RPT-BREAKINGVIEWS-SpaceX’s $1.25 trln deal risks burn-up on re-entry

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, Feb 3 (Reuters Breakingviews) - Elon Musk has launched himself into M&A orbit. He clinched the biggest deal in history on Monday, as SpaceX agreed to acquire xAI in a deal that values his rocket and satellite company at $1 trillion and his artificial intelligence outfit at $250 billion. The numbers only make sense on Musk’s own absurd terms. As the duo prepares for an initial public offering, terrestrial precedent implies a hasty fall back to Earth.

Since both are private companies where Musk retains voting control, information is murky. SpaceX generated about $8 billion of EBITDA on as much as $16 billion in revenue last year, Reuters reported. Projections warrant skepticism given Musk’s tendency to overpromise, but the company anticipates more than $22 billion of revenue next year. Assume similar profitability, and it would produce $11 billion of EBITDA, valuing the company at an out-of-this world multiple of 90 times. Its boss has achieved such a stellar feat before: carmaker Tesla TSLA.O trades at an incredible 103 times.

Valuing xAI is an even more nebulous exercise. The company lost $1.5 billion for the third quarter on $107 million of revenue, according to Bloomberg. Still, the top line doubled from the prior three months. Generously assume that it keeps up this pace, and it would exceed $6 billion this year. Anthropic, a truly leading AI lab, is targeting between $20 billion and $26 billion of sales in 2026, Reuters reported. That places its recent $350 billion valuation at 15 times revenue. On the same multiple, xAI would be worth about $90 billion.

What’s a few hundred billion compared to the stars? Musk describes the deal’s rationale as “scaling to make a sentient sun to understand the Universe.” This, and talk of launching data centers into space, sounds somewhere between optimistic to delusional. The same could be said of the value public markets have ascribed to the billionaire’s corporate efforts to date.

A less encouraging read of history can be found in past mega-M&A. Mobile network operator Vodafone VOD.L bought Mannesmann for $203 billion in 2000, and dot-com-bubble pioneer AOL merged with Time Warner in a $165 billion deal in 2001. Both were built on dreams of world-changing technologies, 3G wireless and the internet. Those really were valuable developments.

Vodafone later took multiple charges, its shares fell, and it retrenched. AOL fared even worse, writing down $99 billion in 2002 before its tie-up unraveled. Musk’s self-referential merger universe, if anything, revolves around even more outlandish hopes.

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CONTEXT NEWS

Elon Musk said in a letter on February 2 that his rocket and satellite company SpaceX had acquired his artificial intelligence and social networking company xAI. The transaction values SpaceX at $1 trillion and xAI at $250 billion, Reuters reported.

Musk’s letter did not provide financial details. He talked about the company’s plan to build data centers in orbit, saying, “this marks not just the next chapter, but the next book in SpaceX and xAI's mission: scaling to make a sentient sun to understand the Universe and extend the light of consciousness to the stars!”

SpaceX is preparing for an initial public offering later this year, Reuters previously reported. The company is considering Bank of America, Goldman Sachs, JPMorgan and Morgan Stanley for senior roles on the listing, according to the report.

The purchase of xAI sets a new record for the world's largest M&A deal. The record was previously by Vodafone’s purchase of Germany’s Mannesmann in a hostile takeover valued at $203 billion in 2000, according to data compiled by LSEG.

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))