In 2020, the total number of SPAC IPOs was 248, as compared to 165 traditional IPOs, meaning roughly 60% of all IPOs were conducted through SPACs. The frenzy continued well into 2021, as the first quarter alone witnessed nearly 300 SPAC mergers.
However, it slowed down considerably in April that year, following new guidance from the Securities and Exchange Commission (SEC) that would classify SPAC warrants as liabilities instead of equity.
After a brief pause, SPAC mergers again took off, finally closing year 2021 at 613.
However, it was obvious by the fourth quarter that interest in SPAC deals was waning owing to the stock performance of companies that had already gone public, and increasing regulations around the corner.
It all came to an abrupt halt by March this year as the SEC proposed new rules and amendments to enhance disclosure and investor protection in IPOs via SPAC.
“It is clear SPACs provide an alternative to the traditional IPO model, and may offer some competitive challenges. That’s a good thing. But, perhaps, we need to be careful not to facilitate a race to the bottom in terms of public market protections. And since the boom, the Commission and its staff identified several areas of concern with SPACs. Such concerns include misaligned incentives, several points of dilution that may disproportionately impact retail investors, and a lack of liability that may be creating an unjustified advantage in this path to the public markets over the traditional IPO.”
Caroline A. Crenshaw, SEC Commissioner.
The proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution. They would also require additional disclosures regarding business combination transactions between SPACs and private operating companies.
SPACs in space
As in other tech sectors, SPACs have been a popular tool for space companies in the past couple years, and following the broader market trend, the interest has drastically fallen this year.
Additionally, the share prices of many companies that went public via SPACs fell significantly by end 2021.
Only one (Rocket Lab) among the 10 companies that went public in 2021 finished the year with its shares performing above the price when it was publicly listed.
“Rocket Lab is one of the few that have made a good showing,” points out Johnson. “But they took a very unique market stand — they went out, researched their markets very well, and were very careful before they jumped into certain locations to stand… like the spaceport in New Zealand they set up contracts ahead of time. They were just very diligent in the way they approached the market research and then the business associated with that,” she explains.
Even well into 2022, the drop in share prices of publicly traded new space companies has been significant in many cases.
According to Promus Ventures’s New Space Companies Top Five Share Price Performers, Spire is trading at -54.14% YTD, Archer Aviation at -30.79% YTD, BlaskSky -44.44% YTD, IonQ -68.46%, and Planet at -4.66%. This, even after scoring a significant jump in performance in the past one month.
Granted the fall in share prices of recently listed SPAC companies is a market-wide trend. According to Renaissance Capital, of the SPAC IPOs in 2021, nearly 70% were trading below their offer price by September of that year. However, the beginning of 2022 saw the Promus Ventures New Space Index three-month performance down more than 40% as compared to about 12% dip in Nasdaq and 4.5% in S&P 500.
So what went wrong? Is it the generic global recessionary trend or something to do with the sector specifically?
“It’s probably a little of both. Investors are rattled by recession fears and the space SPACs haven’t exactly outperformed their peers,” says Brian Berger, Editor of SpaceNews.
“Looking in the rear view one can tell that most of the SPACs were done very early with regard to companies’ business maturity and actual revenues,” explains Révillon. He feels the revenues forecasts advertised in during the SPAC processes were very ambitious, which are now contradicted by lower quarterly results, hence leading to drop in stock prices.
Agrees Johnson: “My last statistics were that 60% of the companies were underperforming. That’s actually better than I thought it would be. I thought it was going to be like 75%, but some people squeaked out their performance because they got contracts approved that looped their revenue up. So, it moved their shares up.”
Why was it all so difficult?
There is largely no one particular reason because space is a complex domain. “It doesn’t matter whether you’re on the software-as-a-service or artificial intelligence and an API deliverer. You still have to go through a lot of hoops and a lot of compliance checks and regulations before you can ever get through it,” says Johnson. “So, a lot of people got excited about it. I saw several of our clients do that in 2020 and 2021. But by 2022, they said, ‘We are not doing this. Too hard’.”
The primary reason is because the space and satellite industry is a heavily regulated one, the companies had to answer so many questions on the regulation side. And in many cases, they carry classified components of their businesses. “When you carry a classified piece of your business that you work with the government, you have to then go back and get re-reviewed and reinstated. You have to have something in the government called a contract novation. Those have proven to be a lot more time- consuming to novate a contract that you already have,” says Johnson.
