L3Harris/Aerojet: small suitor may get greenlight for deal take-off

L3Harris Technologies is hoping to succeed where larger rival Lockheed Martin failed. The US defence contractor is buying missile engine maker Aerojet Rocketdyne for $4.7bn, including debt. The deal comes just 10 months after Lockheed abandoned its bid for Aerojet after US regulators sued to block the deal.

Antitrust watchdogs have become even tougher since then. But L3Harris’s smaller size and lack of overlap with its target may just allow the deal to get the greenlight for lift-off.

In its complaint, regulators alleged that allowing Lockheed to buy Aerojet — the last independent domestic maker of missile propulsion systems — would give the defence giant the ability to deny rivals access to critical components needed to build competing missiles and space systems.

L3Harris, itself formed from the 2019 merger between L3 Technologies and Harris Corp, specialises in satellite and communication technology. Buying Aerojet would fit with L3Harris’s goal of transforming itself into an alternative to the Big Five defence contractors. Together, L3Harris and Aerojet generated $20bn in revenue last year. That is still less than a third of those at Lockheed or Raytheon Technologies.

The strategic logic of buying Aerojet is hard to fault. The financial case may be harder to make. L3Harris’ $58-a-share offer represents a 34 per cent premium to Aerojet’s average three-month share price. Overlaps are few and no cost-cutting plan was released.

But it would pay more than Lockheed, which had offered $56 a share in December 2020. L3Harris has valued Aerojet’s equity at about 38 times forward earnings, pricey as other defence contractors trade on between 18 to 23 times. Also L3Harris’s net debt to ebitda ratio will increase from 1.8 times to roughly 3 times as a result of this transaction.

With nations increasing military spending following Russia’s invasion of Ukraine, L3Harris will hope to recoup this premium via increased orders in this new growth sector.