Tangled Legs
A theory of financial markets is that they do whatever thing causes the most pain, in the most embarrassing way to the greatest number of investors. This is the "Pain Trade" theory. It's tongue-in-cheek, but also seems to actually be how markets work some of the time. (See Crypto from 2021 'till now.)
Occasionally, the universe rearrange to inflict pain on every side of a trade.
A long time ago (two weeks), in a different café, I wrote about the virtues of Viasat's merger with Inmarsat. A big part of the premise built on Viasat using its brand new snazzy satellite to better serve Inmarsat's bandwidth hungry customers.
The satellite launched on May 1. It unfurled in orbit and made like a baby giraffe getting its legs tangled trying walking for the first time.
On July 12 Viasat announced that its new toy was broken.
What does it mean?
The company's press release is cryptic, but doesn't rule out a total loss of the satellite. A rule of thumb in assessing corporate disasters is that if they don't emphatically rule out the worst-case-scenario, its probably that. Between us, we'll will run with that premise here.
In space, there’s not a lot of opportunity to fix anything. If the machine doesn’t work (which seems to be the case), there’s not much the company can do.
So that's seven years of development and construction and $700 million down the drain.
Shares fell 30% on the news. For shareholders, that’s $1 billion of the company’s value up in smoke. Woof.
A Penny for Your Thoughts
There are loads of lessons to learn from the debacle, here, though, I'll focus on the incredible feat of corporate genius (that's not sarcasm, its genuine admiration) that is the merger with Inmarsat. This was a galaxy-brain move. And it left everyone feeling absolute crap. Here's the case:
The Sellers
The Inmarsat sellers (now Viasat shareholders), Apollo and Ontario Teacher's Pension Plan and others, do not feel great. They got a bit of cash, so that's nice. Mostly, though they got shares of Viasat. To the tune of 90% of their deal. Those shares are down. The value of their investment today is 45% lower than when they struck the deal it in 2021. So, for them, that’s an L.
The Shorts
As I've discussed elsewhere, space companies have a knack for spectacular and violent incineration of capital. So they're popular with the crowd that likes to bet shares will decline.
A savvy short seller made the case against Viasat in 2017. A core part of their argument was that there would be no market for their new satellite. It was worse than that, the satellite didn't even work! It won't serve a market if there is one! And since then, shares are down about 10%. Since you have to pay interest to sell shares short, those shorts, over the last six years are also, likely, money losers.
The Shareholders
These are the folks that hired the Viasat board and management to take care of their capital. The board and management's whole job is to work in the best interest of shareholders.
Heading into the 2021 holiday season, Viasat groupies nee shareholders ("Hi, my name is Matt, and I own VSAT shares"), felt pretty good, holding shares at $67 each. As a group, they held just shy of $5 billion in value.
Shares today are around $30. That does not feel so great.
Back then, the company said "we're gonna use some of those shares and buy Inmarsat," a company with a lot of customers and not so much bandwidth. Holders were not thrilled. Share price dropped 17%.
Fast forward, Inmarsat has largely performed. Revenue is up by 13%, profit by 23% and free cash flow by 39%. Let's assume Inmarsat is just as valuable as when the deal was struck, $7.7 billion. Viasat and Inmarsat today, combine, are worth $8.1 billon. So that means, after the money Viasat borrowed to build the satellite, that leaves value for Viasat as a standalone company of… we’ll they’d probably be filing for bankruptcy about now. Space junk for the shareholders.
BUT! They landed the acquisition. It closed on [xx]. So, instead of owning an gleaming orbiting piece of gently-used, avant-garde performance art, shares of the combine company are worth $30. That's… something. Something is, objectively, better than nothing.
In an alternative universe, where the merger didn't happen, the outcome for shareholders would have been much worse. So the merger…worked. It just worked in a way that probably makes everyone unhappy and feeling foolish.