In a transaction announced Sunday, Lockheed Martin Corp. (NYSE: LMT) has reached a definitive agreement to acquire Aerojet Rocketdyne Holdings Inc. (NYSE: AJRD) in a deal valued at $4.4 billion, including Aerojet’s remaining cash. Lockheed will pay $56 a share in cash, a premium of 33% to Aerojet’s Friday closing price.
The actual cash price will be reduced by $5 a share following a special dividend in that amount paid by Aerojet to shareholders of record in its common stock and convertible senior notes as of March 10, 2021. The special dividend will be paid on March 24. The transaction is expected to close in the second half of 2021. At the end of the third quarter, Aerojet had about 78.5 million shares outstanding.
Lockheed CEO James Taiclet commented, “This transaction enhances Lockheed Martin’s support of critical U.S. and allied security missions and retains national leadership in space and hypersonic technology.” The operative words here are “space” and “hypersonic.”
The new U.S. Space Force has a projected budget of some $15.4 billion for fiscal 2021, about 10% of the U.S. Air Force total. Aerojet is a leading maker of solid-fuel rocket engines and parts. In the third quarter of this year, the company reported sales of $528 million, up 9.5% year over year.
While the space business is important, the acquisition really turns on the development of hypersonic weapons. These are intercontinental ballistic missile (ICBM) missiles that can travel at a speed of at least Mach 5 (3,800 mph) and, unlike conventional ICBM-launched warheads, are maneuverable. Russia put its Avangard hypersonic missile into service a year ago and is working on other delivery systems for these weapons. China, too, is developing hypersonic weapons.
Aerojet also has signed on with Northrop Grumman to provide large solid-fuel rocket motors and a post-boost propulsion system for the Ground Based Strategic Deterrent (GBSD) program. This program is expected to cost around $86 billion to replace existing 50-year old ground-based Minuteman nuclear missiles.
In November, Lockheed completed its acquisition of the hypersonic business of Alabama-based Integration Innovation (more commonly called i3) for an undisclosed price. The acquisition gave Lockheed the capability of designing and delivering hypersonic-specific technology to the U.S. Department of Defense.
Aerojet shares traded up nearly 27% in Monday’s premarket, at $53.23 in a 52-week range of $32.15 to $57.27. The company does not pay a dividend.
Lockheed traded down nearly 2%, at $349.78 in a 52-week range of $266.11 to $442.53. The price target on the shares is $436.00, and the dividend yield is 2.92% ($10.40 annualized). Lockheed is one of four top defense stock picks for next year from Goldman Sachs.