Competition in the global security sector intensifies as Northrop Grumman announced the acquisition of Orbital ATK, an aerospace and defense technology company in a $9.2bn deal.
Northrop Grumman was up +1.52% in midday trading after the announcement on Monday and Orbital was up +20.87%.
Northrop will pay $7.8bn in cash for Orbital and assume $1.4bn in net debt. The Virginia-based company, which designs, builds and delivers space, defense and aviation-related systems, has around $4.5bn in annual revenues. Orbital shareholders will receive $134.50 per share.
The acquisition will provide Northrop Grumman with an expanded portfolio of business broadening its capabilities in the missile-defense business and speeding up innovation in the sector. The company won a $21.4bn contract two years ago to build a fleet of B-21 bomber jets for the US Air Force.
Reshaping the aerospace sector
Given the recent threat of North Korea firing missiles, there is an increased focus on missile defense systems. Orbital is a supplier of advanced defense electronics including missile-warning and aircraft survivability and special-mission aircraft and is an industry leader in propulsion and controls for air-, sea- and land-based tactical missiles and missile defense interceptors.
As a bigger company, Northrop Grumman expects to have a competitive edge pursuing what it called “other opportunities”. But as analyst, Byron Callan of Capital Alpha Partners LLC in Reuters outlined, “Orbital’s rocket motors, missiles and electro-optical countermeasure product lines would enlarge Northrop’s offerings to its largest customer, the U.S. Department of Defense.”
This deal follows on the heels of United Technologies’ purchase of Rockwell Collins, an airplane parts manufacturer in a $23bn tie up and the largest deal of the sector. Northrop Grumman says it will achieve higher operational performance in its current businesses with estimated annual pre-tax cost savings projected to be around $150 million by 2020.
The company says on a pro forma 2017 basis, it expects to have sales in the range of $29.5bn to $30bn based on current guidance and expects the transaction to be accretive to earnings per share and free cash flow per share in the first full year after the transaction closes.