Satellite companies are generating hundreds of millions of dollars in financing by striking deals with special purpose acquisition companies (SPAC), helping fuel the growing alternative transaction trend.

The structure of SPAC financing particularly appeals to the needs of US executives in the sector as they seeking stability, strength and flexibility against the backdrop of political breakdown, economic uncertainty and the COVID-19 pandemic.

However, the rise in so-called blank cheque companies is also spawning real scrutiny as well, as studies find that despite their plusses they are not a cure-all to financing ills.

US-based space connectivity provider AST & Science (NASDAQ:NPA) is the latest connectivity company to join the SPAC bandwagon, generating some US$540m in capital and an equity value of US$1.8bn. This included US$230m in a private placement. The company assented to a deal with SPAC New Providence Acquisition.

AST & Science’s existing shareholders, a group that includes UK mobile giant Vodafone (NASDAQ:VOD) and US-based American Tower (NYSE:AMT), will increase their equity holdings as part of the transaction.

These large amounts are mirrored in other recent deals, including a US-based space propulsion-related company called Momentus (NASDAQ:MNTS). The company expects to raise around US$310m with a valuation of US$1.2bn in the aftermath of a transaction with SPAC Stable Road Capital.

Diversified space company Virgin Galactic (NYSE:SPCE) went public in 2019 through a SPAC deal. Virgin Galactic founder Richard Branson's new SPAC, VG Acquisition Corp, priced an upsized US$480m IPO in October 2020 as it searches for opportunities.

SPAC charm and deficiency

Deals between SPACs and target companies entail pluses and minuses as the trend plays out.

SPACs are a draw in part because of their appeal to investors. Some transactions lead to better returns for investors, especially those that seasoned asset managers and executives govern, according to an analysis by academics Michael Ohlrogge of New York University and Michael Klausner of Stanford University.

Returns for IPO investors who receive shares in a SPAC in exchange for their investment average 11.6% or more, according to their research.

The attractiveness of these investment vehicles is generating considerable interest, as SPAC public offerings outpaced traditional IPOs in July and August, according to a report from the Congressional Research Service.

Through 22 December, business intelligence service PitchBook found SPACs raised US$73bn in financing for 244 transactions.

And target companies are in the driver seat amid intense competition from SPACs for deals, which also face less regulation than traditional IPOs.

The plusses are powerful amid the COVID-19 pandemic, which has caused uncertainty that includes business closures and a volatile stock market. The flexibility of the SPAC structure appears to address the unique needs of an uncertain environment, where the timeline to consummate a merger might be key.

If SPAC companies are unsuccessful, dealmakers must file for an extension or return the funds to investors, walking away empty-handed.

Indeed, there are limits to reach, including return on investment. The credibility of SPACs becomes increasingly important as analysis about their performance grows.

SPACs on average lost more than one-third of their value one year after a merger with a target, the academics found. SPAC companies’ performance closely reflects the amount of dilution of their deals.

As SPAC equity shrinks, so do the profits for the sponsors of the deals. The glut of competition among sponsors is having other effects, Pitchbook found. The situation is forcing some dealmakers to trim their profit projections.

The flood of SPACs is also directing financing away from traditional investment vehicles. The number of deals has drained funds from hedge funds, private equity and hedge funds, making 2021 a climactic year for blank-cheque companies.

Seamless connectivity

As executives work through these trends, the satellite industry is developing increasingly seamless connectivity as it looks to serve selected markets.

AST & Science is developing the SpaceMobile constellation that the company says will enable terrestrial phones to access 5G broadband speeds. It claims that the service will not require special devices or other technology. Companies such as Apple (NASDAQ:APPL) and Lynk are also developing direct satellite connectivity to general mobile phones.

This trend is a key difference from other providers developing high-speed internet from space, including Globalstar (NYSE:GSAT), Iridium Communications (NASDAQ:IRDM) and SpaceX’s as part of its Starlink service. These types of networks might require additional technology to access networks, such as modified handsets, specialised user terminals or ground equipment.

The first tranche of AST SpaceMobile’s launch plans will entail 20 satellites to offer mobile connectivity that can be accessed by approximately 1.6 billion people. The initial offering will serve rural and remote areas where UK-based Vodafone will integrate the technology into the services provided by its Vodacom, Safaricom and Vodafone brands. These include several African nations, including Congo, Ghana and Kenya. SpaceMobile will apply for regulatory approval to launch services in India.