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Military firm Lockheed redefines itself with $9B Sikorsky acquisition

July 21, 2015, 10:53 PM UTC
The U.S. Army Black Hawk helicopter.
Courtesy of Sikorsky

The world’s biggest defense contractor just got a lot bigger. This week Lockheed Martin Corporation announced that it will buy United Technologies’ (UTX) Sikorsky unit—the maker of the U.S. Army’s Black Hawk helicopters—for roughly $9 billion, or $7.1 billion after tax benefits.

The deal solidifies Lockheed’s (LMT) place as the United States’ dominant maker of military hardware, one that already pulls in roughly $45 billion per year (the Sikorsky deal could add $6.5 billion in 2015 revenue to Lockheed’s own forecasts). The news comes amid something of a shift in the company’s center of gravity. Along with announcing a stronger-than-expected quarter and the finalization of the Sikorsky deal, Lockheed also recently revealed that it may spin off or sell its information technology and technical services businesses following a strategic review. Those units account for roughly $6 billion in estimated 2015 sales and employ more than 17,000 people.

In other words, on top of building the F-35 Joint Strike Fighter, which is slated to replace a variety of fighter jets across the military services, it will now also make many of the Department of Defense’s workhorse helicopters as well. And while diversifying its platform offerings, the company is also looking to shed some of its less defense-oriented (and less-profitable) technology units, signaling a wholesale shift toward its core competency of building defense platforms.

“This is a power move that picks up a strong defense prime contractor franchise, billions of dollars in U.S. DoD backlog, global international sales potential and new markets for the corporation’s full portfolio of electronic systems, and also reshapes the company to become even more of a pure defense company,” Guggenheim Securities defense and aerospace analyst Roman Schweizer wrote in a market commentary published by Guggenheim Monday.

This power move began to take shape back in March when United Technologies’ new CEO Gregory Hayes, who was promoted from his previous role as chief financial officer last November, announced that UTC would consider unloading Sikorsky. Company sales like Sikorsky don’t come around that often, says Richard Aboulafia, vice president for analysis at aerospace and defense consultants Teal Group.

Boeing (BA) and Textron (TXT) emerged as early potential suitors for Sikorsky, but neither was a perfect fit. An acquisition by Boeing, one of three prime defense contractors in the U.S. helicopter market, would have likely triggered antitrust protections. Textron simply didn’t have the money and removed itself from the competition when the price for Sikorsky soared too high.

However, an acquisition by Lockheed Martin clicks nicely, Aboulafia says. “They know how to manufacture defense platforms, and in terms of profit margins that’s the thing they do best,” he says. “And it’s tough to grow that business organically, there are not a lot of properties you can buy. So when something like this comes along, it makes sense for them to grab it.”

Sikorsky’s portfolio includes the U.S. Army’s H-60 family of helicopters, which includes the Army’s Black Hawk and the U.S. Navy’s Seahawk, as well as the H-53 family also used by the U.S. Navy and Marine Corps. It also manufactures a number of civilian transport helicopters for the commercial market, and some small fixed-wing turboprop aircraft.

With the purchase of Sikorsky, Lockheed acquires its ongoing contracts to supply the U.S. military with those aircraft, particularly new Black Hawks, Sea Hawks, and newer versions of the CH-53 family. That will push Lockheed into the military helicopter market as a prime contractor as well as continue the company’s move away from being a technology integrator and toward complete platform manufacturing. Factor in $150 million in annual synergies Lockheed expects to leverage from the deal (Lockheed already provides components for Sikorsky and other helicopter makers) as well as Sikorsky’s strong foreign sales, and the deal stacks up as something of a coup for Lockheed.

The Bethesda, Md., -based company will now be the world’s largest maker of military helicopters as well as the maker of the $400 billion F-35 Joint Strike Fighter flown by militaries across the globe (the U.S. alone plans to buy 2,443 F-35s). A forthcoming decision from the Pentagon regarding who will win the contract for the Air Force’s $55 billion next-generation Long Range Strike Bomber program—either Northrop Grumman (NOC) or a team composed of both Boeing and Lockheed Martin—could leave Lockheed with another sizable slice of the U.S. defense pie and another major military aircraft program to helm.

On the other side of the deal, United Technologies and CEO Hayes will have billions in cash to invest in acquisitions or strengthening divisions like jet engine maker Pratt & Whitney, which incidentally needs to ramp up production of its latest family of jet engines to meet its obligations to a number of aircraft manufacturers, including Lockheed Martin (Pratt & Whitney provides the engine for the F-35).

But initially UTC’s loose cash is going to go towards buying back stock. The company’s board has approved a stock buyback program for up to 75 million shares of UTC common stock, which would eat up a significant portion of the $9 billion secured in the Sikorsky sale.