Lockheed Martin’s Aerojet Rocketdyne deal helps compete with SpaceX
The four RS-25 engines were scheduled to fly on the maiden flight of NASA’s SLS rocket at the company’s facility at NASA’s Stennis Space Center.
Lockheed Martin intends to purchase Aerojet Rocketdyne for an equity value of $ 4.6 billion. This deal adds rocket and spacecraft propulsion to the defense company as it competes against Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin in the growing space industry.
Aerojet Rocketdyne’s business is split between defense and space, with approximately 60% of sales going to the former and 40% to the latter.
“In the short term, Lockheed Martin’s advantage is on the defense side … and then you buy an option in the space markets to ideally become more competitive and defend your position,” Ken Herbert, genuity analyst at Canaccord, told CNBC.
Lockheed Martin is Aerojet’s largest customer and accounts for around 33% of its sales. The United Launch Alliance (ULA) accounts for a further 10% of Aerojet’s sales – another addition to Lockheed Martin, which has a 50% stake in ULA as a joint venture with Boeing.
“This is clearly a vertical integration game for [Lockheed Martin] and a bigger investment in space. The acquisition should complement the United Launch Alliance’s space business, improve its hypersonic propulsion capabilities and impact the battlefield and tactical missile business, “Bank of America analyst Ron Epstein wrote in a statement to investors on Monday.
Herbert also pointed out the benefits of vertical integration as a catalyst for Lockheed Martin’s acquisition of Aerojet Rocketdyne. While aerospace companies have had a wide network of suppliers in the past, Herbert pointed out that SpaceX and Blue Origin have successfully built as much as possible in-house to keep costs down.
“Maybe on the government side, [Lockheed Martin is thinking] We need to be more vertically integrated here in order to be able to better hold our ground against these companies that come into our market and achieve real cost savings through their vertical integration, “said Herbert.
Lockheed Martin recently highlighted SpaceX as a major competitor shortly after the privately owned company partnered with ULA on the recent Pentagon award of billions of startup contracts.
“We saw SpaceX as an emerging threat [and] They’re more than an emerging threat right now, “Lockheed Martin CFO Ken Possenriede said on the company’s third-quarter earnings conference call in October.
“But … from the recent competitions we had with them, we were actually happy with the outcome, where ULA ended up compared to SpaceX,” added Possenriede. “We are confident that we certainly have the mission-critical skills, but we also believe that we now have an award that will convince customers that will allow ULA to receive a fair share of awards through SpaceX.”
A Falcon 9 rocket launches the company’s 14th Starlink mission on October 18, 2020.
While Herbert expects Aerojet Rocketdyne’s missile defense and hypersonic weapons programs to give a boost, the space business has been on the verge of much of the growth in the space economy, as CNBC PRO noted in November. The company’s diminished lead in the space industry was exemplified in 2018 when longtime customer ULA selected Blue Origin’s BE-4 engine over Aerojet’s AR1 to power the upcoming Vulcan missile.
Lockheed Martin will, however, be powered by Aerojet Rocketdyne, which has the RS-25 engine for NASA’s Space Launch System, the RL10C-X engine for the upper stage of the Vulcan rocket from ULA, and small spacecraft control engines from Boeing be deployed, build, add several key space products to Starliner crew capsules, as well as NASA and ULA missions.
Jefferies analyst Greg Konrad noted the similarity between Lockheed Martin’s purchase of Aerojet Rocketdyne and Northrop Grumman’s acquisition of rocket maker Orbital ATK for $ 7.8 billion in 2018. Both deals represent a top defense entrepreneur who expanded its reach by acquiring a company specializing in rocket propulsion and space.
“We don’t expect any issues with the deal. There will likely be a similar process that Northrop Grumman went through with Orbital ATK, with likely some setbacks from key customers like Raytheon and Boeing,” wrote Konrad.
The transaction is expected to close in the second half of 2021. Analysts highlight regulatory approval as one of the biggest risks to the deal. You can find more analysis of Aerojet Rocketdyne’s business here.
Subscribe to CNBC PRO for exclusive insights and analysis as well as live business day programs from around the world.