Satellite M&A shows space race heating up

December 1, 2021

What most of us call an astronaut’s space suit is officially called an Extravehicular Mobility Unit, a two-piece, 14-layer suit designed to protect astronauts during spacewalks or planetary exploration.

The suits are incredibly complex but haven’t changed much since the mid-1980s. NASA has spent US $420 million over the past 14 years trying to improve them and was committed to spending another $600 million. But its efforts have met with limited success so it is turning the project over to the private sector and has asked for tenders.

It is another example of how the space race has changed. An industry created by governments has evolved into one increasingly dominated by private enterprise in partnerships with governments.

While space headlines have focused on such high-profile players as Tesla’s Elon Musk, Amazon’s Jeff Bezos and Virgin Galactic’s Sir Richard Branson, the moon suits are one example of the sectors behind the scenes nuts and bolts. The delay to improving the suits is likely to hold up Artemis, NASA’s four-stage program to return to the Moon in 2024. Elon Musk for one says his SpaceX is interested in the moon suit contract.

Space travel is one of three areas of opportunity for investors in this sector. Space construction, which includes subcontracts for the crafts and components, is much larger. So are satellite communications, including launches, repairs and retrieval.

“We have to look beyond the larger-than-life superstars and focus on the big picture,” says Paul MacDonald, Chief Investment Officer of Harvest Portfolios Group in Oakville.

“Space travel is really cool and the Artemis project is absolutely amazing, but behind that is many public companies that are involved in manufacturing landers, rockets and communications equipment.”

The sector’s potential led Harvest to launch Canada’s first index-based space industry exchanged traded fund (ETF) in April, 2021. The Harvest Space Innovation Index ETF (TSX: ORBT) invests in 40 large global companies engaged in the development of products and services related to satellites, space flight, space stations and the emerging field of space tourism. It follows an index designed by Solactive AG and has a 0.50% management fee.

Mr. MacDonald said the Harvest ETF holds globally diversified aerospace and defense companies with strong businesses, a history of profitability and financial resources to exploit the opportunity.

Mr. MacDonald said some areas of the industry are consolidating as large investors position themselves for the medium term. This M&A is occurring because many companies have expertise that is hard to replicate and so it is leading to buyouts.

“I expect that trend is going to continue over the next couple of years,” he said.

One example is Orbcomm Inc., a holding in the Harvest ETF and a global provider of Internet of Things (IoT) solutions for satellite communications. In September of 2021, it was purchased for US $1.1 billion by GI Partners, a leading US-based private investment management firm.

Last December, Lockheed Martin Corp., agreed to buy U.S. rocket engine manufacturer Aerojet Rocketdyne Holdings Inc for $4.4 billion. Both companies are held in the ETF. Aerojet Rocketdyne’s propulsion systems are used in aeronautics, missiles and fire control systems.

While most space activity is outside Canada, one domestic company is Telesat Canada which recently entered into an agreement with Loral Space & Communications Inc. (NASDAQ: LORL) to create a new company called Telesat which will trade on Nasdaq. The Harvest ETF also holds Loral.

Mr. MacDonald said watching Elon Musk or Richard Branson go into space may capture public imagination, but satellites and components are what is driving the space race for now.

“This is one of these sleeper funds. There’s nothing like it out there. It really complements pretty much every portfolio I think.”

To find out how your clients can benefit from this strategy call 1-866-998-8298.

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