AST SpaceMobile shareholders should prepare for serious stock dilution

After going from $5 per share at the start of the year to less than half that by May, to an all-time high north of $38 a share in August, the satellite communications stock would AST SpaceMobile (ASTS 11.35%) took its shareholders on a wild ride in 2024.

But buckle up, investors: This ride is far from over, and it could get bumpier in the coming quarters.

Marvel at AST’s astonishingly large bank account

By now you’ve probably heard the news. Two weeks ago, AST SpaceMobile management informed investors that it plans to “redeem all of its exchange-traded warrants to purchase Class A common stock.” A week later, AST reported that it had already received $71 million of this buyback mandate and anticipated collecting an additional $84 million.

The $155 million in new cash will swell AST’s coffers to $440 million, and with payment already made for the company’s first five BlueBird communications satellites (which launched Thursday), the company says it now has (or will (soon) had sufficient funds to support its “short-term operational initiatives,” pay interest on its debt and even begin paying down a portion of its senior secured credit facility.

Or not.

After announcing the buyback two weeks ago, in which management said it had no plans “to raise capital in an underwritten public offering until at least the end of 2024,” AST this week issued a statement later curious. AST says it now it is plans to sell stock — $400 million worth — and has filed a prospectus with the SEC in preparation for such a stock offering.

AST sends mixed signals

To be clear, I don’t think this is a bad idea. Earlier this month we claimed that AST SpaceMobile actually should sell stocks. Indeed, I’ve argued that since building a 168-satellite constellation will likely cost AST $3 billion or more, and because the company’s stock price has already risen so high, the logical thing to do now is to sell. much more stock at today’s high price before it has a chance to drop.

A sizeable stock offering of 100 million shares, for example (AST already has 158 million shares outstanding) should be enough to raise all the money the space company will need to build and launch the entire its constellation of communications satellites as currently envisioned. Instead, by the company’s own admission, a $400 million stock sale will only cover the costs of about 20 BlueBird Block 2 satellites.

So why doesn’t AST go that route? Why does he only sell stocks in drops and drabs? (A strategy I’ve specifically warned against before?)

Danger ahead: stock dilution

I can only imagine that management has decided that its investors will riot if they see AST issuing too many new shares and diluting their holdings in AST SpaceMobile too quickly. But here’s the thing: even spaced out a bit like AST does, the dilution will be significant.

Start with the “mandate redemption” announced last month. As fellow Fool contributor John Rosevear explained in a similar situation with another SPAC — Nicholas — a few years ago, a redemption warrant works like this:

When a SPAC company goes public, it entices investors to participate in its initial public offering by offering cheap warrants to buy stock at a set price so that it profits if the stock sells for more than that price. In AST’s case, warrant holders will pay $11.50 to exercise their warrants and receive shares worth nearly $28 each, at last report, in return.

Warrant holders also have the option to sell their warrants back to AST for $0.01 per warrant. But this is an option that no one would choose. Thus, we can calculate with virtual certainty that if AST expects to raise $155 million from the redemption of its warrant, it must also expect to issue ($155 million divided by $11.50) 13.5 million new shares as part of the buyback.

Next, let’s look at the plan to sell $400 million of AST stock on the open market. AST’s current share price of approximately $28 implies that this share offering will require the creation of 14.3 million More actions. So add up the issuances, and AST shareholders are already looking at a dilution of 27.8 million shares, just from the already announced issuances.

What it means for investors

Added to a total of 158 million shares, that results in AST investors being diluted 17.5%, just from these two announcements — which may help explain why the stock price is down nearly 28% from higher level than last month as investors start. to make his displeasure known.

The truth of the matter is that AST NECESSITY dilute if it is to raise the money it needs to succeed. New investors should be aware of this before investing in AST shares. They also need to know that this is only the beginning of the dilution. There are sure to be more on the way.