Northrop Grumman to Buy Orbital ATK for $7.8 Billion -- 2nd Update

By Dana Mattioli, Doug Cameron and Cara LombardoFeaturesDow Jones Newswires

Northrop Grumman Corp. on Monday said it agreed to buy Orbital ATK Inc. for $7.8 billion, as acquisition activity in the aerospace industry ramps up.

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.

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The two defense contractors said Monday their boards approved an all-cash tie-up. The Wall Street Journal first reported the companies were nearing a deal Sunday.

The news sent Orbital shares up 19.68% premarket Monday. Orbital has a market value of $6.3 billion while Northrop has a market capitalization of more than $45 billion.

Perella Weinberg Partners LP is acting as exclusive financial adviser to Northrop Grumman. Citigroup is acting as exclusive financial adviser to Orbital ATK.

The impending deal, which the companies expect to close in the first half of 2018, comes on the heels of another big aerospace union just announced earlier this month when United Technologies Corp. agreed to buy Rockwell Collins Inc. for about $23 billion.

Purchasing Orbital will add to Northrop Grumman's existing focus on military aircraft and space systems, expanding the franchise with more fast-growing missile-defense business.

Northrop Grumman said plans to establish Orbital as a distinct business sector and expects it to generate 2017 sales of about $30 billion. The company expects the deal to be accretive to earnings per share in its first full year and yield annual cost savings of $150 million by 2020.

Orbital provides space rocket motors and other parts for offensive and defensive missile systems, as well as satellites for military and commercial space operations. It was formed in 2015 from the merger of two missile and space specialists, Alliant Techsystems and Orbital Sciences. Orbital ATK employs about 13,000 and is targeting sales this year of $4.6 billion.

Its role in space and missile systems has led some analysts to view the company as a potential takeover target for big customers such as Boeing Co., Lockheed Martin Corp., or Northrop.

Northrop, which beat out Boeing and Lockheed to build the new B-21 Raider long-range bomber, is also competing to build a new fleet of intercontinental ballistic missiles for the U.S.

Northrop is vying with Boeing for the Ground-Based Strategic Deterrent nuclear missile program, and has joined with Orbital and fellow rocket maker Aerojet Rocketdyne Inc. during the current development phase of the $80 billion program.

Domestic and international defense budgets are starting to climb because of tensions in the Middle East, Eastern Europe and East Asia, with missile defense a priority for many nations.

Meanwhile, some defense contractors are seeking to become more vertically integrated, bringing production in house to give them better control of the supply chain and an ability to capture extra profits from repair work; this deal would fit into that pattern as well.

The planned purchase of Orbital marks a departure for Northrop, which has focused heavily on share buybacks, retiring around 25% of its stock over the past three years.

A deal involving the big prime defense contractors may be less likely to attract antitrust scrutiny than other proposed mergers because of their limited product overlap, though the Pentagon has in recent years become more involved in scrutinizing transactions.

Orbital will owe Northrop Grumman a $275 million termination fee if the deal falls through, according to company filings.

Write to Dana Mattioli at dana.mattioli@wsj.com, Doug Cameron at doug.cameron@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

(END) Dow Jones Newswires

September 18, 2017 08:20 ET (12:20 GMT)