Valuing companies isn’t rocket science — except when it is. Billionaire Richard Branson’s Virgin Galactic has attracted a major investor that will see the 15-year-old space-tourism venture beamed onto the New York Stock Exchange.
Time to get the calculator out.
The space race is an exciting financial theme. Sure, investors can already get some exposure by buying shares of Boeing Co and Lockheed Martin Corp in the US or Airbus SE and Thales SA in Europe. But they’re not the same thing as the visionary ventures spearheaded by Branson and Tesla Inc CEO Elon Musk or Amazon.com Inc founder Jeff Bezos.
Virgin Galactic wants to take tourists on a brief space flight using a craft launched from a carrier plane. Its assets comprise the shuttles, the associated manufacturing capability, the know-how of its 800 or so staff, and an order book of 600 customers. Plus, of course, the Virgin brand.
It’s not hard to see why a major external partnership is happening now. Branson’s Virgin Group is, in essence, a venture capital firm. It starts new things and then brings in partners and exits as projects mature. Galactic has had a long gestation.
The venture has needed about $1 billion (Dh3.7 billion) of funding so far, mostly from Branson. Abu Dhabi’s Mubadala took a minority stake in 2010, but Virgin still owns roughly 75 per cent.
Branson had been talking with Saudi Arabia’s Public Investment Fund about a possible $1 billion investment in both Galactic and a spin-off satellite venture; he ceased discussions last year following the murder of journalist Jamal Khashoggi.
Galactic is beginning to prove its viability. Virgin sent a crewed craft beyond the 80km altitude generally held to mark the boundary of space in December, and staged a zero-gravity flight in February.
But more funds are needed. These will come through a cash-and-stock deal with Social Capital Hedosophia Holdings Corp, a US-listed cash shell and brainchild of one-time Facebook Inc executive Chamath Palihapitiya.
The combination makes sense. Social Capital gets a unique investment. Branson and Mubadala get a partial exit, taking out $300 million in cash while keeping a 51 per cent stake in the combination. Galactic will also get access to the remaining cash on Social Capital’s balance sheet — just less than $500 million after Palihapitiya injects another $100 million.
That said, it looks like an inefficient way for Virgin to raise money. Galactic is obtaining funds indirectly through a listed vehicle that trades at a premium to the value of its own cash pile. The flip-side is that Branson gets an important external validation of his business.
The implied enterprise value of the combination is $1.5 billion. That is 2.5 times Virgin Galactic’s estimate for its revenue in 2023 and 5.5 times expected Ebitda.
A lot still needs to happen for revenue and profit to materialise. We will have to wait and see how reusable spacecraft depreciate to know what the real bottom-line is.
Pick your comparable peers as you wish. Tesla trades on seven times estimated 2023 Ebitda and Boeing eight times. Virgin Galactic certainly deserves a discount.
It will take time for the company to establish a safety record — Virgin suspended taking deposits from passengers following a fatal test flight in 2014 — and the total addressable market may not, after all, be that big. UBS Group AG analysts estimate the annual space tourism market will be only worth $3 billion by 2030, the bigger space prize being long-haul flights.
There won’t be many people willing to go through the extreme G-forces involved.
But Virgin’s plan is moving forward. Now it would appear to have the money to finish the job.