The federal government did not require L3Harris Technologies [LHX] to negotiate a consent agreement to ensure it would be an unbiased supplier of tactical missile motors and rocket engines before closing its acquisition of Aerojet Rocketdyne [AJRD] but the company did assure the Department of Defense it will remain a merchant supplier of these products to any potential eligible customer, Christopher Kubasik, chairman and CEO of L3Harris, said on Thursday.
The $4.7 billion acquisition is expected to close as early as Friday, L3Harris said on Wednesday evening after the close of the stock markets.
The Federal Trade Commission (FTC) in early 2022 rejected an attempt by Lockheed Martin [LMT] to acquire Aerojet Rocketdyne due to concerns that allowing Lockheed Martin to become more vertically integrated—which means it would own production of the munitions and the motors that power them—could reduce competition and fuel higher costs to the government and stymie innovation.
When Northrop Grumman [NOC] acquired Orbital ATK in 2018, the government mandated that Orbital ATK’s rocket motors and engine business would remain a merchant supplier.
L3Harris on the other hand does not make munitions and the rocket motors and engines business of Aerojet will be a new product portfolio for the company, which in turn will give it a position on key missile platforms such as the Javelin anti-tank weapon, the Guided Multiple Launch Rocket System, Standard Missiles, Army Tactical Missile System, Stinger, and others.
Kubasik said Thursday morning during the company’s second quarter earnings call that owning Aerojet fits well with L3Harris’ legacy business model as a holding company where most of its business units operated as merchant suppliers to the aerospace and defense industry.
“We have a long legacy of being a merchant supplier and we’ll continue with that model,” Kubasik told analysts on the call. “Once we close Aerojet Rocketdyne, I can assure you, we are highly motivated to sell rocket engines and rocket motors to anyone who wants to buy him within the rules, globally,” he said.
Once the deal closes, L3Harris is “ready to hit the ground running on day one,” he said, highlighting that the company has an integration office that includes Aerojet employees to ensure the combination goes well. He added that L3Harris is using the “playbook” it used to merge the former Harris Corp. and L3 Technologies in 2019.
L3Harris has identified about 100 key Aerojet employees and more than 98 percent have agreed to remain with the company, Kubasik said.
Kubasik was asked by J.P. Morgan aerospace and defense analyst Seth Seifman about his investment plans for Aerojet, pointing to concerns the Defense Department has had in sourcing solid rocket motors and issues that Aerojet’s customers have had over the years about the “perceived lack of investment” by the rocket maker in its product lines.
Kubasik noted the recent DoD Defense Production Act contract to provide Aerojet with $215 million to expand the company’s production facilities and to “digitize their engineering.” L3Harris will bolster the government’s investment by immediately leveraging its internal tools such as capability modeling and zero-defect planning, he said.
Aerojet already has a “go forward plan” that Kubasik said has been reviewed by L3Harris and puts “a real focus on deliveries and quality of critical missile programs.”
At the outset of the call, Kubasik said the “acquisition will strengthen the defense industrial base, foster healthy competition and accelerate innovation in supporting the warfighter.”
Kubasik also repeated the strategic rationale for the deal, which has been reinforced by Ukraine’s war against Russia and the need for a healthy munitions industrial base.
“These are growth markets, as you well know, especially on the weapons side and its well aligned with the government priorities already mentioned,” he said.
Aerojet also gives L3Harris a position in hypersonics for engines, propellants and materials, a technology area that in the long-term will be a market “differentiator” and disruptor, Kubasik said.