Merger talks between UK satellite operator OneWeb and its larger French rival Eutelsat have sent shares in Seraphim Space (SSIT ) flying, rising 10% as it and other growth funds make a comeback from recent lows.

Fund manager Mark Boggett said Eutelsat’s confirmation of advanced discussions over a merger with OneWeb vindicated the UK government’s controversial decision to back the company out of bankruptcy, which it briefly fell into during the 2020 pandemic.

‘The government played a pivotal and decisive role in saving this important asset, retained a say in how the UK can benefit from the OneWeb broadband platform, and made a solid investment return for the public purse,’ he said.

Although Seraphim doesn’t invest in either company, their all-share combination would be positive for the satellite communications sector in which a number of the venture and growth fund’s companies operate.  

It would help create a European champion, backed by the UK and French governments, that could keep up with Elon Musk’s SpaceX which, like OneWeb, has used easier-to-launch lower-earth orbit (LEO) satellites.

In addition to increasing competition, the merger could help further reduce manufacturing and launch costs, boosting Serpahim portfolio companies such as Arqit (ARQQ.O), the Nasdaq-listed pioneer of quantum secure communications, and Reading-based, unquoted Isotropic Systems, which has developed technology to connect to any satellite constellation from a single antenna.

Seraphim shares, which launched at 100p a year ago, jumped 7p or 10.8% to 72.4p, valuing the company at around £170m. The shares have rallied from a low of 48p two weeks ago but still trade on a wide discount of around 26% below their latest estimated net asset value, according to Numis Securities. 

Eutelsat (ETL.PA) shares plunged 16%, however, potentially wiping out the UK government’s paper profit of $100m on its near 18% stake, according to the Financial Times.

Markus Kaufen, a risk manager at Swiss asset manager BWM, a top-15 investor in Eutelsat told the FT the transaction was a shock for holders of the 9%-yielder. ‘Right now, it is a boring value stock for income-oriented investors with high free cash flow and high dividends. 

‘If it were to merge with OneWeb, it would become a growth business hoping that an expensive bet will pay off in the future, rather than an established business with known economics.’

Boggett (above), who helped Seraphim raise £150m at its flotation last July, said the deal was good for OneWeb. ‘Ownership within a listed vehicle is the right path for this business as it needs to access significant further capital to effectively compete in the LEO internet market.’ 

He hoped the transaction could herald more deal-making and revive sentiment towards a sector battered by this year’s switch from ‘jam-tomorrow’ growth stocks to cash-generative, profit makers.

‘We see other similar M&A on the horizon as the traditional space players position themselves within the $trillion LEO communication and earth observation market re-deploying the $billions made recently through C-band spectrum sales to accommodate 5G expansion,’ he said in emailed comments to Citywire.

‘Despite the challenging macro backdrop of inflation, recession and war, the space domain has a range of uncorrelated drivers that will see the sector thrive even in the short term,’ he added.

Boggett’s optimism, after a pounding in Seraphim’s share price that until 14 July had seen the stock more than halve this year, comes as investors see a silver lining in the recessionary clouds gathering on the horizon.

A fall in the price of Brent crude from about $118 a barrel in early June to under $104 today flags the economic slowdown and indicates a let-up in inflationary pressures that could create a breathing space for growth funds that have been battered by the spike in US interest rates. 

The Federal Reserve is widely expected to lift its funds rate by 0.75% to 2.25%-2.5% on Wednesday but may stay its hand on further big hikes if cost-of-living pressures eases.

‘We believe that this is one of the angles that is ushering in the phase of “bad data is starting to be seen as good”, said Mislav Matejka, equity strategist at JPMorgan Cazenove.

However, a report by Citywire’s Fix the Future team in May found there was little appetite among leading mainstream fund investors for space tech yet.

Growth trusts rally

As a result in the past month, more than 10 broadly ‘growth’ focused investment companies have rallied over 14%, according to data Numis Securities, although all remain well below their New Year starting points.

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Growth trusts (in bold)	Ticker	One month share price change %	Year-to -date %	Share price premium (- discount) %
Doric Nimrod Air One	DNA	75.8%	134	-2
Augmentum Fintech	AUGM	25.8%	-26	-28
DP Aircraft	DPA	22.2%	107	-84
Eurocastle Investment	ECT	21.7%	12	3.5
abrdn Private Equity Opportunities	APEO	20.5%	-12	-31
Alpha Real Trust	ARTL	18.1%	-2	-26
BlackRock Throgmorton Trust	THRG	17.3%	-35	-1%
Bellevue Healthcare	BBH	17.3%	-14.5	-4
Scottish Mortgage	SMT	16.9%	-38	-6
Impax Environmental Markets	IEM	15.9%	-18	2
ICG Enterprise	ICGT	15.2%	-9	-37
Baillie Gifford Shin Nippon	BGS	15.1%	-30	-8
3i Group	III	14.9%	-6	-12
Baillie Gifford UK Growth	BGUK	14.4%	-11	-30
Baillie Gifford US Growth	USA	14.1%	-45	-14

Source: Numis Securities 22/7/22

Analysts at broker Singer last month said they were positive on the outlook for Seraphim’s concentrated portfolio. Although its companies were yet to break even they targeted large ($80bn plus) total addressable markets in weather forecasting, shipping and aviation and space mapping with clear demand from government and commercial customers such as insurers.

‘We view the fund’s de-rating as collateral damage tied to the market’s issue with “growth” assets and not a fundamental issue with the opportunity,’ they said.

The investment company is chaired by Will Whitehorn, a former president of Virgin Galactic, Richard Branson’s space rocket company. Patrick McCall, a former chair of Virgin Galactic, joined Seraphim in May as a venture partner.