Northrop Swoops In to Save the Day for Orbital ATK

Defense contractor Northrop Grumman Corp. (NOC) said Monday, Sept. 18, it would acquire its Dulles, Va.-based peer Orbital ATK Inc. (OA)   for $7.8 billion in cash, or $134.50 per share, continuing a long-awaited spree of defense sector M&A. 

The all-cash deal comes at a 24% premium to Orbital's closing share price Friday, Sept. 15, before accounting for the $1.4 billion in debt Northrop has agreed to assume.

For Los Angeles-based Northrop, the transaction is somewhat of an about-face to its recent strategy, which has focused on maintaining a solid balance sheet and has seen the company do much more selling than buying in recent years.

In fact, the last time Northrop announced a purchase was in September 2008 when it picked up CM Equity Partners LP-backed 3001 International Inc. for an undisclosed sum. Since then, the company has divested four businesses, including Tasc Inc., which it sold in November 2009 to an investor group led by General Atlantic LLC and affiliates of Kohlberg Kravis Roberts & Co. for about $1.65 billion in cash. In January, Northrop sold BluVector Inc. to LLR Partners Inc. for an undisclosed sum. 

But defense industry consolidation was a major expectation in 2017, even before President Donald Trump was elected and Republicans took control of both houses of Congress. 

Earlier this month, United Technologies Corp. (UTX)  agreed to pick up airplane parts maker Rockwell Collins Inc. (COL) ) for $23 billion, or $140 a share. 

And Orbital ATK may have been as ripe as anyone in the sector for a takeover, given its recent financial woes and the stock's performance over the past few years. The Deal named Orbital a target last August, noting that if the company did not seek immediately to right the ship, an activist could come in to shake things up. 

Orbital ATK, an aerospace and defense technology company that produces launch vehicles and related propulsion systems, missile products, subsystems and defense electronics, was formed in April 2014 through the $2.3 billion merger of Orbital Sciences Corp. and Alliant Techsystems Inc.

Since then, the company has clawed and scratched its way through a number of missteps, including a major launchpad explosion in 2014 and a 2016 accounting issue on a $2 billion-plus contract to supply the U.S. Army with ammunition.

Now Northrop, a $25 billion-in-sales global security firm, has swooped in to save the day, with the companies expecting to close the deal in the first half of the year, pending regulatory and Orbital ATK shareholder approval. 

Northrop said it will establish Orbital ATK as a new, fourth business sector, and on a pro forma 2017 basis, the combined company expects to have sales in the range of $29.5 billion to $30 billion. Furthermore, Northrop anticipates that the deal will be accretive to earnings and free cash flow in the first full year following the deal's close, and to generate annual pre-tax cost savings of $150 million by 2020. 

The buyer said it has secured fully committed debt financing and expects to put in place permanent financing prior to closing. Northrop said it will use its strong cash flow to continue to pay down debt, pay a competitive dividend and repurchase shares while maintaining a solid investment grade credit rating. 

Northrop received financial advice from Perella Weinberg Partners LP's Peter Weinberg and Ben Wilcox and legal counsel from Cravath, Swaine & Moore LLP's Faiza Saeed and Eric Schiele. Northrop's in-house legal effort was led by general counsel Sheila Cheston and assistant general counsel John Cox.

Orbital ATK took financial advice from Citigroup Inc.'s Stephen Edelman and Brian Link and legal counsel from Hogan Lovells US LLP's John Beckman, Joseph Connolly Jr., Leslie Reese III, Peter Trentman, Joseph Krauss, Meghan Rissmiller, Carin Carithers and Meg McIntyre. Citigroup was represented by Cleary Gottlieb Steen & Hamilton LLP's Victor Lewkow, Neil Markel, and Ashley Kerr.

--David Marcus contributed to this report

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