On Sunday, Lockheed Martin (LMT) ($356.03) announced the acquisition of Aerojet Rocketdyne (AJRD) ($42.04) in an all cash deal worth $4.4B at a net share price of $51. The deal should close in late 2021.
The deal is the first large move by Lockheed CEO James Taiclet since taking over this past summer and seems to validate predictions of the company entering a period of expansion and diversification.
Aerojet Rocketdyne
- Aerojet and Rocketdyne have been premier American rocket and missile engine manufacturers for decades, providing the engines for the Apollo spacecraft, the Saturn V moon rocket and the Space Shuttle. The Saturn V F-1 engine still remains the largest single-chamber liquid-fueled rocket engine ever made.
- AJRD's current space programs include the National Security Space Launch program (formerly EELV), NASA's Space Launch System essential to getting back to the moon and on to Mars, Boeing's (BA) CST-100 Starliner (Space X competitor) and electrical and chemical propulsion systems for a multitude of satellites.
- AJRD's current defense programs include components on LMT's THAAD missile defense system, the Navy's Standard Missile, Northrop's Ground Based Strategic Deterrent (ICBM replacement), Raytheon's Tomahawk missile and Lockheed's hypersonic missile (ARRW = Air Launched Rapid Response Weapon).
- 96% of AJRD's $2B net sales in 2020 are directly or indirectly to the US Government. Lockheed is AJRD's largest customer with a 34% share of net sales, followed by NASA at 22% and Raytheon (RTX) at 16%.
- As of 30 September, AJRD's net income for 2020 is running at 6.7% of $1.5B in net sales with free cash flow of $108M, compared to $80M for the same period in 2019.
Assessment
- Lockheed's move looks a lot like Northrop Grumman's (NOC) acquisition of Orbital ATK in 2018. At the time of that purchase Orbital ATK had a solid tradition in the building of spacecraft, rocket engines and solid fuel boosters and was essentially the only traditional alternative to AJRD. Orbital was about 2.5X in revenues compared to AJRD today. The approval of the merger by the FTC required that NOC install a firewall with the solid booster business during the Ground-Based Strategic Deterrent (ICBM replacement) competition so that Boeing could access Orbital as a supplier. Nevertheless, Boeing saw its position as untenable and withdrew from the competition leaving NOC as the sole bidder for the $80B program.
- If approved, the acquisition will greatly improve Lockheed's vertical integration in space and missile systems. Lockheed has the dominant position within DoD in the race to develop hypersonic weapons as well as in the long range air and ground weapons programs essential to any conflict with China. Raytheon is its main competitor in these tactical and operational missiles whether from aircraft, ships or the ground. We agree with Boeing's assertion that owning one of the main suppliers in a very narrow sector is a huge advantage over outsiders and provides advantages, e.g., integration, to other sectors within the company. Lockheed would reap this benefit over Raytheon.
- The approval process for this acquisition will provide one of the first insights into the Biden Administration's policy on consolidation within the defense/aerospace industry. There is no question that DoD will continue to want to maintain the ability to compete the cost-driving and essential components of its future weapons. Lockheed will undoubtedly argue that bringing AJRD into its large family will in fact improve its ability to compete with Northrop, Blue Origin and Space X.
