by Douglas Messier
During the SmallSat Symposium last week, Richard Branson was asked why Virgin Galactic had gone public using a special purpose acquisition company (SPAC).
“I’m impatient. The SPAC gets through all of the rigmarole of public companies. Yes, I thought, that’s great, let’s do it,” he replied.
Branson was half right. A SPAC makes it a lot easier for a company to go public. But, impatience was probably not the main reason Virgin Galactic went SPAC.
Here a SPAC, There a SPAC, Everywhere a SPAC SPAC
A SPAC is a publicly traded company whose sole purpose is to acquire or merge with another company. A SPAC doesn’t own factories, produce widgets or sell automobile, or maintain offices on five continents. It’s a “blank check company,” an investment vehicle that happens to be listed on the stock exchange.
In Virgin Galactic’s case, Branson’s space company attracted the attention of Chamath Palihapitiya. In October 2019, Virgin Galactic merged with the venture capitalist’s SPAC, Social Capital Hedosophia, and began trading under the Virgin name (SPCE) on the New York Stock Exchange.
It was relatively quick process that primarily involved convincing Social Capital Hedosophia’s shareholders to invest $800 million in Branson’s space tourism company. Going SPAC skips a lot of the more expensive and time consuming steps required to go public in traditional ways.
Since Virgin Galactic went public, going SPAC has become a bit of a trend in the space industry. Launch provider Astra Space and in-space transportation company Momentus have announced plans to go public using SPACs.
The SPAC approach contrasts with the strategy taken by Redwire and Voyager Space Holdings, which focus on acquiring small companies. Redwire has acquired Made in Space, Deep Space Systems and four other companies with complementary capabilities.
Big Fish, Little Pond
Venture capitalist Steve Jurvetson, whose investments have included SpaceX and Planet Labs, is not a big fan of SPACs. He is concerned that it will lead to companies being listed on the stock exchange that should not be publicly traded.
Jurvetson said that companies that go SPAC tend to be early-stage entities “that are unable to raise a penny from any other source” at that point in their development. (He did not comment on Virgin Galactic.)
At the time Virgin Galactic went SPAC in 2019, it was far from an early-stage company. Branson had launched the SpaceShipTwo project 15 years earlier in 2004. And it had already spent more than $1 billion developing the suborbital rocket plane and its WhiteKnightTwo carrier aircraft.
Virgin Galactic went SPAC because it needed more funding. And it had just seen a major funding round fall apart. And given the company’s long record of delays and cost overruns (commercial service was supposed to have begun in 2007), it probably could not have gone public otherwise.
In October 2017, the Virgin Group announced that it had signed a memorandum of understanding under which the Saudi Arabian government would have invested $1 billion into Virgin Galactic, The Spaceship Company and Virgin Orbit. The Saudis had the option to invest an additional $480 million in the future.
In return, the Virgin Group would have invested in various ventures in Saudi Arabia, including a space-centric entertainment complex and the nation’s planned city of the future, Neom. The deal included the possibility of SpaceShipTwo flying from Saudi Arabia, export license permitting.
Branson embraced Saudi Arabia’s de facto ruler, Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, as a reformist who let women drive and relaxed other restrictions in the tightly controlled kingdom.
It was win-win. Branson was getting much needed cash infusion for his space companies and investment opportunities in Saudi Arabia. The crown prince was securing future investment and the endorsement of a prominent Western billionaire.
The crown prince visited Mojave during his tour of the United States to see SpaceShipTwo and a mockup of a Virgin Hyperloop One vehicle.
Then came the death of writer Jamal Khashoggi in October 2018. A critic of the Saudi regime, Khashoggi was tortured, murdered and dismembered with a bone saw inside the Saudi consulate in Istanbul, Turkey.
Branson withdrew the Virgin Group from the partnership amid a massive international uproar and intelligence reports that bin Salman had personally ordered the murder. The crown prince has denied the accusation, but Western intelligence agencies believe the murder of a prominent critic in a Saudi consulate could not have happened without his prior approval.
The end of the partnership presented Virgin with a challenge: where was it going to find investment to continue its programs? The search for funding led the company to go SPAC with Palihapitiya and Social Capital Hedosophia.
Thus far, it has paid off. A stock that opened at $12 had rocketed to $49.36 in after-hours trading on Wednesday. Ironically, the sharp rise in the stock price has occurred while Virgin Galactic’s plan to fly passengers continues to slip into the future.
When it was selling the merger to Social Capital Hedosophia shareholders, Virgin Galactic projected it would complete SpaceShipTwo’s flight test program and begin commercial tourism flights by June 2020.
Since going public, Virgin Galactic has conducted two SpaceShipTwo glide flights and one aborted suborbital test. It still needs to conduct three suborbital flight tests before it can begin commercial service.
Technical issues delayed the flight test program. A serious failure during SpaceShipTwo’s second suborbital flight test in February 2019 nearly destroyed the ship and killed the three-member crew. Engineers had to redesign a crucial part of the ship.
Virgin Galactic hasn’t released a schedule for upcoming flights. But, the maiden flight appears unlikely to occur much before June. That would mean a schedule slip of one year.
None of these issues have dissuaded investors — yet. Virgin Galactic’s stock price is based on expectations of what the company will achieve in the future. Virgin Galactic has kept the dream alive for 16 years even as it has failed to deliver on its promises. But, if delays continue, or there is a serious accident, the stock could quickly come crashing back to Earth.