TAMPA, Fla. — Large defense companies are itching to buy space assets as part of the market is on the verge of a shake-out, executives discussing deal-making in the industry said Feb. 8.
Phillip Ingle, a managing director in Morgan Stanley’s investment banking division, highlighted large “appetite for the big primes to get their hands on attractive space assets” during the SmallSat Symposium in Mountain View, California.
U.S. Department of Defense budgets orientated “towards space are growing much more healthfully than other parts of the defense budget,” Ingle said, encouraging primes “to grow their space businesses because that’s where a lot of the growth is.”
Defense giants Raytheon and L3 Harris have set up venture capital arms in recent years to capture emerging technology, he noted, following the steps of Boeing and Lockheed Martin.
L3 Harris also announced plans in December to buy space hardware maker Aerojet Rocketdyne in one of the aerospace and defense (A&D) sector’s largest deals of the year.
Three of the acquisitions announced last year in the A&D market worth more than a billion dollars are space-related.
The other two are Maxar Technologies and CAES Space Systems — now called Frontgrade Technologies — which were sold to private equity in deals highlighting strong interest from financial institutions in the sector.
Defense stocks outperformed the broader stock market in 2022, buoyed by Russia’s war in Ukraine.
This is in stark contrast to the poor share performance of young space companies from a range of markets that recently went public by merging with a special purpose acquisition company (SPAC), which analysts believe will help push them to the deal table.
Space firms trading shares following SPAC deals include launchers Astra, Virgin Orbit, and Rocket Lab; satellite operators BlackSky, Spire, AST SpaceMobile, Satellogic, and Planet; spacecraft maker Terran Orbital; space tourism firm Virgin Galactic; space infrastructure consolidator Redwire; and orbital transfer vehicle specialist Momentus.
Acquisition targets
Space businesses with strong government links and a robust earnings outlook are prime acquisition targets for defense primes, Ingle said.
But companies with strong cashflows are hard to come by in the space industry, quipped Armand Musey, president of the Summit Ridge Group consultancy.
“I think if we added up the cash flows of all the companies that are here at this conference we probably have a negative number,” Musey said.
The small satellite industry is “dominated by a lot of startups who are generally in need of funding,” he added.
However, cash flow, revenue, and profits are only part of the equation that investors look for, Deutsche Bank investment banker Pawel Skonieczka said.
“If a company is developing technology that is deemed critical, whether to DoD or to the industry in general … [this also impacts] appetite of others to either invest or engage in” mergers and acquisitions.
SPAC shake-out
The dozen or so space companies that have listed shares via SPACs pose a mixed bag for investors.
Some have “very interesting business models” that have been funded, Ingle said, while others will need to access capital to proceed with their plans.
Whether these space firms are acquired or fall to the wayside, he said: “I don’t think there’ll be a dozen companies in … 12 to 24 months.”
Sunil Nagaraj, managing partner at early-stage investor Ubiquity Ventures, said “it seems like about half will be still public in about a year, I think.”
Bright spots
The panelists said space companies building businesses around software would be more attractive to buyers than those focusing on capital-intensive hardware.
These companies can “hit cash flow breakeven usually fairly quickly,” Musey said.
“I think related to that would be ground segment infrastructure,” he added.
“That’s going to become increasingly important over time, particularly for the big constellations.”
Although capital intensive, he said the significant demand in the space industry for more launch capacity could also be a deal-driver.
“So I think there will be people who … look at some of the startup launch providers and say, ‘who can we really put money into and get going?’ And I think some of the big primes might be interested in going down that road.”