Northrop Grumman Looks To Get Foothold in Military Space Race
September 18 2017 - 12:04PM
Dow Jones News
By Doug Cameron
Northrop Grumman Corp. plans to acquire Orbital ATK Inc. for
around $7.8 billion in a bid to position itself for the new
military battleground: space.
The proposed deal, announced Monday, would help Northrop to
produce and launch large and small spy and communications
satellites and develop new high-speed weapons and missile-defense
systems to deter potential adversaries such as Russia and
China.
Northrop is the world's fifth-largest defense company by sales
and the fourth largest in the U.S. after Lockheed Martin Corp.,
Boeing Co. and Raytheon Co. The planned combination would be the
largest in the U.S. defense sector for two years. It also
represents the first test of the Trump's administration's views on
industry consolidation as it would increase Northrop Grumman's role
in key programs such as a new, long-range bomber.
The Wall Street Journal first reported Sunday that the companies
were nearing a deal.
"Orbital ATK is the fit," said Northrop Chief Executive Wes Bush
on an investor call Monday. He noted the company hadn't previously
spotted attractive acquisition targets before opening talks with
the company earlier this year. Orbital wasn't put up for sale, said
CEO David Thompson.
Northrop Grumman, based in Falls Church, Va., makes fuselages
and radars for the F-35 combat jet, as well as satellites and other
surveillance and communications systems, many of them classified.
Dulles, Va.-based-based Orbital ATK produces space rockets, engines
for missiles, and smaller satellites.
Northrop aims to close the deal in the first half of next year,
subject to shareholder and regulatory approvals.
U.S. defense companies are returning to growth after five years
of federal- government budget pressures. But big opportunities are
scarce and focused on a handful of large programs such as the
Lockheed Martin F-35, replacing U.S. nuclear weapons and
strengthening its space-based capabilities.
Potential adversaries such as China and Russia have been
investing heavily in space capabilities, and Pentagon leaders have
expressed concern about the U.S. losing its technological
advantage.
The Pentagon is also looking to make U.S. space assets less
vulnerable by launching larger numbers of smaller satellites, and
pursuing research into new weapons such as hypersonic missiles able
to travel at more than 5,000 miles an hour. That would enable them
to hit any target on the globe in minutes.
Deal activity in the defense sector in recent years has focused
on the services business rather than weapons makers. Pentagon
leaders have discouraged any further consolidation among the
largest defense companies since a series of huge deals in the
1990s. However, analysts said Northrop's move could trigger
interest in other smaller, space-focused companies such as Harris
Corp.
One of the largest defense-sector opportunities is the
Pentagon's plan to develop a new, land-based nuclear missile, with
Northrop competing against Boeing for a program estimated to cost
around $80 billion.
Northrop is already working with Orbital ATK and fellow
rocket-engine maker Aerojet Rocketdyne Inc. on the project. Boeing
has also signed up Aerojet as a partner, and Mr. Bush said on the
call that his planned deal wouldn't affect existing programs.
"Our industry is characterized by the ability of companies to
work together," he said.
Mr. Bush declined to comment on whether the proposed deal had
been discussed with the Pentagon, though he pledged to continue
working with other large defense companies on large military
programs.
Boeing and the Pentagon had no immediate comment Monday.
Northrop agreed to pay $134.50 a share for Orbital, a roughly
22% premium to Friday's closing price of $110.04. Including $1.4
billion in assumed debt, the deal carries a total price tag of
about $9.2 billion.
Orbital shares were up almost 21% to $133.11 in early trade.
Northrop shares gained 1.5% as the company committed Monday to
reducing debt and maintaining a share buyback program. Repurchases
have powered the company's stock in recent years.
Northrop Grumman said it plans to establish Orbital as a
distinct business segment.
Buying Orbital ATK would add a company with 13,000 employees and
an estimated $4.6 billion in sales this year to Northrop's expected
revenues of around $25 billion in 2017.
Northrop said it expects the deal to boost earnings per share in
its first full year and yield annual cost savings of $150 million
by 2020.
(END) Dow Jones Newswires
September 18, 2017 12:49 ET (16:49 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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