Last of the Independent Defense Contractors Sold

US defence contractor L3Harris to buy Aerojet Rocketdyne for $4.7bn

US aerospace and defence contractor L3Harris Technologies will acquire Aerojet Rocketdyne, the last independent domestic maker of missile propulsion systems, in a $4.7bn deal. The acquisition comes after Lockheed Martin, the world’s largest defence contractor by revenue, tried to buy the rocket maker for $4.4bn before abandoning the bid after federal regulators sued in January to block it. 

 

 

 At the time, the Federal Trade Commission (FTC) alleged that Lockheed would use its ownership of Aerojet to damage other defence companies and would ultimately control multiple defence programmes critical to national security. Under the terms of the deal agreed at the weekend, L3Harris will pay $58 per share in an all-cash transaction valuing Aerojet at $4.7bn, inclusive of net debt. The unconsummated Lockheed deal had been struck at $56 per share in December 2020. 

“We’ve heard the DoD leadership loud and clear: they want high-quality, innovative and cost-effective solutions to meet both current and emerging threats, and they’re relying upon a strong, competitive industrial base to deliver those solutions,” said L3Harris chief executive Christopher Kubasik.

L3Harris will use existing cash and issue new debt to fund the deal, which will need US regulatory approval to be completed. Sean Stackley, senior vice-president for strategy and growth at L3 Harris, played down potential concerns that the deal might run afoul of regulators in an interview with the Financial Times. The FTC’s concerns around Lockheed’s proposed acquisition had focused on its impact on “competition and also on innovation,” he said. L3 Harris, said Stackley, intended to “strengthen the merchant supplier role that Aerojet plays in defence and space”. 

The company, he added, was already speaking to customers of Aerojet: “I think we are getting a warm reception.” A series of mergers and acquisitions over the past several decades has turned the defence industry into one of the most consolidated in the US. In the 1990s, 51 prime contractors worked for the Pentagon. This has shrunk to five highly diversified companies: Lockheed, Raytheon Technologies, Boeing, General Dynamics and Northrop Grumman. 

L3Harris, known for communications and electronic technologies embedded in weapons systems such as sensors, and for its involvement in space programmes, is the sixth-largest US defence contractor with annual revenue of $17.8bn, according to Refinitv data. It is responsible for making the position and navigation unit for the Himars, or high mobility artillery rocket system, a truck-mounted rocket launcher that has been critical for the Ukrainian army in its fight against Russia. Lockheed, Raytheon and Boeing, the three prime tactical missile contractors for the Department of Defense, rely on Aerojet and a Northrop Grumman subsidiary for critical components such as rocket motors. 

Its acquisition will make L3Harris a more important subcontractor for these three larger companies as well as the Pentagon. Aerojet executed $2.2bn in sales last year. Aerojet’s rocket systems have been important on the Ukrainian battlefield, too. They provide the propulsion systems for the Javelin and GMLRS, or guided multiple launch rocket system, missiles the US has provided, the latter of which is shot out of the Himars. Florida-based L3Harris was formed in 2019 via the merger of L3 Technologies and Harris Corporation, and the group has been seeking further scale through acquisitions. 

Earlier this year, it purchased Viasat’s tactical data links unit, which provides data and voice communications systems for military vehicles, aeroplanes and ships, for $1.96bn. Stackley said L3Harris expected both acquisitions to close in 2023. Advising L3Harris financially are Barclays and Goldman Sachs, while Citi and Evercore are advising Aerojet. 

 This past summer, the company’s longstanding chief executive Eileen Drake defeated a proxy contest led by the then-executive chair of Aerojet, Warren Lichtenstein. His investment firm, Steel Partners, had been a big shareholder at the company for years and it sought to remove Drake in a heated battle for control. Drake had testified in a corporate court proceeding that Lichtenstein once offered her a pricey Birkin handbag if she pursued the Lockheed deal’s terms in a way that he preferred. Lichtenstein testified that he had offered Drake expensive handbags as a proper incentive to secure a higher deal price.