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ATK to Merge With Orbital, Spin Sporting Business

NEW YORK (The Deal) -- Orbital Sciences (ORB - Get Report) and Alliant Techsystems (ATK), two companies that have weathered a slowdown in government spending, said Tuesday they intend to combine in a deal that would create a $4.5 billion-sales space and defense juggernaut.

Deal terms call for Arlington, Va.-based Alliant, or ATK, to swap 0.449 of its shares for each share of Dulles, Va.-based Orbital, valuing Orbital at about $2.3 billion.

Post-deal, current ATK shareholders will own about 53.8% of the combined company, to be called Orbital ATK Inc.

In conjunction with the merger, ATK said it intends to spin its sporting group -- a maker of ammunition and other products for hunters -- as a separate publicly traded company. ATK said that about $1.4 billion in net existing company debt would remain with Orbital ATK at closing.

The Orbital-ATK deal would create a 13,000 employee government contractor focused on the manufacture of space launch vehicles and propulsion systems, tactical missiles, defense electronics, satellites, armaments and aircraft structures.

The deal combines two companies, with strong reputations among aerospace vendors, that have faced difficult times lately due to political gridlock. Orbital and other space-related companies have been hobbled by government cutbacks and contract delays, but the company's small- and medium-class satellite and launch lines are well regarded by NASA and other customers.

For ATK, the combination would provide it with Orbital's deep expertise and valuable government contracts, while responding to analyst and investor demand for the company to unlock the value of its fast-growing commercial ammunition business.

The transaction ranks as the largest U.S. aerospace deal in some time, and could signal a long-awaited thaw in aerospace and defense M&A. Bankers have said since last fall that a pent up demand exists in the sector for dealmaking, but complained that executives have been gun-shy due to uncertainty in Washington.

The companies said that Orbital's expertise, when combined with ATK's rocket propulsion, composite structure and space power systems businesses, should create better equipment at more affordable prices. Orbital has been a customer of ATK for more than two decades.

"This merger-of-equals combination of Orbital and ATK brings together two of the space and defense industry's most innovative developers and cost-efficient manufacturers who have worked closely together for over 25 years," Orbital chairman and CEO David W. Thompson said in a statement. "By building on complementary technologies, products and know-how and highly compatible cultures, Orbital ATK will deliver even more affordable space, defense and aerostructures systems to our existing customers and be well positioned to expand into adjacent markets."

Combined, the companies would have generated Ebitda of about $585 million on $4.5 billion in sales and boast a backlog of $11 billion. Orbital ATK said it believes it can cut upward of $100 million in annual expenses by eliminating duplicate public company costs and other streamlining, and expects revenue synergies of between $100 million and $200 million, thanks to improved competitiveness of their offerings and strengthened customer relationships.

ATK's sporting business was formed in 2001. The company has built a large position as a provider of ammunition and gear via deals including its 2013 purchase of Bushnell Group Holdings Inc. from MidOcean Partners LP for $985 million. The sporting business, which will be based in Utah post-spin, generated adjusted Ebitda of $361 million on sales of $2.2 billion in 2013.

The Sporting unit has secured a $750 million senior secured financing commitment from Bank of America Merrill Lynch and will dividend $300 million to $350 million of the proceeds of that new indebtedness to ATK immediately prior to the closing of the split. ATK said it would use that dividend to pay down its debt.

Post-deal, Orbital's Thompson would serve as CEO of Orbital ATK, with current ATK chief executive Mark W. DeYoung becoming chairman and CEO of ATK Sporting. Current ATK chairman Ronald R. Fogleman, a retired Air Force general, will lead a 16-person Orbital ATK board that includes seven directors from ATK and nine current Orbital board members.

ATK was advised by Bank of America Merrill Lynch along with attorneys from Cravath, Swaine & Moore LLP, while Orbital received advice from Citigroup Inc. and Hogan Lovells US LLP.

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