Lockheed Martin will acquire helicopter manufacturer Sikorsky Aircraft for $9 billion, the Bethesda-based military contractor announced Monday.
United Technology Corp. said last month that it planned to sell Sikorsky to help simplify its eclectic mix of businesses. Industry competitors Boeing, Textron and Airbus had been rumored as possible buyers, but Lockheed Martin produced the winning bid, and the company says it expects the sale to close by the end of this year or in the first quarter of 2016.
Here’s a quick primer on the deal.
1. What were the main reasons for the purchase?
In a conference call on Monday, Lockheed Martin CEO Marillyn Hewson called Sikorsky a “natural fit” to add its operations to her company’s. The two corporations already collaborate on a number of projects, with Lockheed Martin supplying the information systems and sensors for a number of Sikorsky’s products.
The acquisition will strengthen Lockheed Martin’s core business, Hewson said, as the two continue to work together on projects such as presidential and combat rescue helicopters.
Both also derive a significant portion of their work from the U.S. military, giving them familiar customers. Lockheed sees Sikorsky’s strong brand as a positive.
“They obviously are a national icon in terms of the capabilities that they bring to the rotary marketplace, so they do a lot of things well already,” said Lockheed Martin Chief Financial Officer Bruce Tanner.”We think this deal has pretty low execution risk … I like to think of this as we’re buying a portfolio of programs versus a new business model and new marketplaces and new customers we’ve never dealt with before. This is all familiar to us.”
2. What new markets does this open up for Lockheed Martin?
The deal also opens up new opportunities for Lockheed Martin to expand its operations in the international and commercial sectors. Last year, the contractor generated around 20 percent of its revenue overseas, while that number was close to 50 percent for Sikorsky, which has operations in 20 countries and products in more than 40.
Hewson expressed her hope that the acquisition would provide Lockheed Martin with the opportunity to build on Sikorsky’s existing international footprint.
The helicopter maker also has made gains on the commercial side — accounting for 25 percent of its expected revenue this year — which Lockheed Martin expects to create additional value in the coming years.
“While [the commercial] segment has been under recent pressure due to low oil prices, it is expected to recover in the future and add value to the corporation. We believe these current pressures allowed us to make the acquisition at a low point in the economic cycle,” Hewson said.
3. Are there additional financial considerations?
The announced $9 billion sticker tag is somewhat misleading; the acquisition will be structured to give Lockheed Martin and its shareholders a $1.9 billion tax benefit, effectively reducing the purchase price to $7.1 billion.
This makes for an “attractive price” for one of the U.S. military’s top contractors in the helicopter sector, Hewson said.
4. Is the government going to object to the deal?
Last week, Pentagon officials said they would carefully evaluate any sale of Sikorsky, citing the need to “maintain competition,” Reuters reported. With the acquisition now involving two of the U.S. military’s top suppliers, it could be subject to heavy scrutiny from the Department of Defense, wrote Cai von Rumohr, who analyzes Lockheed Martin for Cowen and Company.
But, von Rumohr acknowledged in his note, any purchase of Sikorsky would have likely invited scrutiny from the Pentagon. If Textron, which makes Bell helicopters, had been the buyer, it would have consolidated the market.
With Lockheed Martin, which does not itself have a helicopter division, those concerns recede.
“If you look at the acquisition, we are not reducing the number of competitors in this segment, in the helicopter segment, so in that sense there shouldn’t be a concern,” Hewson said.
5. What are the long-term implications of the acquisition?
With the decline in the U.S. military’s need for Lockheed Martin’s F-35 fighter jets as military operations in the Middle East taper, the market expansion helps the contractor diversify, analysts say.
Ultimately, the deal will “bolster LMT’s position in franchise areas,” von Rumohr wrote.
The company also expects to turn additional profits from Sikorsky’s strong aftermarkets business as it supports and sustains helicopters in the field. This source of earnings can even outpace those from building and selling new aircraft.
And Lockheed Martin expects the acquisition to be profitable in both the short and long term.
“We’re not buying this business for the next three years,” Tanner said. “We’re buying this business for the next three decades, and that’s very much the way we look at it, in terms of a long-term acquisition cycle for us.”
For at least one day, investors agreed. Lockheed Martin’s stock rose 1.96 percent to 205.13. It also helped that the company posted solid second-quarter results Monday, reporting net earnings of $929 million, or $2.94 per share, compared to $889 million, or $2.76 per share, in the second quarter of last year. Net sales for the quarter were $11.6 billion compared to $11.3 billion for the second quarter last year.