Adding some momentum to what has been a slumbering market in mergers and acquisition in the aerospace and defense industry, ATK [ATK] and Orbital Sciences [ORB] on Tuesday announced a $5 billion all-stock merger of their companies, minus ATK’s sporting business which will be spun-off to its shareholders.
The new Orbital ATK, a mid-tier defense and space company that is expected to stand up later this year pending approvals by regulators and each companies’ boards, will have $4.5 billion in sales, 13,000 employees and a broad portfolio of products in launch vehicles, solid rocket engines, tactical rocket motors, satellites and related components, composite aerostructures for commercial and military aircraft, precision munitions and related subsystems, large, medium and small caliber ammunition, strike weapons and missile warning systems.
Wall Street analysts reacted positively to the merger announcement and the company’s stocks prices did too. ATK’s stock on Tuesday closed at $148.22, up nearly 7 percent or $9.40, while Orbital’s jumped $4.39, or nearly 17 percent to close at $30.96.
“The strategic rationale is sound to us, and both companies should be well positioned in their respective markets,” J.P. Morgan aerospace and defense analyst Joseph Nadol said in a note to clients regarding the merger of Orbital and ATK and the divestiture of ATK’s $2.2 billion Sporting Group.
David Thompson, the current head of $1.4 billion Orbital, will lead Orbital ATK while ATK Chief Mark DeYoung will lead the still unnamed outdoor sporting company that competes in retail markets offering everything from bullets and guns to an extensive array of accessories for hunters, sportsmen and law enforcement. ATK is slated to report its fiscal year-end results on May 15 and has guided to sales between $4.7 billion and $4.8 billion.
There is little if any product overlap between the two companies and the greatest synergies come in the areas of launch vehicles and satellites and related subsystems and components. In the space and missile defense areas, Thompson said on an analyst call that the merger will create more vertically integrated product lines by marrying Orbital’s launch vehicles and satellite systems with ATK’s propulsion and satellite components. He said Orbital’s strengths in systems engineering and integration will help ATK’s defense systems and aerostructures businesses.
The two companies have been partnering for over 25 years in various areas of space related work, which Thompson said should ease the integration of the two into Orbital ATK. He pointed out that more than 400 ATK rocket motors have been used on more than 150 Orbital launch vehicles while 100 Orbital satellites have used 250 ATK components and subsystems.
The companies are also working together on a number of Orbital’s programs including the Antares medium launch vehicle, unmanned Cygnus spacecraft, missile defense interceptors and target vehicles, and commercial and government satellite programs, Thompson said.
Thompson provided a breakout of the five major aerospace and defense business areas and their respective sales profiles for Orbital ATK, with space and aeronautics accounting about 60 percent of the company and non-space defense the rest:
- Launch vehicles and rocket propulsion systems will make up about 25 percent of the company’s sales, combining legacy operations from Orbital and ATK;
- Satellites and advanced space systems, mostly from Orbital, will provide 22 percent of sales;
- Armament systems and ammunition, all ATK, 22 percent;
- Missile systems and defense electronics, mostly ATK, 18 percent; and,
- Aerospace structures and components, all ATK, representing 13 percent.
The companies expect annual cost savings of between $70 million to $100 million by the end of 2016 and an added annual revenue boost of between $150 million and $200 by the same time. The added sales will come through improved competitiveness, better products and stronger customer relationships, they said.
Thompson said that Orbital ATK will be in a position to compete for the next-generation ICBM program and in-space satellite servicing, endeavors neither company could have pursued on its own. He said Orbital’s work in long-range missile defense interceptors that includes the guidance and control, vehicle design and systems integration, combined with ATK’s solid rocket engines, gives the pending new company the know-how and capabilities to develop and build a strategic system.
Thompson and DeYoung emphasized that both companies bring a culture of agility and flexibility in meeting customer needs for innovative and affordable solutions.
Once the deal closes, ATK shareholders will own about 54 percent of Orbital ATK and Orbital shareholders about 46 percent. However, Orbital will hold nine of the 16 planned board seats while ATK chairman Ronald Fogleman will become chairman of Orbital ATK.
Thompson offered several preliminary financial targets for Orbital ATK between 2015 and 2017, with compound annual sales growth between 4 and 5 percent and per share earnings growth between 12 and 15 percent. He also said cumulative free cash flow in that period would be at least $1 billion, providing firepower to lower its debt, make strategic investments, and return cash to shareholders via dividends and share repurchases.
If Orbital ATK had stood up at the end of 2013, its earnings before interest, taxes, depreciation and amortization would be about $585 million, earnings per share $4, and total backlog $11 billion. The company will be based at Orbital’s current headquarters in Dulles, Va., and its stock will trade on the New York Stock Exchange under the ticker symbol “OA.”.
ATK’s financial adviser on the transaction is
Bank of America Merrill Lynch and Orbital’s is Citigroup.
The sporting business that ATK is divesting will be based in Utah and have 5,800 employees.
In highlighting one of the reasons for pursuing the split of ATK now, the company pointed out that the sporting, and aerospace and defense businesses are in different markets and have different operations, customers and compliance requirements. Separating the businesses will enable more management focus on each, the company said.
The announcement by ATK and Orbital follows two other deals announced last week, including The SI Organization’s planned acquisition of most of the North American operations of Britain’s QinetiQ and France’s Nexter Group’s agreement to buy the European munitions business of Britain’s Chemring Group.
Byron Callan, an aerospace and defense analyst with Capital Alpha Partners, said in a note to clients on Tuesday that the positive reaction by investors to the ATK-Orbital merger could stimulate further combinations in the sector.
“Given the familiarity of firms within the sector, we have to believe that other possible combinations have been long contemplated,” Callan wrote.