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Lockheed Martin intends to buy Aerojet Rocketdyne at a $4.6 billion equity value, a deal that adds rocket engine and spacecraft propulsion assets to the defense contractor as it competes against the likes of Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin in the growing space industry.
Aerojet Rocketdyne’s business is split between defense and space, with about 60% of its sales to the former and 40% to the latter.
“Near term, the benefit for Lockheed Martin is on the defense side … and then you’re buying some optionality in the space markets down the road, to ideally get more competitive and defend your position,” Canaccord Genuity analyst Ken Herbert told CNBC.
Lockheed Martin is Aerojet’s largest customer, making up about 33% of its sales. United Launch Alliance, or ULA, makes up another 10% of Aerojet’s sales – a further complement to Lockheed Martin, which owns a 50% stake in ULA as a joint venture with Boeing.
“This is clearly a vertical integration play for [Lockheed Martin] and a larger investment on Space. The acquisition should complement their space launch business at United Launch Alliance, boost their capabilities in hypersonic propulsion and could have an impact on their battle field and tactical missile business,” Bank of America analyst Ron Epstein wrote in a note to investors on Monday.
Herbert also pointed to the benefits of vertical integration as a catalyst for Lockheed Martin acquiring Aerojet Rocketdyne. While aerospace companies historically have wide networks of suppliers, Herbert pointed out that SpaceX and Blue Origin have had success with building as much as possible in-house to drive down costs.
“Maybe on the government side, [Lockheed Martin is thinking] that’s where we need to be more vertically integrated to better compete over time against these companies coming into our market who are demonstrating real cost savings through their vertical integration,” Herbert said.
Lockheed Martin recently highlighted SpaceX as a major competitor, shortly after the private company went toe-to-toe with ULA in the latest Pentagon award of billions in launch contracts.
“We have seen SpaceX as an emerging threat [and] they are more than an emerging threat right now,” Lockheed Martin CFO Ken Possenriede said on the company’s third quarter earnings conference call in October.
“But … of the recent competitions we’ve had with them, we’ve actually been pleased with the outcome of where ULA landed relative to SpaceX,” Possenriede added. “Going forward, we’re confident that we certainly have the mission capable abilities, but we also think we now have a price point that is compelling to customers that will allow ULA to get its fair share of awards over SpaceX.”
While Herbert expects Aerojet Rocketdyne’s missile defense and hypersonic weapons programs will bring a boost, its space business has been on the sidelines of much of the grow in the space economy, as identified by CNBC PRO in November. The company’s decreased lead in the space industry was exemplified in 2018, when long-time customer ULA picked Blue Origin’s BE-4 engine over Aerojet’s AR1 to power the coming Vulcan rocket.
But Lockheed Martin will add several key space products through Aerojet Rocketdyne, which builds the RS-25 engine for NASA’s Space Launch System, the RL10C-X engine for the upper stage of ULA’s Vulcan rocket, and small spacecraft control thrusters that are used by Boeing’s Starliner crew capsules as well as NASA and ULA missions.
Jefferies analyst Greg Konrad noted the similarity of Lockheed Martin buying Aerojet Rocketdyne to Northrop Grumman’s $7.8 billion acquisition of rocket maker Orbital ATK in 2018. Both deals represent a top defense contractor widening its reach by acquiring a company that specializes in rocket propulsion and space.
“We don’t expect any issues with the deal closing. There will likely be a similar process as Northrop Grumman went through with Orbital ATK, with likely some pushback from key customers such as Raytheon and Boeing,” Konrad wrote.
The deal is expected to close in the second half of 2021, with analysts highlighting regulatory approval as one of the top risks to the transaction. Read more analysis of Aerojet Rocketdyne’s business here.
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