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Northrop Grumman Buying Missile Maker Orbital ATK in $7.8 Billion Deal

September 18, 2017, 10:27 AM UTC

U.S. defense contractor Northrop Grumman said on Monday it would buy missile and rocket maker Orbital ATK for about $7.8 billion in cash, giving it access to lucrative contracts with NASA and the U.S. Army.

The deal, which comes as North Korea tests threatening missiles, will also help Northrop increase its arsenal of missile defense systems and is a rare departure for the company, which has not made a large acquisition in several years. It last bought TRW in 2002 for about $7.8 billion.

The acquisition, which would establish Orbital as a new, fourth business sector under Northrop (NOC), also comes ahead of a likely jump in demand from the planned upgrades of U.S. ballistic systems.

The Air Force last summer called for proposals to replace its aging nuclear cruise missiles and intercontinental ballistic missile (ICBM) system as the military moves ahead with a costly modernization of older atomic weapons systems.

Northrop’s offer price of $134.50 per Orbital share represents a premium of 22% over the stock’s Friday close. Orbital’s shares were trading at $131.75 before the bell.

Northrop will assume $1.4 billion in Orbital’s net debt and the deal is expected to close in the first half of 2018.

Orbital’s main businesses of missile defense, government satellites and the prospect to develop an in-orbit satellite servicing business “clearly make sense” for Northrop, analysts at Stifel said on Sunday following news reports of a potential deal.

Orbital is one of two companies hired by NASA to fly cargo to the International Space Station under an initial contract worth up to $3.1 billion.

Northrop’s other businesses, such as aerospace systems, mission systems and technology services, provide manned aircraft, electronic warfare systems and network defense services.

The two companies’ complementary offerings will help increase efficiency, boost revenue and save costs, Northrop Chief Executive Wes Bush said in a statement.

“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,” Vertical Research Partners analyst Robert Stallard said in a client note on Monday.

On a pro-forma basis, Northrop said it expects 2017 sales of $29.5 billion to $30 billion.

Perella Weinberg Partners is the financial adviser to Northrop, while Citigroup is advising Orbital.