By Calvin Biesecker
Orbital Sciences Corp. [ORB] recently said it has agreed to acquire the spacecraft development and manufacturing business of General Dynamics [GD] for $55 million, giving the company an instant entry into the government market for medium-size satellites.
The cash deal is expected to close early in April. Orbital officials said they expect the acquisition to add about $50 million in sales in the current fiscal year with modest earnings accretion and $100 million in sales next year with more significant earnings accretion. The GD business had about $150 million in backlog at the end of 2009.
Orbital develops and manufactures small and medium-class rockets and small satellites. The annual government market for small satellites, around one ton or less in weight, is around $300 million to $350 million in the United States, with most of the work in the defense and intelligence space, David Thompson, Orbital’s chairman and CEO, said during an analyst call.
The market for medium-class satellites, which range between one and five tons, averages around $900 million annually, Thompson said.
The products from GD’s spacecraft business “should more than double Orbital’s addressable market over the next few years,” he said.
Thompson wouldn’t mention specific opportunities but said there are six to seven over the next 18 months worth up to $1.5 billion combined that Orbital can now entertain or pursue from a stronger position than it could previously.
Thompson outlined four main reasons the pending acquisition of GD’s spacecraft business is a “compelling strategic fit” with Orbital. One is that the deal expands and strengthens Orbital’s customer base with NASA, military space customers and government intelligence agencies.
Some of the satellite programs GD has worked on include the commercial GeoEye-1 earth imaging satellite, NASA’s Gamma Ray Large Area Space Telescope and the NFIRE experimental satellite for the Missile Defense Agency.
The deal also gives Orbital a deeper understanding of key government satellite applications such as intelligence and surveillance, missile warning and tracking, space situational awareness, earth science and observation, and advanced astronomy, Thompson said.
Third, he said, Orbital will gain one of the leading medium-class satellite platforms, a standard satellite-bus that serves as the foundation for a number of satellites, which accelerates entry into a new market for the company and less expensively than if Orbital had to invest in the design, development and manufacturing of medium satellites from scratch.
The product development costs to “evolve” Orbital’s current satellite capabilities and products into medium-size craft would at least be $25 million to $30 million and it would take some additional monies for capital equipment, Garrett Pierce, Orbital’s chief financial officer, said. This would take upward of two and a half years, he said.
On top of those investments would be construction of modern manufacturing facilities, which Orbital is obtaining through the deal, costing more than $50 million, Pierce said. These manufacturing facilities, combined with the 325 employees that will be joining Orbital from GD, are another reason the deal squares well with Orbital’s strategy, Thompson said. GD’s space manufacturing facilities in Arizona “will address our mid- and long-term manufacturing capacity needs for larger satellites in both government and commercial markets,” he said.
Over 80 percent of the new Orbital employees have security clearances with the U.S. government and 60 percent are engineers and program managers, Orbital said.
The space business that GD is selling is the former Spectrum Astro, which GD acquired in 2004. At the time, the small satellite manufacturer had about $134 million in annual sales, over 30 percent more than Orbital expects it to generate next year.
GD, through its C4 and Advanced Information Systems divisions, will still be involved in space related business, supplying satellite-based encryptors, ground-based and integration services, and satellite control services.
Houlihan Lokey served as Orbital’s financial adviser on the deal.