Northrop bulks up missile business on $7.8bn Orbital deal

Bloomberg

Northrop Grumman Corp.’s $7.8 billion purchase of Orbital ATK Inc. will expand its space and missile businesses just as the US steps up efforts to defend against a possible strike by North Korea and threats in the Middle East.
The deal cements a turnaround for Northrop, which had been the target of breakup speculation before it scored an upset win in 2015 to build the next US stealth bomber. The transaction, the largest in the defense industry in two years, adds rocket propulsion, missile-defense and satellite expertise to Northrop’s capabilities as a US weapons maker.
Buying Orbital would make Northrop the fourth-largest Pentagon contractor, displacing Raytheon Co., according to Bloomberg Government. Orbital stands to benefit as the US expands a ground-based missile-defense programme that Northrop already supplies with command-and-control systems. US contractors have soared this year on prospects for greater weapons spending under President Trump.
“As we watch what’s happening around our globe, the rather rapid advance of some of our potential adversaries is quite concerning,” Northrop Chief Executive Officer Wesley Bush said. “This issue of technological superiority for the US and our allies is a real issue. It’s something that our customers are struggling with.”

Defense Prime
The deal ranks as the largest in the defense industry since Lockheed Martin Corp. bought Sikorsky Aircraft in 2015. Together, Northrop and Orbital got about $14.6 billion from Pentagon contracts last year, about half of their combined sales.
Orbital’s “expansive position in missile defense would solidify” Northrop’s place in a growing market, Cowen analyst Cai Von Rumohr said in a note to clients.
While there is limited overlap between the companies, the tie-up, coming weeks after aerospace manufacturer United Technologies Corp. announced a $23 billion acquisition, will test the Trump administration’s tolerance for consolidation among prime defense contractors. Under Barack Obama following the Sikorsky deal, the Pentagon had signalled that it would frown on such deals because they reduced competition.
“Given that Northrop already operates in the space field, it is possible that there could be some overlapping activity or increased vertical
integration that could prompt regulatory scrutiny,” Robert Stallard, an analyst at Vertical Research Partners, said.
“We have also not had a prime contractor acquisition under the current US administration, and so this is a test case as to whether concerns over the scale of the primes is still an issue.”