Orbital Sciences and ATK are set to combine their US aerospace and defence groups in a stock-for-stock merger valued at around US$5bn. The tax-free deal would combine Orbital’s small-to-medium satellite and launch products with ATK’s rocket…
Orbital Sciences and ATK are set to combine their US aerospace and defence groups in a stock-for-stock merger valued at around US$5bn.
The tax-free deal would combine Orbital’s small-to-medium satellite and launch products with ATK’s rocket propulsion, composite structures and space power systems.
Called Orbital ATK, the companies said the new group would provide more affordable space and missile defence products, while enhancing ATK’s military suite by leveraging on Orbital’s technological expertise.
The deal will also see ATK spinning off its commercial sporting equipment assets to its shareholders. That unit posted revenues of US$2.2bn and adjusted EBITDA of US$361m for last year.
With ATK already being Orbital’s single largest supplier, the combined group is forecasting up to US$100m in annual cost savings and up to US$200m in revenue synergies by the end of 2016.
Merger-of-equals to bring prices down
Orbital CEO David Thomson has been selected to head the combined company, whose 16-strong board would include nine directors from Orbital and seven from ATK.
“This merger-of-equals combination of Orbital and ATK Aerospace and Defense brings together two of the space and defence industry’s most innovative developers and cost-efficient manufacturers who have worked closely together for over 25 years,” said Thompson.
“By building on complementary technologies, products and know-how and highly-compatible cultures, the new Orbital ATK will deliver even more affordable space, defence and aviation systems to our existing customers and be strongly positioned to expand into adjacent areas.”
ATK shareholders will own roughly 53.8% of the new group with Orbital’s investors holding the rest.
Based on 2013 financial results, Orbital ATK would have about US$4.5bn in revenues, more than US$575m in EBITDA and a total contract backlog of over US$11bn.
After taking roughly US$300m in combined cash balances into account, the new group is set to have net debt of around US$1.4bn at closing.
It will also have approximately 13,000 employees and be headquartered at Orbital’s existing site at Dulles, Virgina.
Most of the new company’s board has yet to be decided, but will see Orbital CFO Garrett Pierce holding the same role at the combined group and Blake Larson, president of ATK’s aerospace group, taking the COO role. ATK chairman General Ronald Fogleman, USAF (Ret.), will be assuming the same role at Orbital ATK.
The deal has been unanimously approved by both boards but requires the nod from shareholders in both companies. It is also subject to regulatory approvals and is expected to close by the end of this year.
As part of the transaction, ATK’s sport unit has already netted a US$750m senior secured financing commitment from BofA Merrill Lynch, and intends to use just under half of that to issue a dividend to ATK prior to closing. ATK will use those proceeds to repay existing debt.
Consolidation murmurs
The deal follows increasing murmurs of oversupply in the satellite manufacturing sector, with forecasts suggesting orders for new spacecraft are unlikely to exceed 22 per year over 2014-2019.
Speaking at the Satellite 2014 conference in Washington last month, Thomson himself predicted consolidation in the next five years among “second tier” manufacturers, those one level down from the big five to six players in the US and Europe.
He said a downturn in overall defence spending will likely drive this trend, as well as a new generation of entrepreneurs getting into the industry.
Euroconsult COO Steve Bochinger described the merger as a logical move motivated by a need to extend their businesses and improve efficiencies, and helping ATK to realise ambitions to diversify and gain more prime capabilities.
“This wasn’t possible with [Canadian manufacturer] MDA some years ago, and this is now offered with the deal with Orbital,” said Bochinger.
“At a larger level, the US industry needs to reorganise itself as a direct consequence of the downturn of US government business and the pressure to be more competitive in the international market. This has already led to several reorganizations of the industry: consolidation, mergers and acquisitions, internal restructuring of several primes and equipment suppliers.
“The ATK/Orbital deal reflects this trend and we should likely see this process continuing in the future at the various levels of the US satellite value chain.”
Citigroup is financially advising Orbital on the merger while Hogan Lovells is providing legal advice.
ATK hired BofA Merrill Lynch as its financial adviser and Cravath, Swaine & Moore for legal advice.
