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Lockheed Martin: A Solid Offer for Aerojet's Solid Rocket Business

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GuruFocus.com
·4 min read
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- By John Engle

On Dec. 20, Lockheed Martin Corp. (LMT), a leader in the aerospace industry, announced that it would acquire Aerojet Rocketdyne Holdings Inc. (AJRD), a solid rocket motor (SRM) manufacturer.


With a total transaction value pegged at $4.4 billion, the buyout is poised to reshape a significant portion of the U.S. missile engine market.

An accretive acquisition

Lockheed has been one of the top buyers of Aerojet's missile engines for years. In fact, Lockheed accounts for roughly 33% of Aerojet's total sales. For companies so closely intertwined, a merger can yield significant economic benefits. Lockheed CEO James Taiclet made that very case in a company press release on Dec. 20:


"Acquiring Aerojet Rocketdyne will preserve and strengthen an essential component of the domestic defense industrial base and reduce costs for our customers and the American taxpayer. This transaction enhances Lockheed Martin's support of critical U.S. and allied security missions and retains national leadership in space and hypersonic technology. We look forward to welcoming their talented team and expanding Lockheed Martin's position as the leading provider of 21st century warfare solutions."



By acquiring Aerojet, Lockheed will both expand its capabilities and vertically integrate a key supply chain. It may also offer additional strategic advantages, including becoming a critical SRM supplier to industry rivals such as Raytheon Technologies Corp. (RTX), which makes up about 17% of Aerojet's missile engine sales.

Leveling the playing field

Two companies, Aerojet and Orbital ATK, long dominated the nation's large SRM market. Always smaller than its rival, Aerojet still managed to carve out a lucrative niche for itself. Then in 2018, the delicate balance between the two players was disrupted when Orbital merged with Northrop Grumman Corp. (NOC). Backed up by such a large and diversified aerospace company, Orbital seemed poised to muscle Aerojet out of the large SRM market.

By acquiring Aerojet, Lockheed has upended the large SRM space yet again. According to the Lexington Institute's Loren Thompson, the combined entity could be able to go head to head with Northrop Grumman:


"Having largely cornered the market for large SRMs, Orbital looked poised to dominate for the foreseeable future given the financial leverage it would have by combining with the vast Northrop enterprise...Lockheed Martin's purchase of Aerojet, assuming regulatory and shareholder approvals, would seem to definitively resolve the concerns. Aerojet Rocketdyne will now have the same kind of financial resources to draw on as Orbital did when it joined Northrop, assuring that both domestic suppliers of large solids can remain active in military and civilian markets."



With the backing of Lockheed's vast reach and resources, Aerojet's SRM business can once again compete on a level playing field with Orbital. Indeed, it may even open the way to seizing the top position in future.

Subject to government approval

As is the case with most companies deeply tied to the defense sector and military, Lockheed's acquisition of Aerojet will not be a done deal until federal regulators and the Department of Defense (DoD) give it their stamp of approval. On a Dec. 21 conference call with analysts, Taiclet expressed confidence that the deal would be approved, citing the similar circumstances governing Northrop's acquisition of Orbital:


"There's already an example of how DoD handled a prime contractor in the space domain taking in a propulsion supplier. Our overall expectation is that this may be the same lens through which this transaction is viewed."



While the DoD tends to follow precedent, there is no way to truly guarantee approval of an acquisition. Moreover, industry rivals may raise objections. According to Byron Callan, an industry analyst at Capital Alpha Partners, Raytheon and the Boeing Co. (BA) are the likeliest industry players to try to derail the deal:


"Raytheon and Boeing may see the Lockheed-Aerojet deal as a competitive threat, but we don't yet know if this is true and, if so, how hard they will push DoD and other Justice or Federal Trade Commission on this issue."



My verdict

In my assessment, a $4.4 billion price tag looks like a fair deal for shareholders of both Aerojet Rocketdyne and Lockheed Martin. Aerojet shareholders are set to get bought out at a decent premium, while the Aerojet business itself will become part of a larger organization that can give it the resources and support it needs to compete with Northrop Grumman in the large SRM space. Lockheed, meanwhile, will gain a valuable and accretive new business line.

It will likely take several months before the final decision is made and there are many variables that could potentially disrupt, or even derail, Lockheed's acquisition of Aerojet. I will be following the story closely as it develops.

Disclosure: No positions.

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This article first appeared on GuruFocus.