Social Capital Hedosophia Holdings Corp. to Merge with Virgin Galactic Pending Shareholder Vote
By John Jannarone and Oliver Estreich
One critical factor in the 1960s Space Race was a need for cash, and the same goes for commercial space travel. Ordinary investors now have a chance to supply such capital to fuel Richard Branson’s Virgin Galactic. The big question is whether the thrill is worth the risk.
Social Capital Hedosophia Holdings Corp. (ticker: IPOA), a special-purpose acquisition company or SPAC, raised cash about two years ago to find a target company. In July, IPOA announced it planned to merge with Virgin Galactic in a deal that will give IPOA shareholders a 49{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} stake in the surviving company, which will command an enterprise value, adjusted for cash, of about $1.5 billion. Based on recent trading activity in IPOA (well above cash value), it appears likely the deal will be approved at a vote Wednesday.
As the first company to successfully offer commercial space travel, Virgin Galactic has some seriously exciting potential. Next June, it expects to put its first commercial astronauts in space on rides that include a few minutes of weightlessness. Some $120 million of such trips have been booked by high-net-worth individuals, who pay about $250,000 a ride.
Such a price, while literally astronomical to most people, is probably sustainable so long as Virgin Galactic is the only game in town. Even if another player offers the experience a couple of years on, it’s hard to imagine multimillionaires taking chances with a discounted trip to space. That suggests the current contribution margin of 66{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}, which captures the costs of each flight, can hold.
What’s more, the company has reasonable cash needs. Virgin Galactic is debt free and has already spent over $1 billion to help build the company this far. Unlike, say, Tesla, Inc., which has continued to need cash to survive, Virgin Galactic is on the verge of generating meaningful revenue and has a clearly-defined plan for capital expenditures – mainly focused on building a couple more spaceships to expand the fleet to three.
If all that is true, Virgin Galactic has a fairly-clear path to profitability and cash flow. The company expects Ebitda to swing positive in 2021 and reach $274 million two years later. That reflects a multiple of 5.5 times 2023 Ebitda, which looks very reasonable if Virgin Galactic can safely complete the 571 flights it expects over the first four years.
What’s more, Virgin Galactic has two future growth phases that hold promise. One is to simply reduce the cost and attract people who are rich, but not absurdly rich, to enjoy space tourism.
The other, more ambitious idea, is to pivot into hypersonic international fights, offering trips between the U.S. and Japan or Australia in just a couple of hours. That could lead to partnerships with major manufacturers such as The Boeing Company or Airbus SE.
But for now, the safe and timely completion of flights under the current plan will be the key to Virgin Galactic’s success. The company goes to great lengths to emphasizes measures taken to protect its staff and astronaut customers. The words “safe,” “safely,” and “safety” appear 96 times in the most recent version of the SEC offering document, according to Sentieo.
Virgin Galactic looks to be doing all it can to fly safely and hasn’t had any notable scares in the lead to its first commercial trip. The last few months have seen several successful test flights that reached space and returned home.
The company’s flight team includes seven professionals, five of whom have been to space and four of whom have NASA on their resumes. All seven have over 30 years of experience. The executive suite is similarly impressive, with CEO George Whitesides and President Mike Moses both being NASA alumni.
The design of the flight plan itself should also help ensure safety. The two-stage trip to space starts with a horizontal takeoff on a plane that carries the ship to a higher altitude for launch rather than a powerful vertical takeoff. And the time in space is only a few minutes, which should minimize the chance of a serious problem.
Even so, it will only take one accident to spook passengers. If that happens, Virgin’s order book could essentially shrink to zero and recovery would be nearly impossible.
One smart way to play Virgin Galactic, which appears to be popular based on recent trading, is to purchase warrants (ticker:IPOA/W). Those are currently out of the money with a strike price of $11.50. The built-in leverage could mean enormous upside if the stock performs well and the downside is very clear.
Regardless of the security, investing in Virgin Galactic – like reserving a seat – is not for the faint of heart.
Contact:
editor@IPO-Edge.com
Twitter: @IPOEdge
Instagram: @IPOEdge
