AST SpaceMobile Investors: Prepare to Be Diluted

I hate to say I told you so (but I did). And just as I forewarned back in September, AST SpaceMobile (NASDAQ: ASTS) stock has decided to dilute its investors.

Again.

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On Thursday last week, AST management announced plans to float $400 million worth of convertible senior notes due 2032 (that's debt, convertible into stock) in a private offering to qualified institutional investors. The company explained that these notes will pay 4.25% interest and will be convertible into shares of AST common stock at about $27 per share. AST said at the time that it would permit its underwriters to buy an additional $60 million worth of the notes should they so desire. On Monday, AST confirmed that they did in fact so desire, and that the final size of the offering ended up being $460 million.

So flip over to the back of your napkins, now, and add $460 million to AST's cash reserves. Minus transaction fees, management says AST now has "nearly $1 billion in cash" to work with as it continues to build out its constellation of direct-to-cell satellite communications (DTC) satellites.

Why does AST SpaceMobile need all this cash?

At last report, AST had launched and begun the work of bringing to life its first five operational BlueBird comsats. As I explained back in September, though, AST needs many more satellites before it can provide all the communications services that it has promised to its partners, which include telco heavyweights such as AT&T (NYSE: T), Verizon (NYSE: VZ), and Vodafone (NASDAQ: VOD).

Last week -- around about the same time AST was trying to sell its debt -- PC Mag reported that AST had finally won "special temporary authorization from the FCC" to "start testing" its BlueBird satellites with AT&T customers (after awaiting authorization since asking in November). The authorization permits up to 2,000 AT&T customers at a time to give the satellite service a test run, and trials appear to be centered across the states of North Dakota, South Dakota, and Minnesota in the Midwest, as well as much of the U.S. Northeast (roughly everything north of Maryland and east of western Pennsylvania, with the exception of Maine).

This authorization runs through May 30, but does not constitute a true opening of "beta" service on the satellite network. Rather, PC Mag called this just "one step in [AST's] ongoing journey to use dozens of BlueBird satellites to beam high-speed data to phones across the globe."

Image source: Getty Images.

$1 billion for new satellites

And that's just it -- AST took an important step when it won the FCC's temporary approval. It took another important step on Tuesday, when it successfully helped Vodafone place "the world's first video call via satellite using a standard smartphone from a remote location."

But to get to the scale it will need to begin pulling down significant revenue, AST needs many more satellites than in currently has in orbit. And for that, AST needs cash.

Specifically, the company needs about $3 billion in cash in order to fully build out the 168-satellite constellation of BlueBird satellites it envisions, provide DTC satellite service all around the world, and access the "five billion mobile subscribers" and the "$1 trillion global mobile wireless services market" that AST SpaceMobile promised its investors back at the time of its IPO.

Pre-payments for satellite service from AT&T, Verizon, and others will help get AST the cash it needs, but at last report, those two contracts with its biggest American customers might bring in as little as $200 million in revenue over six years -- too little money to get the job done. For the rest, AST simply must access the capital markets, through stock sales and debt issuances like the one this week.

AST SpaceMobile's dilution solution

But at what cost? Converted to stock at $27 per share, AST's $460 million capital raise this week promises to add 17 million shares to the share count and dilute outside shareholders by about 8.5%.

That's a big sacrifice, but a reasonable one if it helps AST get to its goal of launching first beta, and then full commercial service (at which point revenues will start coming in to reduce the need for share dilution). Raising the remaining $2 billion that AST will need to build its satellite fleet, however, could require the issuance of as many as 74 million additional shares (or debt convertible into those shares). More, if the stock price continues to shrink.

Investors in AST stock today should prepare themselves for at least another 37%-worth of stock dilution before this company is fully up and running.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Verizon Communications and Vodafone Group Public. The Motley Fool has a disclosure policy.