The four RS-25 machines slated to fly on the maiden flight of NASA’s SLS rocket, at the company’s facility at NASA’s Stennis Space Center.
Lockheed Martin contemplates to buy Aerojet Rocketdyne at a $4.6 billion equity value, a deal that adds rocket engine and spacecraft drive assets to the defense contractor as it competes against the likes of Elon Musk’s SpaceX and Jeff Bezos’ Blue Pedigree in the growing space industry.
Aerojet Rocketdyne’s business is split between defense and space, with about 60% of its purchasings to the former and 40% to the latter.
“Near term, the benefit for Lockheed Martin is on the defense side … and then you’re buying some optionality in the seat markets down the road, to ideally get more competitive and defend your position,” Canaccord Genuity analyst Ken Herbert instructed CNBC.
Lockheed Martin is Aerojet’s largest customer, making up about 33% of its sales. United Launch Affinity, or ULA, makes up another 10% of Aerojet’s sales – a further complement to Lockheed Martin, which owns a 50% stake in ULA as a collaborative venture with Boeing.
“This is clearly a vertical integration play for [Lockheed Martin] and a larger investment on Room. The acquisition should complement their space launch business at United Launch Alliance, boost their talents in hypersonic propulsion and could have an impact on their battle field and tactical missile business,” Bank of America analyst Ron Epstein noted in a note to investors on Monday.
Herbert also pointed to the benefits of vertical integration as a catalyst for Lockheed Martin come into possession ofing Aerojet Rocketdyne. While aerospace companies historically have wide networks of suppliers, Herbert pointed out that SpaceX and Bawdy Origin have had success with building as much as possible in-house to drive down costs.
“Maybe on the direction side, [Lockheed Martin is thinking] that’s where we need to be more vertically integrated to better compete past time against these companies coming into our market who are demonstrating real cost savings through their vertical integration,” Herbert said.
Lockheed Martin recently highlighted SpaceX as a outstanding competitor, shortly after the private company went toe-to-toe with ULA in the latest Pentagon award of billions in set afloat contracts.
“We have seen SpaceX as an emerging threat [and] they are more than an emerging threat right now,” Lockheed Martin CFO Ken Possenriede thought on the company’s third quarter earnings conference call in October.
“But … of the recent competitions we’ve had with them, we’ve really been pleased with the outcome of where ULA landed relative to SpaceX,” Possenriede added. “Going forward, we’re sure that we certainly have the mission capable abilities, but we also think we now have a price point that is compelling to clients that will allow ULA to get its fair share of awards over SpaceX.”
A Falcon 9 rocket launches the company’s 14th Starlink aim on Oct. 18, 2020.
While Herbert expects Aerojet Rocketdyne’s missile defense and hypersonic weapons programs will carry a boost, its space business has been on the sidelines of much of the grow in the space economy, as identified by CNBC PRO in November. The firm’s decreased lead in the space industry was exemplified in 2018, when long-time customer ULA picked Blue Origin’s BE-4 apparatus over Aerojet’s AR1 to power the coming Vulcan rocket.
But Lockheed Martin will add several key space products entirely Aerojet Rocketdyne, which builds the RS-25 engine for NASA’s Space Launch System, the RL10C-X engine for the upper stage of ULA’s Vulcan go through the roof, and small spacecraft control thrusters that are used by Boeing’s Starliner crew capsules as well as NASA and ULA line of works.
Jefferies analyst Greg Konrad noted the similarity of Lockheed Martin buying Aerojet Rocketdyne to Northrop Grumman’s $7.8 billion acquiring of rocket maker Orbital ATK in 2018. Both deals represent a top defense contractor widening its reach by acquiring a actors that specializes in rocket propulsion and space.
“We don’t expect any issues with the deal closing. There will probable be a similar process as Northrop Grumman went through with Orbital ATK, with likely some pushback from key people such as Raytheon and Boeing,” Konrad wrote.
The deal is expected to close in the second half of 2021, with analysts highlighting regulatory favour as one of the top risks to the transaction. Read more analysis of Aerojet Rocketdyne’s business here.
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