Northrop Grumman beefs up space-defense arm
Company purchases $7.8 billion Orbital ATK
Northrop Grumman Corp.’s $7.8 billion purchase of Orbital ATK Inc. will expand its space and missile businesses just as the U.S. sharpens its focus on defending against a possible strike by North Korea.
The transaction cements a turnaround for Northrop, which had been the target of breakup speculation before it scored an upset win in 2015 to build the next U.S. stealth bomber. The combined company would be firmly positioned as one of the four largest U.S. defense contractors, with about half of roughly $29 billion in sales last year having come from Pentagon prime contracts.
The cash offer represents a 22 percent premium over Orbital’s closing price last week, and it ranks as the largest defense deal since Lockheed bought the Sikorsky helicopter division of United Technologies Corp. in 2015. U.S. defense companies have soared this year on prospects for greater weapons spending under President Donald Trump and from governments overseas, amid rising perceived threats.
“As we watch what’s happening around our globe, the rather rapid advance of some of our potential adversaries is quite concerning,” Northrop Chief Executive Officer Wesley Bush said Monday on a conference call with analysts to discuss the transaction. “This issue of technological superiority for the U.S. and our allies is a real issue. It’s something that our customers are struggling with.”
The tie-up extends the broad reshuffling of the aerospace industry after United Technologies said this month that it will buy Rockwell Collins Inc. for $23 billion. It will also test the Trump administration’s tolerance for consolidation among prime defense contractors. Under Barack Obama following the Sikorsky deal, the Pentagon had signaled that it would frown on such deals because they were reducing competition.
“Given that Northrop already operates in the space field, it is possible that there could be some overlapping activity or increased vertical integration that could prompt regulatory scrutiny,” Robert Stallard, an analyst at Vertical Research Partners, said in a note to clients. “We have also not had a prime contractor acquisition under the current U.S. administration, and so this is a test case as to whether concerns over the scale of the primes is still an issue.”
Orbital holders will receive $134.50 a share in cash, the companies said in a statement. The total transaction is valued at $9.2 billion including the assumption of $1.4 billion in net debt.
The Orbital acquisition expands Northrop’s product lineup with rocket propulsion, composites and munitions. The contractor is competing with Boeing Co. to develop the next ground-based missile interceptor system in the U.S., a contract that could be worth as much as $85 billion.
Orbital “is a leader in solid rocket propulsion” while Northrop “is strong in sensors and networks, enabling a comprehensive ballistic missile defense solution,” Jefferies analyst Howard Rubel said Monday in a note to clients.
Northrop, known for its Global Hawk drones, recently won a contract to build the next generation B-21 stealth bomber. It also supplies frames for Lockheed Martin Corp.’s F-35 fighter jet.
The acquisition marks a bold bet on growth for Falls Church, Virginiabased Northrop, which has recently focused on returning cash to shareholders through stock buybacks and dividends. Bush hinted at the change in July, telling investors during the second-quarter earnings call that he was looking for acquisition opportunities to expand the contractor’s business.
Orbital will operate as a fourth business unit within Northrop following the close of the transaction, expected in the first half of 2018, the companies said. The deal is expected to add to Northrop’s earnings in the first full year after closing, and to yield annual pretax cost savings of $150 million by 2020, according to the statement. It is subject to customary closing conditions, including approval by regulators and Orbital shareholders.