Northrop Grumman Announces Orbital ATK Buyout For $9.2B

Northrop Grumman Corporation (NYSE:NOC) announced that it has settled the acquisition deal with Orbital ATK (NYSE:OA) for $9.2 billion. Out of the total amount, the former will pay approximately $7.8 billion in cash and the assumption of $1.4 billion in net debt.

The shareholders of Orbital ATK will be given all-cash consideration of $134.50 per share, reflecting a premium of nearly 22.2% from Orbital’s Friday closing price of $110.04. The companies expect the transaction to be closed by the first half of 2018.

Orbital ATK’s current market capitalization is approximately $6.3 billion and the deal price is based on the company’s value and assumption of long-term debts of the company. On completion of the deal, Northrop Grumman wants to setup Orbital ATK as a new and fourth business unit.

Benefits of the Acquisition

Northrop Grumman continues to enjoy strong presence in Air Force, Space & Cyber Security programs. The company’s product innovation and focus on strengthening its ISR wing will help maintain a stable earnings stream amid rapidly changing requirements of the defense landscape.

With the acquisition of Orbital ATK, Northrop Grumman will benefit from the former's rocket motors, missiles and electro-optical countermeasure product lines. According to Northrop Grumman, post the merger, this new business unit will be accretive to earnings per share and free cash flow per share during the remaining months of 2018. Northrop Grumman will benefit from the acquisition of Orbital ATK .

Orbital ATK’s knowledge and expertise in satellites, spacecraft components and commercial space launch system will further expand Northrop Grumman’s product offering. No doubt the combined company will provide tough competition to the existing defense companies.

Orbital ATK's contracts with the NASA and the U.S. Army is expected to boost Northrop Grumman’s product portfolio and rake in more than $4.4 billion in the form of annual revenue according to Orbital’s 2016 financials. As of Jul 2, 2017, Orbital ATK’s total backlog was nearly $15.4 billion (up 4% year over year), of which, firm backlog was $9.5 billion (up 10% year over year).

The deal will be accretive to Northrop Grumman’s earnings per share and free cash flow in the first year of acquisition and lead to annual cost savings of nearly $150 million by 2020.

The combined company will be able to hold a larger portion of the U.S. Defense order through a diverse product portfolio. Incidentally, President Trump has requested to increase fiscal 2018 defense spending by 10% from the present level.

Another Mega Deal in the Space

Expansion through acquisition is not new in the defense industry. Earlier this month, United Technologies Corp. (NYSE:UTX) finalized the deal to acquire Rockwell Collins Inc. (NYSE:COL) for $30 billion. The deal is projected to be concluded by the third quarter of 2018, depending on consents from Rockwell Collins’ shareowners and other customary closing conditions, including the receipt of required regulatory approvals. (Read More: Rockwell Collins Clinches $30B Deal With United Technologies)

Price Movement

The announcement has received positive response from the market. Shares of Northrop have gained nearly 1.3% during intraday trading at the time of writing this blog.

Zacks Rank

Northrop Grumman currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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