Geopolitics

North Korea’s Nuclear Threat Triggers $9.2B Defense Deal

Northrop Grumman has agreed to acquire fellow aerospace & defense contractor Orbital ATK (NYSE: OA) for $7.8 billion in cash, plus the assumption of $1.4 billion in net debt. That works out to $134.50 per share for Orbital investors, up roughly 22% on Friday’s close. Along with opportunities in large-class launch and in-orbit satellite servicing, the deal was motivated by Northrop’s desire to increase its exposure to the missile defense sector—a segment that’s been in focus in recent months given weapons tests by North Korea and threats to strike Guam, a US territory.

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Since May 1, strategic acquirers have completed 25 transactions in the space, per the PitchBook Platform, quickening the pace of what has otherwise been a slow year:

Global M&A activity in aerospace & defense

North Korea Defense Deal

Deal count has largely held steady at or above roughly 100 completed transactions on an annual basis in aerospace & defense for most of the past decade, with the exception of the post-recession years of 2009 and 2010. Deal value has been a different story, however, as a combination of massive aircraft order backlogs, focus on advanced avionics, and an expected ramp in defense spending boosts interest.

This year's $11.67 billion in deal value has come on the back of just 42 completed transactions; by contrast, 2012's record-setting totals for both deal value and deal count represented $22.1 billion on 105 completed transactions led by United Technologies picking up Goodrich for some $16.5 billion. Likewise, deal value this year's been led almost single-handedly by Rockwell Collins closing its $6.7 billion B/E Aerospace deal.

Rockwell's own potential $30 billion acquisition by United Technologies, announced earlier this month, is the largest deal in a pipeline that includes 13 other aerospace & defense transactions waiting to close.

Northrop Grumman plans to establish Orbital as a fourth business sector generating sales in the range of $29.5 billion to $30 billion based on current guidance. The combination is also expected to generate estimated annual pre-tax cost savings of $150 million by 2020 and be accretive to earnings in the first year after closing.

The combination of Northrop Grumman and Orbital has already received unanimous approval from the boards of both companies and is expected to close sometime in 1H 2018. Shares of Northrop Grumman (NYSE: NOC) popped more than 3.3% Monday as investors cheered the deal. In an initial note to clients, Stifel analysts highlighted the synergies in play as the two companies maintain a complementary set of businesses: Northrop makes satellites; Orbital makes space rockets and missile engines.

The combination will help Northrop compete against Boeing in the US Defense Department's plans for a new, $80 billion land-based nuclear missile program to replace the Minuteman III. In addition, the combination will help increase exposure to Boeing's Ground-based Midcourse Defense system, or GMD, designed to target ballistic missiles during their launch apogee in space. Orbital builds the launch vehicles while Northrop builds the control systems.

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Article by Adam Putz, Anthony Mirhaydari - PitchBook