MISSILE COMMAND
Northrop Grumman expands its space and missile businesses as the US steps up efforts against a possible strike by North Korea.
NEW YORK/CHICAGO: Northrop Grumman Corp’s $7.8 billion purchase of Orbital ATK Inc will expand its space and missile businesses just as the United States steps up efforts to defend against a possible strike by North Korea and threats in the Middle East.
The deal 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 US stealth bomber.
The transaction, the largest in the defence industry in two years, adds rocket propulsion, missile-defense and satellite expertise to Northrop’s capabilities as a major US weapons maker.
Buying Orbital would make Northrop the fourth-largest Pentagon contractor, displacing Raytheon Co, according to Bloomberg Government.
Orbital stands to benefit as the US expands a ground-based missile-defence programme that Northrop already supplies with command-and-control systems.
“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 on a conference call with analysts to discuss the transaction.
“This issue of technological superiority for the US and our allies is a real issue. It’s something that our customers are struggling with.”
The deal ranks as the largest in the defence industry since Lockheed Martin Corp bought Sikorsky Aircraft in 2015. Together, Northrop and Orbital got about $14.6 billion from Pentagon contracts last year, about half of their combined sales.
While there is limited overlap between the companies, the tie-up, coming weeks after aerospace manufacturer United Technologies Corp announced a $23 billion acquisition, will test the Trump administration’s tolerance for consolidation among prime defence 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 US 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, representing a 22% premium over Orbital’s closing price last week. The total transaction is valued at $9.2 billion including the assumption of $1.4 billion in net debt.
The acquisition marks a bold bet on growth for Falls Church, Virginia-based 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.
Orbital, which has about 13,000 employees, was formed in 2015 through the combination of Orbital Sciences and Alliant Techsystems. The Dulles, Virginia-based company competes to hoist payloads to space with Space Exploration Technologies Corp’s Falcon 9 and United Launch Alliance’s Atlas family of rockets.
Orbital CEO David Thompson could get as much as $15 million in severance, benefits and equity awards, based on the transaction price, if he’s dismissed.
The payout would include $5.94 million in severance and a prorated target bonus of $855,000, according to the proxy statement. He also holds equity awards worth $7.95 million at the $134.50 offer price that would vest early, some of which are prorated and tied to performance conditions, data compiled by Bloomberg show.