Nearly a year after the collapse of a proposed deal by Lockheed Martin [LMT] to buy engine and rocket maker Aerojet Rocketdyne [AJRD], the only independent supplier of tactical rocket motors and engines for space launch vehicles last Saturday found a new suitor, L3Harris Technologies [LHX], which agreed to buy the company for $4.7 billion.
L3Harris will pay $58 per share in cash for the California-based Aerojet Rocketdyne, and the total deal value includes debt. The companies made the announcement on Sunday, a day after the deal was agreed to.
The transaction value is $300 million above what Lockheed Martin agreed to in December 2020 when its deal for Aerojet was announced. But 13 months later, in January 2022, the U.S. government moved to block the acquisition due to anti-trust concerns and Lockheed Martin terminated the agreement in February.
Aerojet is the last independent manufacturer of missile propulsion technologies that Lockheed Martin, among other defense companies, uses in their weapon systems. The Federal Trade Commission warned that Lockheed Martin could cut off access to Aerojet’s missiles and munitions components to other defense contractors, potentially raise prices for these components, and let quality and innovation suffer.
Aerojet is a provider of propulsion technology for Lockheed Martin’s Guided Multiple Launch Rocket System precision munitions, which goes by GMLRS and is being used with great effect by Ukrainian forces in their war against Russian invaders.
L3Harris’ proposed deal is less about vertical integration. The company doesn’t make missiles and munitions but it does develop and manufacture defense electronics, fuses and sensors used in these weapons.
“We don’t see regulatory hurdles to an L3Harris-Aerojet deal as there are no vertical integration issues, and the resulting company is still smaller than several larger primes,” Byron Callan, an aerospace and defense analyst with the strategic advisory firm Capital Alpha Partners, said in a note to clients on Sunday night.
The companies expect to close the deal in 2023 subject to approvals by regulators and Aerojet’s shareholders. If the deal isn’t concluded by Dec. 17, 2023, deal terms include an automatic six-month extension, and beyond that L3Harris could extend the closing period another three months.
If regulators don’t approve the deal, L3Harris will be required to pay Aerojet at $406.3 million termination fee. If Aerojet terminates the deal, it must pay L3Harris a $95.6 million break fee.
Once the deal closes, L3Harris will have around $20 billion in sales. The company expects revenue this year to be around $16.8 billion and Aerojet had $2.2 billion in 2021. L3Harris is also in the process of acquiring the tactical data link business of ViaSat [VSAT] for $2 billion.
In addition to missiles and munitions, the pending acquisition will give L3Harris a significant footprint in the areas of missile defense, space exploration, and hypersonics.
Sheila Kahyaoglu, an aerospace and defense analyst with Jefferies, said in a client note on Sunday that Aerojet will allow L3Harris to expand into the Next Generation Interceptor missile defense program and the Ground Based Strategic Deterrent, a successor to the current Minuteman III ICBM.
Other marquis missile programs that Aerojet is on include the Standard Missile, Patriot PAC 3, and Terminal High Altitude Area Defense.
In the space market, Aerojet supplies the RS-25 and RL 10 engines for launch vehicles, the main engine for NASA’s Orion space capsule, an in-space propulsion for satellites. L3Harris provides electronics, instruments, sensors and also satellites for the space market.
Capital Alpha’s Callan points out that the rocket engine and weapons propulsion arena has welcomed a number of new competitors such as Adranos, Estes Energetics, Firehawk Aerospace, X-Bow Systems and possibly others that will eventually increase competition.
He doesn’t expect Aerojet to be dislodged “from heritage tactical and air defense programs, but if new programs emerge to address precision weapons and air defense needs underscored by the Russo-Ukraine War, Aerojet will likely need additional investment and human capital to compete. We suppose that L3Harris can supply that, but addressable markets may be more dynamic as the decade unfolds.”
Northrop Grumman [NOC], through its 2018 acquisition of Orbital ATK, also manufactures propellants for missiles, as well as space launch vehicles.
Defense programs make up the majority of Aerojet’s sales with the Army and Missile Defense Agency the largest end customers followed by the Air Force, Navy and others. NASA is the company’s largest customer in the space arena.
Aerojet has more than 5,000 employees and total backlog of $6.7 billion, which will increase L3Harris’ backlog to nearly $30 billion, giving the company greater earnings visibility. L3Harris expects the acquisition to be accretive to adjusted earnings in the first year after the deal closes.
L3Harris also said the acquisition will better balance its mix of long-cycle programs and short-cycle products.
Aerojet’s financial advisers on the deal are Citi and Evercore. L3Harris is being advised by Barclays Capital and Goldman Sachs & Co.