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‘Virgin Galactic doesn’t have a future’: why investors should shun shares in Richard Branson’s space tourism venture
“Millions of people are deeply inspired by human spaceflight,” wrote Sir Richard Branson earlier this month. “By taking Virgin Galactic public... we can open space to thousands of new astronauts.”
To be an astronaut today is to be part of a prestigious group indeed. Just 536 human beings have been in space by the internationally recognised definition, that of travelling beyond the Kármán line 100km above the Earth. Astronauts are normally chosen with great care from already elite communities such as scientists and test pilots. They train for years. They have the Right Stuff. Their achievements have, indeed, inspired millions.
Almost all astronauts so far have not merely ascended above 100km: they have also been accelerated to the enormous velocities required to achieve orbit, so as to stay in space for a useful period of time. Pretty much all worthwhile space activity is in orbit.
But it’s also possible, much less expensively – but not especially usefully – to lob people briefly upwards out of the atmosphere at much lower speeds, such that they will fall back down again straight away. This happened a few times in the 1960s, in the early days of the US space programme.
Back then, the US Air Force – miffed at the transfer of manned space activity to the newly-formed NASA – decided that it would give consolation-prize “astronaut” badges to the five military pilots who got above 80km in the experimental X-15 rocket plane. If the air force had used the internationally-accepted 100km Kármán line, it wouldn’t have had any astronauts. Technically, it is thus possible to say that a person who has been above 80km, without orbiting, is an “astronaut” who has been on a “space flight”.
That obscure historical footnote is the basis of Virgin Galactic’s business model. The “Virgin Space Ship” Unity finally managed a brief sortie above 80km last December, replicating the X-15’s achievement 56 years earlier, which itself had already been far surpassed by NASA’s Mercury capsules. Unity is an enlarged, passenger version of the privately funded SpaceShipOne rocket plane of 2004, which won the Ansari X-Prize by flying above 100km.
Branson characteristically describes last December’s sortie as “Virgin Galactic’s historic first spaceflight”. He says that 600 wealthy individuals, including many Hollywood celebrities, have put down a total of $80m in deposits to reserve seats on Virgin Galactic flights. The company calls these people “Future Astronauts”. It now says they will begin flying next year, 14 years after Branson began taking bookings and 13 years late by his original dates.
Four years from now, Virgin Galactic expects to be flying almost every day and creating more than a hundred new “astronauts” every month. This is the company’s unique selling point, not the view or the ride. Ordinary aircraft can offer free fall and black skies: but they don’t let you say you’ve been into space.
Before any of that happens, however, Branson plans to turn Virgin Galactic into the “very first publicly listed human spaceflight company”.
He isn’t doing so by means of a conventional share sale. Instead, Virgin Galactic will merge with a SPAC, a special purpose acquisition company, called Social Capital Hedosophia. The idea of a SPAC is that stock market investors supply capital to an expert management team who will buy private companies at hopefully advantageous prices, so reaching around the various obstacles that may prevent a normal stock market listing.
Social Capital Hedosophia floated on the NYSE in 2017 and its expert managers are Chamath Palihapitiya and Adam Bain. Bain is a former chief operating office of Twitter and Palihapitiya was a senior Facebook executive in the web giant’s early years before leaving to start his own VC fund, Social Capital. Social Capital has lost most of its former staff since 2017 and ceased accepting external capital last year.
Under the terms of the merger, Social Capital Hedosophia’s investors will get 49pc of the new company’s shares and Virgin Galactic’s shareholders will take the remaining 51pc. “The majority” of the cash held in trust from the float, a sum in the neighbourhood of $700m, will be joined in the new company’s coffers by $100m from Palihapitiya.
$300m of the resulting cash pile will be paid to Virgin Galactic’s current owners, Branson’s Virgin Group and Abu Dhabi-based Aabar, since folded into Mubadala. They also get their 51pc, consisting of 100 million publicly listed shares initially valued at $1bn in total.
The merger announcement says that the resulting company will have an enterprise value of $1.5bn based on notional revenue and pre-tax earnings for 2023. SEC filings and investor presentations suggest that an initial stock market valuation of just under $2bn is expected. The $1.5bn valuation is based on a conservative 2.5x price-earnings ratio applied to the not-so-conservative $600m of turnover forecast in four years time.
