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)