Virgin Orbit is a magical unicorn -- and it may have just saved another space company from going bankrupt.
Last month, Virgin Orbit -- the Sir Richard Branson-owned space company that is not Virgin Galactic (NYSE:SPCE), and has not yet had an IPO -- announced plans to seek a $1 billion market valuation by selling $150 million to $200 million worth of its shares on the private market. As far as we know, Branson hasn't quite sealed that deal just yet. According to The Wall Street Journal, he wants to sell the shares before the end of the year. But he's already putting some of that money to work.
Down in Australia, reports SpaceNews.com, Virgin Orbit is finalizing plans to take a 14.7% stake in publicly traded penny stock Sky and Space Global (SAS).
If you've never heard of SAS, that's not surprising. As I said, it's only a penny stock, and a microcap company, valued at just $50 million. It's also not a company in the best of health.
S&P Global Market Intelligence describes SAS as having nearly as much debt as cash on its balance sheet, and losing more than $21 million a year in its most recent annual report, on nil revenue. Despite these abysmal numbers, SAS has big ambitions to deploy a constellation of 200 cubesats in orbit to provide communications services to the international transport industry.
To date, however, SAS has only launched a trio of demo satellites -- and its plans to send up a batch of eight operational sats this year were derailed by the arrival of COVID-19. Then in April the company filed for "voluntary administration" (i.e. bankruptcy).
Why buy a bankrupt Australian satellite company?
But here's the thing: Prior to filing for bankruptcy protection, SAS had a A$55 million ($38.5 million) contract with Virgin Orbit, under which the latter would be launching the former's satellites into orbit. If SAS were allowed to fade quietly into the night, all of that revenue that Virgin Orbit was counting on would disappear.
It still might if SAS can't secure all the financing it needs. In the meantime, though, the companies anticipate canceling the launch contract and substituting a "launch services and consulting agreement" with Virgin Orbit. Under this deal, SAS will pay its new investor $1 million per year, for three years.
Now, $1 million times three equals $3 million. This is an interesting number because, as SpaceNews reports, Virgin Orbit will be buying 11 million SAS shares at roughly $0.14 each, for a total of about $1.5 million. And if that's all Virgin Orbit is paying for its stake in SAS, then Virgin Orbit stands to get back double the value of its investment over the course of the three year consulting contract -- and retain a 15% interest in SAS to boot!
Virgin even gets the option of buying an additional 7 million shares -- 9.4% more of the company -- for $0.28 per share at a later date, once SAS is stabilized and its stock is worth a bit more. Should this come to pass, Virgin Orbit could soon own more than 24% of the company.
What it means to Virgin Orbit -- and potential investors in a Virgin Orbit IPO
On balance, this still doesn't feel like a great deal for Virgin Orbit. For a start-up rocket company, losing $38.5 million in contracts right off the bat has to come as a kick in the gut. Still, if all goes as (currently) planned, Virgin Orbit could end up owning a sizable interest in a start-up space telecommunications company, and make a tidy profit on an initial investment.
And potentially, if SAS can right its ship and begin building out its satellite constellation farther down the road, Virgin Orbit could also find itself in possession of a captive customer for future satellite launch missions. As consolation prizes go, this is far from the worst possible outcome.