July 17, 2019

Reverse Mergers: “SPACs – The Final Frontier”

It’s been 50 years since Apollo 11, and now it looks like the prospect of space tourism is finally on the horizon.  Personally, I don’t think I’m built for it. I’ve found that the harnesses on some roller coasters at Cedar Point aren’t designed for – ahem – athletic builds like mine, and I can’t imagine that I’d have better luck with whatever harness Richard Branson intends to use to strap people into their seats on his spaceship.

While I may not be in the market for a ride on a rocket, other people are excited enough about Branson’s prospects to permit his company, Virgin Galactic, to plan to go public in a deal that values the business at $1.5 billion. This Pitchbook article discusses the transaction, which will be accomplished in a very unorthodox way for such a high-profile deal – a reverse merger with a SPAC. Here’s an excerpt:

Virgin Galactic and tycoon Richard Branson are planning to take their promise of space tourism to the public markets—with a little help from Social Capital and founder Chamath Palihapitiya. A special-purpose acquisition company called Social Capital Hedosophia has agreed to purchase a stake of up to 49% in Virgin Galactic at an enterprise value of $1.5 billion, with Palihapitiya contributing $100 million and taking over as chairman of the newly combined entity. Social Capital Hedosophia will put about $800 million into the deal, according to The Wall Street Journal, a bet on Virgin Galactic’s ability to safely send earthlings into the stratosphere—and, of course, bring them back.

Reverse mergers  with public shells have long been the go-to route to public status for microcaps peddling cancer cures & cold fusion. More recently, they’ve been used as a quick way to investors’ wallets by participants in the so-called  “China Hustle.” While legitimate companies have successfully gone public through reverse mergers, the deal structure had been abused enough that the SEC saw fit to issue an investor bulletin on it back in 2011.

But in recent years, VCs & private equity players have entered the game and have sponsored their own SPACs. Reverse merger deals like the one Virgin Galactic & Social Capital are working on suggest that the credibility that these financial sponsors add may make this route to the public markets more attractive to real companies than it has been in the past.

John Jenkins