Aerojet Meets Lockheed Need

With its acquisition of Aerojet Rocketdyne Holdings Inc., Lockheed Martin Corp. will boost its presence in the space industry and the Valley.The Bethesda, Md.-based aerospace and defense contractor is buying Aerojet in El Segundo for $5 billion cash. Lockheed will pay $56 a share for Aerojet stock although a special dividend of $5 per share will be paid to stockholders in March. That dividend will reduce the price per share paid by Lockheed to $51.

Aerojet makes rocket engines. As Rocketdyne, the company developed rocket engines for the entire U.S. space program, including the Saturn rocket engines for the Apollo moon missions and the main engine for the Space Shuttle. It has a facility in the San Fernando Valley at DeSoto Avenue and Nordhoff Street in Chatsworth. That facility is currently manufacturing the RS-25 engine for use on NASA’s Space Launch System (SLS), the space agency’s heavy lift rocket that will return humans to the moon in 2024 and then possibly to Mars.

Lockheed Martin maintains its top-secret research and development division known as the Skunk Works in Palmdale.  Alex King, founder of Cestrian Capital Research Inc., an equity research firm in Newport Beach that follows the space industry, said that with this transaction Lockheed gets a business in propulsion where it doesn’t have a presence.

“I’d fall off my horse if it ran into anti-trust problems because they don’t own much in propulsion, if any, today,” King said.

Whether any other buyers will appear is unlikely, said King and two other analysts who follow the company – Greg Konrad of Jefferies Financial Group Inc. and Truist Securities Inc.’s Michael Ciarmoli.

Raytheon Technologies Corp. would have been a potential buyer, but that defense contractor has its hands full right now with the merger of United Technologies Inc., King said.“Lockheed is the best buyer,” he added.   United Technologies is the former owner of Rocketdyne, having bought the company from Boeing Co. in 2005 and sold it in 2013 to GenCorp., which combined Rocketdyne with its Aerojet division. GenCorp later changed its name to Aerojet Rocketdyne Holdings.

King admitted to having no insider knowledge about how the acquisition will affect the Valley operations. But he did not foresee any major staffing cuts and cited three reasons.

For one, Lockheed is not a big player in Aerojet’s core propulsion projects, and second there isn’t a lot of fat to trim off the company, King said “And three, it doesn’t look good for a buyer to arrive and start closing things down,” he added. “I’d be surprised if a wrecking ball were swung around.”Government clientsThe transaction is expected to close in the second half of the year.

In his research note on the deal after it was announced on Dec. 20, Ciarmoli of Truist Securities wrote that Aerojet was already a supplier to Lockheed within that company’s aeronautics, missile and space businesses.

“(It) maintains a portfolio aligned with top Department of Defense priority and we believe is complementary to Lockheed Martin’s capabilities including Hypersonics, Tactical Missiles, Integrated Air and Missile Defense, Strategy Systems and Space Exploration,” Ciarmoli wrote in the note.

In talks with Aerojet management, they said that the deal “occurred naturally over time,” Ciarmoli added.

“On the space side, given increased commercial competition and program concentration around the SLS program, management believes that platform will have superior capabilities over commercial alternatives and will maintain strong support from NASA,” he wrote.

The commercial space industry, dominated by such companies as Space Exploration Technologies Corp. or SpaceX, in Hawthorne and Virgin Galactic in Las Cruces, N.M., has not been a part of Aerojet’s strategy.

For decades, the company’s core business had been selling big rocket engines to government agencies. To change that and sell solid rocket motors to a Virgin Galactic would mean selling at a price point 10 times to 50 times lower than usual, King said.

“Companies have a hard time moving between market segments in that way,” he added.

Aerojet could not profitably supply to commercial customers because they would have to design a whole new set of motors at a much lower price point, King noted.

Lockheed’s space gameKonrad, the analyst with Jeffries Financial, said in a research note that he did not expect any issues in regard to closing the Aerojet deal.“Product overlap is not a concern. In the end, the industry is used to competing in some aspects, but partnering in others. In addition, we believe a competing bid is unlikely,” he wrote in his note.