Palihapitiya and Bain gave themselves 20pc of SCH for free when the SPAC listed, translating to just under 10pc of the new Virgin Galactic company. Palihapitiya gets another 10 million shares for his cash injection, or something close to another 5pc of the merged firm, and will become chairman.
The Virgin Galactic story goes back a long way. Branson originally registered the name “Virgin Galactic Airways” in 1988. The following year the first “Virgin Galactic” craft took flight: a balloon designed to look like a flying saucer, in which Branson flew above London in “one of my favourite pranks”, bringing motorway traffic to a halt and achieving extensive publicity.
In 2004, when SpaceShipOne was dazzling the world and winning the Ansari X-Prize, Branson jumped aboard with plans for enlarged SpaceShipTwos or “Virgin Space Ships” which would be carrying passengers on sub-orbital joyrides by 2007. He placed his top public-relations man, Will Whitehorn, in charge of the new Virgin Galactic operation: one of the company’s first moves was a poll on Virgin Radio to decide what music should be played during flights (David Bowie’s ‘Space Oddity’).
The construction of the rocket planes did not go smoothly. In 2007, during ground equipment tests, an explosion at the Mojave plant killed three workers. The first craft, VSS Enterprise, was not rolled out until 2009: at that point Branson was predicting passenger flights in 2011.
Soon after that, Whitehorn was replaced by the current boss, George Whitesides. Whitesides later said: “We’ve changed dramatically as a company. When I joined in 2010 we were mostly a marketing organisation.”
Before Virgin Galactic, Whitesides was vice-president for marketing at Zero Gravity Corporation. Zero Gravity’s customers, like Virgin Galactic’s, experience brief intervals of free fall created by zooming up to great heights and then plunging down again. Zero Gravity, however, uses ordinary jet planes for this and charges just $5,500 a seat.
Whitesides was also Director of Marketing for Blastoff! Corporation, a company which planned to send robots to the moon but went bust in 2001. With his wife, Loretta Hidalgo Whitesides, he founded “Yuri’s Night – the World Space Party”. Ms Whitesides also works at Virgin Galactic, as the company’s “Jedi Trainer”. The couple have been forced to delay their honeymoon plans for 13 years, as these include a Virgin Galactic flight.
Following the Whitesides’ arrival, the troubles at Virgin Galactic continued. The Enterprise finally made rocket flights in 2013, but got nowhere near 80km. In early 2014, 10 years after the project had commenced, it was decided to use a different type of rocket fuel and engine. At this point Branson predicted first passenger flights in 2015.
The next flight, in October 2014, was a disaster. Co-pilot Michael Alsbury made a fatal error, unlocking the craft’s pivoting tail booms too soon and causing it to break up in mid-air. Alsbury was killed and the other pilot, Peter Siebold, was seriously injured.
Tests eventually resumed in 2018 with the second rocket plane, Unity, and there have now been two flights above 80km, though not fully loaded. And now comes the merger deal and public listing.
What happens next? Branson estimated back in 2004 that there might be 3,000 people in the world willing to pay his prices. Virgin Galactic now suggests that it will have flown that many passengers at some point in 2023. There may well be more customers out there, but probably not that many.
Virgin Galactic simply cannot do anything other than joyrides. Its “space ships” will never be able to achieve orbit: nor could they be used for super-fast long-haul flights, despite carefully worded mentions of two-hour London-Sydney flights by Branson.
Even if passenger flights really do happen, Virgin Galactic probably doesn’t have much of a future. But Richard Branson believes in it.
Or does he? It’s noticeable that he’s split off Virgin Orbit, the small-satellite launch operation which might actually become a real space company, and is keeping that. Despite the artful mention of 51pc and 49pc holdings in the merger announcement, he wont have full control of Virgin Galactic. Although Virgin Group and Mubadala will together own 51pc of the company through a combined entity, Branson owns 80pc of that venture, while the remaining 20pc is owned by the Abu Dhabi investment giant. That effectively leaves Virgin with a 40pc stake.
Nobody knows how much money Virgin Group has put into Virgin Galactic over the years – perhaps not much. Aabar has put in $380m, the project has been boosted by a $200m spaceport funded by the New Mexico state government, and Galactic reportedly has debts of $460m. The merger announcement says that total investment to date has been “$1bn+”. Branson’s group is now getting roughly $800m in cash and shares.
If this was happening at an ordinary startup company, it would probably be described as an exit. Cautious investors might want to avoid Virgin Galactic shares when they list, or Social Capital Hedosophia shares now.