Huge News for Rocket Lab Investors

The space sector is changing almost at the speed of a high-powered rocket. Among the numerous developments in the business recently, one in particular could make quite a difference: Rocket Lab's (NASDAQ: RKLB) $8 billion deal for satellite telecom company Iridium Communications (NASDAQ: IRDM).

Rocket Lab is touting the acquisition as transformational. While there's some degree of the usual corporate hype behind that assertion, it's absolutely going to change the company. Here's why.

Calling on a new asset

At the end of June, Rocket Lab and Iridium agreed that Rocket Lab would pay $54 per share for Iridium in a mix of cash and stock. The deal has an enterprise value of around $8 billion.

Image source: Getty Images.

In a joint press release, the two companies said that this is a synergistic combination of Rocket Lab's launch business and equipment manufacturing with Iridium's low earth orbit (LEO) satellite network and related assets.

Fusing will "create a competitive, vertically integrated space company that designs, builds, launches, and operates its own constellations, delivering critical communications capability to millions of users worldwide," the companies said.

The boards of directors of both have unanimously approved the acquisition. The purchase price breaks down into $27 per Iridium share and shares of Rocket Lab stock, calculated according to an exchange ratio yet to be determined.

The deal is subject to approval from both Iridium shareholders and the relevant regulatory authorities. It's expected to close in the middle of next year.

Comparisons with the big guy

This deal is pricey, but it still looks like a smart, opportunistic move by Rocket Lab. It's getting a unique -- and, importantly, highly productive -- asset with Iridium's satellite network, which is the go-to for customers wanting/needing pole-to-pole telecom connectivity for a variety of use cases.

Even in the likely case that the two businesses take some time to integrate, Iridium is regularly profitable and significantly free cash flow (FCF) positive, with FCF hovering just below $300 million in 2025. So owning it will have an immediate and beneficial effect on Rocket Lab's fundamentals.

Although Iridium and the Starlink service, now under the wing of Space Exploration Technologies, aka SpaceX, aren't exactly direct competitors, their businesses are close enough to inevitably draw comparisons. So, going forward, Rocket Lab will be regularly matched against its monster rival.

To me, SpaceX as a conglomerate is something of a mishmash, with artificial intelligence (AI) infrastructure and development, a social media site, and Starlink sitting alongside the company's space operations. Meanwhile, with the Iridium deal, Rocket Lab is shaping up to be a tighter, yet still comprehensive, set of complementary assets.

One big caveat with Rocket Lab is its still-high valuations, as the market still clearly hasn't entirely gotten over its excitement about bulking up space companies. Personally, this would make me hesitant to buy the stock, as I feel it's overvalued for a company that still needs to prove it can become reliably profitable with its legacy business.

Investors with a more bullish view of the space sector's prospects who don't mind waiting a while for Rocket Lab and Iridium to properly integrate might feel differently. Those folks should definitely consider buying.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Rocket Lab. The Motley Fool has a disclosure policy.