Rocket Lab returns to the M&A playground
Companies are often coy about when they want to do acquisitions, but not Rocket Lab. The space hardware and launch provider raised $355 million through issuance of convertible senior notes Feb. 7, with the motive of “potential M&A and other strategic growth and scaling investments.”
Predictably, the stock slid 17% on the news to $4.02, as the market accepted the risk of dilution if the notes, due in 2029, convert to shares (carrying a conversion price of $5.13/share). Rocket Lab easily secured the funding, in fact upsizing the offering, but with $288 million in cash and short-term investments at September 30, why do it in the first place? Part of the rationale may be explained by the cliché “raise money when you can, not when you need to,” buoyed by the positive news of their recent Space Development Agency (SDA) T2TL – Beta contract award. But we believe enhanced vertical integration on satellite manufacturing is Rocket Lab’s core motivation for the capital raise.
Satellite manufacturing is typically a low-margin business, with profitability on fixed-price contracts influenced by the amount of non-recurring engineering (NRE) and unexpected challenges that a program incurs. Rocket Lab CEO Peter Beck, on the company’s last earnings call, described both of Rocket Lab’s marquee constellation contracts as difficult, suggesting higher than anticipated NRE. Globalstar’s 17 to 26 satellites are, in Beck’s words, a “very deeply complicated mission in a horrible radiation environment, and the SDA’s 18 satellites are “not an easy build” either.
Rocket Lab has organically built upon the satellite and systems integration capabilities that arose from the acquisitions of Sinclair Interplanetary (March 2020), flight software company Advanced Solutions, Inc. (October 2021), and solar array provider SolAero (January 2022). This diversified Rocket Lab’s revenue away from launch, adding stability to revenue but also introducing new gaps (and new costs). To digest hard satellite programs, and take on more of them, Rocket Lab may need to invest more resources, requiring new (inorganically acquired) capabilities, leading to the raise. We think it is likely that we will see Rocket Lab subsume additional spacecraft systems and engineering capabilities over the next year.
Rocket Lab could instead deploy the proceeds for launch-related M&A, but we find the odds of this to be low. Last May Rocket Lab obtained Virgin Orbit’s Long Beach, California, launcher factory at a fire sale price of $16.1M. Beck described the factory as “gold plated,” punching above its weight for Rocket Lab’s Archimedes engine production needs. Though capital intensive, Neutron, Rocket Lab’s next-gen, medium-lift rocket, appears supported by the company’s existing facilities and resources.
Spending on hypersonics expertise is a third possibility, with slightly greater odds than launch. Rocket Lab converted Electron into a low-cost hypersonic test platform and quickly gained customer interest, with the U.S. Defense Department booking seven missions after a demonstration last year. DoD has given heightened interest to hypersonic capabilities (mostly offensive, but also defensive) over the past few years. It's possible there are classified programs Rocket Lab is competing for that could require skillsets currently outside the company.
SOURCE: https://investors.rocketlabusa.com/news/news-details/2024/Rocket-Lab-Announces-Closing-of-Upsized-Offering-of-355-Million-Convertible-Senior-Notes/default.aspx