2021 was the year of the space initial public offering (IPO). All sorts of brand new space stocks followed the trail first blazed by Virgin Galactic -- conducting special purpose acquisition company (SPAC)-sponsored IPOs, giving investors their proverbial chance to "dabble a little bit in a spaceship company, own a little bit of a spaceship company."
Many investors took that chance -- and paid the price in 2022 and 2023, as the stock market taught the dangers of investing in SPACs. Stocks that had come public at $10 a share, rocketing many times in value in the days after their IPOs, plummeted to mere fractions of their IPO prices.
Here's the thing: As recently as last year, a lot of these space stocks were still too expensive. But what about now?
Now that irrational exuberance has given way to investor regret and prices have finally returned to Earth, are there any values to be found in the space sector?
Image source: Getty Images.
How much is a space stock worth?
As space stock prices began to rightsize last year, I asked myself this very question. I ultimately concluded that, after surveying the prices that established space companies were paying to acquire upstarts over the past few years, it seemed the "right" price to acquire an unprofitable space start-up should be no more than 4x annual sales.
Granted, the cheaper a space stock gets below 4x sales, the more likely I'd be willing to buy it. But the most I'd pay is 4x sales -- tops. And it turns out Lockheed Martin(NYSE: LMT) agrees with me.
Lockheed Martin will pay 4x sales for a space company
On Friday last week in a Scheduled 13G filing with the SEC, Lockheed Martin revealed that it has offered to acquire all outstanding shares of satellite manufacturer Terran Orbital(NYSE: LLAP). If you recall, Terran Orbital already has a significant relationship with the aerospace and defense giant -- it's Terran Orbital's biggest customer. What's more, in 2022, Lockheed arguably saved Terran from going bankrupt, investing $100 million to bring the satellite company into its own orbit.
Now, Lockheed is ready to take the next logical step -- and swallow Terran Orbital whole. To accomplish this, Lockheed is offering to pay $1 per share for each of the 181 million shares of Terran Orbital stock that it doesn't already own. (Between participating in Terran's SPAC IPO and making its additional investment in 2022, Lockheed Martin already owns 13.5 million of Terran Orbital's 194.5 million shares outstanding, according to data from S&P Global Market Intelligence.)
Additionally, Lockheed will spend "over $70 million" to acquire all of Terran Orbital's outstanding warrants. And Lockheed will take on Terran Orbital's outstanding debt of $313 million.
Add up those three amounts -- $181 million plus $70 million plus $313 million -- and then subtract Terran Orbital's current cash reserves of $39 million, and you wind up with a total deal value of $525 million. Divide that sum by the $134.2 million in sales that Terran Orbital did over the past year, and Lockheed will be paying almost exactly 4x the final enterprise valuation of Terran Orbital -- or 3.9x sales to be precise.
Is this a good deal for Terran Orbital? For Lockheed Martin?
Notably, Terran Orbital doesn't appear 100% convinced that it wants to sell out to Lockheed Martin -- but it may not have much choice.
On Monday, Terran quickly swallowed a poison pill to give it some time to consider the offer. But Terran carries significant debt, has little cash with which to pay that debt down, and is burning cash at the rate of $150 million a year -- so the company could be out of cash as soon as one quarter from now. It also has a weak stock price that would make raising new cash from a stock offering unattractive.
On top of all this, Terran's biggest claim to financial independence from Lockheed Martin -- last year's $2.4 billion contract to build 300 satellites for "Rivada Space Networks" -- looks a whole lot like vaporware to me. I'm not at all convinced that anything's ever going to come of it.
For Lockheed, meanwhile, this deal looks like a no-brainer. For one thing, it needs Terran Orbital alive and financially healthy to build the satellites that Lockheed has ordered from it. For another, with $6.9 billion in annual profits and $1.4 billion in cash already, Lockheed can fund this acquisition with the loose change found between its couch cushions. It's offering Terran Orbital a fair price and a way to put questions about its financial solvency to bed once and for all.
This is a good deal for both parties. Terran Orbital should spit out its poison pill and take it.
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