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To Elon Musk’s fan club, there is nothing to see apart from more evidence of the great man’s visionary genius. SpaceX, the rocket firm, is buying xAI, the artificial intelligence developer, and the combination of these two Musk-controlled entities is being valued at $1.25tn (£910bn). Feel the positive vibes ahead of a stock market debut due in June! The most valuable private company in history! The largest ever transaction!
Or, as Musk described it, he is creating “the most ambitious, vertically-integrated innovation engine on (and off) Earth, with AI, rockets, space-based internet, direct-to-mobile device communications and the world’s foremost real-time information and free-speech platform”.
SpaceX’s minority shareholders may have a less stellar view. From their perspective, this all-share transaction must look less like an attempt to “accelerate humanity’s future” and more like an instant bailout of loss-making xAI, conducted with minimal scrutiny of valuation or a meaningful attempt to seek their views.
Remember that, while SpaceX is routinely described for shorthand purposes as owned by Musk, he is not the only person in the capsule. His stake is estimated to be 42%. There have been outside shareholders for years – in the UK, two popular investment trusts, Scottish Mortgage and Edinburgh Worldwide, have SpaceX as their largest holding. Do end-investors in those funds really want to combine with xAI, a cash-burning operation that comes with X, the scandal-generating social media platform (latest news: a raid by prosecutors on X’s French headquarters and an ongoing UK inquiry into indecent deepfakes produced by the Grok AI tool)? One doubts it.
The beauty of SpaceX as an investment, until now, was the purity of its focus on sending satellites into orbit via reusable rockets and operating the Starlink communications system. It is a field in which competitors have been left on the launch pad. SpaceX’s customers include Nasa and the US Department of Defense.
Musk’s strategic justification for combining SpaceX and xAI is that the AI battleground is about to shift to space. “Global electricity demand for AI simply cannot be met with terrestrial solutions, even in the near term, without imposing hardship on communities and the environment,” he argues.
He may be correct in that analysis, but it is still a jump to say the two corporate entities must be housed under the same roof. If xAI needs to use SpaceX’s rockets to establish orbital data centres, business could be done at arm’s-length on commercial terms. Or, if you think the energy angle changes everything, make the case in greater detail than a brief statement and, most of all, ensure valuations are transparently fair.
Musk didn’t even mention terms, although SpaceX is reportedly being valued at $1tn and xAI at $250bn. Those round numbers may be roughly related to valuations at which each firm has raised capital in the recent past, but most assessments would surely conclude that SpaceX is seriously overpaying in this deal.
The rocket firm, after all, is a profitable market leader and has annual revenues of $16bn; it looked set to achieve a $1tn valuation (however lofty it looks) at IPO under its own power. xAI, by contrast, is a startup with annual revenues of less than $1bn, faces an enormous investment bill to build data centres and is engaged in an uphill battle for AI supremacy with the likes of Google and Anthropic.
It’s an all-share transaction so if, like Musk, you’re on both sides, there is a swings-and-roundabout feature to the relative valuations: what you lose on the rockets, you gain on the AI. There are also many outside backers in both camps. But the position is very different if, like the two UK investment trusts, your overwhelming exposure is to SpaceX (Baillie Gifford, manager of both trusts, declined to comment).
Maybe, in the end, such details will be lost in the excitement of the public listing of the now-expanded SpaceX. Musk-mania should never be underestimated. But this warmup transaction still looks like a rescue of xAI, complete with the troublesome X being shunted on to SpaceX’s long-term outside investors who get no say in the matter. Yes, those backers have still made stupendous returns from the rocket adventure – that remains the case. But they’ve been taken for a ride in this latest Musk manoeuvre.