Further, space and satellite companies require or hold licenses from one, and in many cases, several regulatory bodies. These include the Federal Communications Commission (FCC), the Federal Aviation Administration (FAA), and the National Oceanic and Atmospheric Administration (NOAA). In some cases, regulatory approvals may be required prior to the SPAC transactions, and may take months to complete. Additionally, these processes are subject to scrutiny by the Department of Justice, Department of Defense, and other national security agencies.
But more than the lack of approval, Johnson thinks it’s the process that turned out to be tedious and complex. “I think these smaller companies thought that the bigger SPAC companies they were merging with would take on more of all this procedural work. But the truth is a law firm or an ITAR specialist (which is what a SPAC company essentially employs), can only do so much, and then you must get involved in it,” she explains.
“The SPAC immediately causes six months of no work,” says Johnson. No work means no revenues. “They’re all doing briefings and presentations to each other. And they saw their current book of business dwindle during these processes,” she adds.
Also, a lot of these companies had to delay their government contracts as they were going through the SPAC process. “You’re either going to lose that government contract or you’re going to withdraw from the SPAC. Most of these space/satellite companies are brought into the SPACs for their government contracts, and the review and the novation of those contracts are very difficult,” she elaborates.
Is a bounceback on the cards?
It is interesting to note that while the new space stocks continued to underperform well into July this year, they surprisingly rose in August. As of August 19, 2022, the PV New Space Index was up 12.5% in the past three months. In comparison, NASDAQ was up
11.6% and S&P 500 was up 8.4%.
One could attribute the sudden spike in the Promus Space Index in August to the recent government contracts worth billions of dollars.
Agrees Révillon: “The recent NRO contract awards are bringing fresh air to US companies.”
This being the first year of these companies going public, the government did not novate the earlier contracts because they were still reviewing the SPAC. “And so, those contracts didn’t hit the revenue recognition line in 2021, and some of them still haven’t hit it in 2022,” Johnson says. These companies didn’t lose the contract yet, but they have not met their revenue recognition goals because it’s taken the government contract side a lot longer to approve it.
Now, with the contracts coming back, a bounceback is expected.
What does the future hold?
Révillon is firmly of the opinion that new SPAC mergers in the industry would be more difficult to organize going forward.
Agrees Berger: “I wouldn’t expect to see as many space SPACs in the next year or so as we’ve seen the past year or two.”
“I think, right now, it is very much the norm,” echoes Johnson.
Instead, more consolidation is on the cards if some companies are unable to trade back to sustainable levels, but the Earth Observation (EO) sector will likely do better than the rest.
For the companies that have already gone public, the cash infusion has supported the ability of several companies to finance the deployment of their first-generation constellations. This should contribute to some consolidation (horizontal and/or
vertical) in the industry.
“Synergies are also higher within EO companies compared to other space industry’s vertical or segments of the value chain, hence opening the door to consolidation opportunities,” Révillon adds.
Meanwhile, the SPAC challenge is not likely to dampen the private equity enthusiasm for space, even though it fell sharply in the second quarter of 2022, according to a report by New York-based Space Capital.
However, Space Capital’s Managing Partner Chad Anderson doesn’t see that as a cause of worry. “While we believe the macro environment will continue to cause headwinds for some space companies, we do not believe that the space economy is at existential risk… Space technologies are next generation digital infrastructure, the ‘invisible backbone’ that powers our global economy,” he wrote in the report.
Johnson says she sees a lot of mergers and acquisitions already on the airborne and the intelligence surveillance and reconnaissance side. “Then there is a lot of equity partner movement on the space technology side too. And I see a lot of communication satellites’ mergers going on right now.”
One example is Eutelsat’s recent acquisition of OneWeb. Similarly, satellite data analytics company Descartes Labs was just acquired by Antarctica Capital, a private equity firm.
“And that’s a big difference being acquired by an equity partner who buys distressed assets versus unsuccessfully trying to go for a SPAC three years ago,” she points out.
There is a thought that the space industry — more so the startups — should first put good business processes and people in place, and not run their businesses primarily with an exit strategy or the big money in mind.
Révillon points out that the high redemption rate of several space SPACs makes it obvious that founders or early investors were not looking to merely raise additional funds to support their companies’ growth but were mainly looking to cash out.
“Everybody gets into space industry because it’s cool. And it is. But it is also hard work. And it’s tough putting in the right business processes and narrowing down your target market and going after those contracts. When you grow your business the right way, the big companies will come to you and want to buy you. That due diligence process and everything else you have to go through will be pretty easy,” wraps up Johnson.
Space and satellite companies require or hold licenses from one, and in many cases, several regulatory bodies. These include FCC, FAA, NOAA, and often the Department of Justice. Regulatory approvals may be required prior to the SPAC transactions, and may take months to complete.
